[Senate Hearing 117-655]
[From the U.S. Government Publishing Office]
S. Hrg. 117-655
THE FINANCIAL STABILITY OVERSIGHT COUNCIL ANNUAL REPORT TO CONGRESS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING THE FINANCIAL STABILITY OVERSIGHT COUNCIL'S ANNUAL REPORT TO
CONGRESS
__________
MAY 10, 2022
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https://www.govinfo.gov/
__________
U.S. GOVERNMENT PUBLISHING OFFICE
55-754 PDF WASHINGTON : 2024
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL G. WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Elisha Tuku, Chief Counsel
Dan Sullivan, Republican Chief Counsel
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Hearing Clerk
(ii)
C O N T E N T S
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TUESDAY, MAY 10, 2022
Page
Opening statement of Chairman Brown.............................. 1
Prepared statement....................................... 41
Opening statements, comments, or prepared statements of:
Senator Toomey............................................... 3
Prepared statement....................................... 42
WITNESS
Janet L. Yellen, Secretary, Department of the Treasury........... 5
Prepared statement........................................... 43
Responses to written questions of:
Senator Toomey........................................... 45
Senator Warnock.......................................... 51
(iii)
THE FINANCIAL STABILITY OVERSIGHT COUNCIL ANNUAL REPORT TO CONGRESS
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TUESDAY, MAY 10, 2022
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 9:45 a.m., via Webex and in room 538,
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Chairman Brown. The Senate Committee on Banking, Housing,
and Urban Affairs will come to order. Today's hearing is in a
hybrid format. Our witness is in person, obviously.
We will hear testimony from the Secretary of the Treasury
on FSOC's annual report for the first time in 4 years.
This is the first time Secretary Yellen has been before
this Committee since Putin's invasion of Ukraine. I want to
commend you, Madam Secretary, for Treasury's work helping
implement our massive, historic multilateral sanctions and
export control effort against Russia, punishing them
economically and isolating them diplomatically and politically.
Putin has been shocked by two things. He was shocked by the
courage of the Ukrainian people and the tenacity of their
resistance, and he was shocked by how effectively President
Biden and you and this Administration put together this broad
international coalition--Germany, Switzerland, Finland, Sweden.
This past weekend's announcements by the G7 to further
limit dependence on Russian energy will bite even harder. In
the months to come we must sustain and expand our efforts to
help Ukraine, including intensified sanctions, export controls,
and other means of ratcheting up economic pressure on Russia.
Financial stability allows Americans to trust their money
is safe in the bank. It means they can get an affordable
mortgage without fear that they will lose their home. It means
they can count on their retirement savings, knowing their
investments will not be gambled away by reckless speculators.
And it means taxpayers are not forced to shell out billions to
bail out the banks that gambled with our whole economy. That is
why Congress created FSOC in the Dodd-Frank Wall Street Reform
bill.
Americans are still living with the consequences from the
last time Wall Street took too many risks. Families who lost
their homes after 2008 still have not recovered all the wealth
the crisis took from them.
Whenever big banks or hedge funds come up with some new
scheme that goes wrong, they are never the ones that pay the
price. It is ordinary Americans whose homes, retirement
savings, and livelihoods are at risk. And it is taxpayers.
People in this town act like they have forgotten the bailouts.
In too many cases, they probably have.
Americans have not forgotten. When families who are already
struggling with lost jobs, lost homes, lost savings are forced
to use their tax money to bail out some of the richest elites
in this country, that stays with most people.
We created this watchdog to make sure it never happens
again. Under the Biden administration and with Secretary
Yellen's leadership, we once again have an FSOC that looks out
for those risks to our financial system. They have turned the
page on the prior Administration's Wall Street-first mentality.
The last White House, always looking out for its corporate
allies, did everything in its power to stop this agency from
doing its job. They ignored shadow banks that grew in size and
created risks to the system. They gutted the agency from the
inside out, diminishing career public servants dedicated to
protecting our economy. They abandoned their responsibilities.
They did nothing to identify and nothing to address risks to
financial stability.
So when the global coronavirus pandemic froze our financial
markets, big and small companies were not prepared to withstand
the shock, and our Government had to step in to prevent a
market meltdown and stabilize the economy. What we have seen
over the past 2 years is that risks can come at any time, in
any form.
Today, FSOC is keeping watch on all the potential risks to
our economy, so working families do not have to. These public
servants are looking at ways to improve financial system
resilience in the face of climate-related financial risks.
Their job is to make sure our financial markets are
efficient and fair. We have seen frenzies like GameStop and
hedge fund blowups like Archegos. Those have the potential to
cause dangerous volatility. And FSOC is watching out for asset
bubbles, so that risky bets that go bad do not actually hurt
the real economy.
This watchdog works with financial institutions to shore up
cyberdefenses and protect our financial system from
cyberattacks. And they are tackling risks posed by
cryptocurrency and digital assets. So many Americans are
searching for an alternative to the Wall Street system that has
burned them time and again, but we cannot allow them to be left
holding the bag when an inevitable crash or hack comes.
FSOC monitors international risk. They are clear-eyed about
the threats to U.S. and global economy--a pandemic, a broken
global supply chain, Putin's attack on Ukraine.
Finally, the agency is doing its job again, working to
prevent corporate greed, overleveraged deals, and risky bets on
Wall Street from crashing our financial system as interest
rates rise.
For the first time in decades, workers are seeing real wage
gains and more bargaining power. Median wages for the lowest-
income workers increased last year an average of 6 percent. The
unemployment rate is 3.6 percent, the lowest in five decades.
For many Americans, those gains do not go as far when you
are paying more at the gas pump and grocery store. Corporations
blame workers and claim they just have to raise prices to keep
up with costs. Of course they do not have to raise prices to
keep making a profit. They could cut their own executive
bonuses or do fewer stock buybacks and still enjoy healthy
profits. But instead they would rather price-gouge working
families.
Do not take it from me. Listen to the CEOs who brag, at
stockholder meetings, they brag about their enormous pricing
power every quarter on investor calls. When big corporations
have concentrated power and no competition, the usual rules of
capitalism do not rein them in.
This Wall Street business model incentivizes anything that
juices stock prices, including excessive risk-taking, at the
expense of long-term stability and broad economic growth. We
need to build and maintain a resilient financial system with
strong safeguards in place at the biggest Wall Street firms, so
that they can withstand economic shocks without wrecking the
real economy.
That is FSOC's job, to serve as the Wall Street watchdog
looking out for working Americans on Main Street. At this
critical moment, FSOC's job is more important than ever.
Secretary Yellen, I look forward to your testimony.
Senator Toomey.
OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY
Senator Toomey. Thank you, Mr. Chairman, and Secretary
Yellen, welcome back to the Committee. Today's hearing is an
important opportunity to discuss FSOC's 2021 annual report and
other matters.
I have long been skeptical about FSOC's process for
designating nonbank financial institutions as systemically
important, or SIFIs. FSOC's process has been opaque, and
previous designations have lacked sufficient cost-benefit
analysis. This approach also needlessly imposed bank-like
regulations on nonbank financial institutions, such as
insurance companies and asset managers.
But more fundamentally, the act of designating a firm as a
nonbank SIFI signals to the market that the firm is too big to
fail and would be bailed out if it became insolvent, thereby
introducing moral hazard.
For these reasons I was glad to see FSOC, in 2019,
unanimously approved an activities-based approach to
identifying potential risk as well as an enhanced cost-benefit
analysis for potential designations. These changes marked
significant improvements over the previous approach with
respect to both process and substance. I have been encouraged
that you have recognized the value of this approach and I urge
FSOC to retain it going forward.
I have also been concerned that FSOC, like other financial
regulators, is becoming politicized. Consider global warming.
FSOC has held 10 meetings under your leadership and 7 of those
meetings have focused on global warming, according to the
public readouts. By contrast, not a single one of those
meetings included a meeting of cybersecurity, which clearly
presents a much more imminent and significant threat to the
financial system.
In October of last year, FSOC issued a lengthy report that
audaciously claimed global warming is, quote, ``an emerging
threat to the financial stability of the United States,'' end
quote, and FSOC uses this supposed risk to justify its
recommendation that financial regulators consider sweeping
changes to their rules.
But the actual data shows that physical risks associated
with global warming--that is to say severe weather events--do
not threaten financial stability. Economic damage from weather-
related events as a percentage of GDP has actually trended
down, steadily, over the last 30 years, and we are not aware of
a single bank failure in the modern era caused by any weather
event.
As I have previously warned, the real risk is political.
Some unelected financial regulators want to accelerate our
transition to a lower-carbon economy and they want to misuse
their powers to allocate capital away from traditional energy
companies to do it. At a time of skyrocketing energy prices we
certainly do not need financial regulators making it even more
expensive for Americans to fill up their gas tanks or heat
their homes.
Addressing global warming requires difficult political
decisions that involve tradeoffs, and in a democratic society
these tradeoffs must be made by elected representatives
accountable to the American people through a transparent and
deliberative legislative process. Instead of pursuing political
issues that are outside the mandate and expertise of financial
regulators, the FSOC should enhance coordination across
regulators on existing threats to the financial system.
To this end I was encouraged that the FSOC annual report
identified certain issues that are worthy of regulatory
attention, such as enhancing the resilience of the U.S.
Treasury market and improving the community resilience of the
financial sector. But I do worry that progress on addressing
these challenges could be stalled because of FSOC's focus on
political issues.
Finally, in your role as Chair of the President's Working
Group of Financial Markets, or PWG, you released a report last
November on stablecoins. Although I disagree with the report's
recommendation that all stablecoin issuers must be insured
depository institutions, I was glad to see it acknowledge that
it is the responsibility of Congress to create new rules for
stablecoins.
Last month I released a discussion draft of a bill, the
Stablecoin Trust Act, to establish a regulatory framework for
stablecoins. There are tremendous potential benefits of
stablecoins in our society. Today stablecoins primarily
facilitate trading of digital assets, but tomorrow stablecoins
could be widely used in the physical economy, for payments and
automating transactions. Because of the dollar price stability
of stablecoins they have the potential to serve all the
traditional functions of money, including acting as a medium of
exchange. Stablecoins could also improve upon traditional forms
of money by increasing payment speed, reducing transaction
costs, helping to combat illicit finance, and enabling
programmable contracts.
The proposed regulatory framework I have released will
allow stablecoins to continue flourishing while protecting
consumers and minimizing potential risks from stablecoins to
the financial system. It is critical that Congress provide
clarity in this area as soon as possible. Congress needs to
enact a sensible regulatory framework before something bad
happens with the stablecoin that harms consumers. If that were
to happen, Congress will rightfully share some of the blame.
Thankfully, I am optimistic that the Administration is
working with Members of Congress and that we can find common
ground on bipartisan legislation that addresses the risks of
stablecoins while also encouraging innovation and competition.
Secretary Yellen, I look forward to hearing your testimony
and discussing these and other important issues with you today.
Chairman Brown. Thank you, Ranking Member Toomey.
We will hear from the Chair of FSOC today, Treasury
Secretary Yellen. Thanks for your service and your testimony.
Please begin, Madam Secretary.
STATEMENT OF JANET L. YELLEN, SECRETARY, DEPARTMENT OF THE
TREASURY
Secretary Yellen. Thank you so much, Chairman Brown,
Ranking Member Toomey, and Members of the Committee. I am
pleased to speak with you today about the Financial Stability
Oversight Council's 2021 annual report. The report is a
collaborative effort of the Council member agencies, and it is
a vehicle for providing Congress and the public with the
Council's collective assessments of potential risks to U.S.
financial stability. Today, I will highlight a few topics in
the report and provide an update on the Council's activities
since the report's publication.
First, the report discusses vulnerabilities in the nonbank
financial sector which were highlighted by the turmoil in
financial markets in March 2020. While the Dodd-Frank act
reforms increased the resiliency of the U.S. financial system,
the market turmoil in March 2020 demonstrated that the
liquidity mismatch and use of leverage by some nonbank
financial institutions can make them vulnerable to acute
financial stresses, and these stresses can be transmitted and
amplified to the broader financial system. The Council has
taken steps to examine these risks, including re-establishing
its Hedge Fund Working Group to develop an interagency risk-
monitoring system and to propose options to mitigate identified
risks. And earlier this year, the Council issued a statement to
express support for the Securities and Exchange Commission's
efforts to reform money market funds and their work to consider
potential reforms open-end funds.
The Council is also working to support improving the
resilience of the Treasury market and is coordinating with the
Interagency Working Group on Treasury Market Surveillance.
Potential steps to be taken include improving data quality and
availability, evaluating expanded central clearing, and
enhancing trading venue transparency and oversight.
The SEC has proposed certain reforms to enhance
transparency and oversight over alternative trading systems
that trade Government securities. The SEC has also proposed
updating the definition of a Government securities dealer to
include market participants that plan an increasingly
significant liquidity-providing role in overall trading and
market activity. Additionally, the Office of Financial Research
is working to fill identified data gaps for uncleared,
bilateral repurchase agreements trough a pilot data collection,
which should improve visibility into a major source of
financing for nonbank financial institutions in treasury
markets.
Additionally, the Council is working to ensure that
financial institutions better understand their climate-related
financial risks. In its October 2021 Report on Climate-Related
Financial Risk, the Council outlined how climate change can be
a source of shocks to the financial system and increase risks
to financial stability.
To address these risks, the Council recommended that
regulators build their capacity and expand their efforts to
address climate-related risks, improve the availability of
data, enhance and standardize disclosures, and assess and
mitigate risk to financial stability. The Council has also
formed its staff-level Climate-Related Financial Risk
Committee, which will serve as coordinating body to the Council
to share information, facilitate the development of common
approaches and standards, and foster communication across FSOC
members.
In addition, the Council is establishing the Climate-
Related Financial Risk Advisory Committee. This advisory body,
which will include a broad array of external stakeholders, will
help the Council gather information and analysis on climate-
related financial risks.
With respect to digital assets, new products and
technologies may present opportunities to promote innovation
and increase efficiencies. However, digital assets may pose
risks to the financial system and increased and coordinated
regulatory attention is necessary.
On March 9th, President Biden signed an Executive order
calling for a comprehensive approach to digital asset policy.
The Council is drafting a report that will identify financial
stability risks and regulatory gaps. I look forward to working
with you on the issues and opportunities posed by digital
assets. We are also eager to work with you to ensure that
payment stablecoins and their arrangements are subject to a
Federal prudential framework on a consistent and comprehensive
basis.
Finally, there is the potential for continued volatility
and unevenness of global growth as countries continue to
grapple with the pandemic. Russia's unprovoked invasion of
Ukraine has further increased economic uncertainty. The U.S.
financial system has continued to function in an orderly
manner, though valuations of some assets remain high compared
with historical values. We stand firmly with the people of
Ukraine and have implemented an unprecedented suite of
sanctions on Russia that have been implemented by financial
institutions.
On February 28th, I convened the Council in the wake of the
invasion, and we will continue to monitor developments and
coordinate actions as the risks and threats evolve.
The Council's report also discussed other potential
emerging threats and vulnerabilities that the Council continues
to monitor, including short-term wholesale funding markets,
central counterparties, alternative reference rates,
cybersecurity, corporate credit markets, and real estate
markets.
The Council remains committed to its mission of identifying
and responding to risks to U.S. financial stability, and I look
forward to working with this Committee to promote a more robust
and resilient financial system. Thank you.
Chairman Brown. Thank you, Madam Secretary. I have to step
out to introduce an Ohioan at the Health Committee. Senator
Menendez will begin the questioning, followed by Senator
Toomey.
Senator Menendez. Well thank you, Mr. Chairman. Madam
Secretary, welcome. I want to talk to you about some things
that also can affect our economy. The ability to have full
control over one's reproductive health has real-world economic
consequences. According to the Institute for Women's Policy
Research, current State-level abortion restrictions already
cost the United States about $105 billion annually due to
reduced earnings levels, increased job turnover, and time off
for women.
So Secretary Yellen, if the draft of the Court's majority
holding in Roe v. Wade is the actual decision, what impact will
the loss of abortion access mean economically for women?
Secretary Yellen. Well I believe that eliminating the right
of women to make decisions about when and whether to have
children would have very damaging effects on the economy and
would set women back decades. Roe v. Wade and access to
reproductive health care, including abortion, help lead to
increased labor force participation. It enabled many women to
finish school. That increased their earning potential. It
allowed women to plan and balance their families and careers.
And research also shows that it had a favorable impact on the
well-being and earnings of children.
There are many research studies that have been done over
the years looking at the economic impacts of access, or lack
thereof, to abortion, and it makes clear that denying women
access to abortion increased their odds of living in poverty or
need for public assistance.
Senator Menendez. For half of the population of America,
eliminating a right that has existed for half a century,
particularly for low-income and minority women who have already
shouldered much of the burden from the public pandemic would be
a disaster.
Let me turn to something else. The Federal Reserve Chair,
Chairman Powell, has acknowledged that part of the labor
shortage is being fueled by an inordinately high number of
retirements. According to the most recent figures from the
Bureau of Labor Statistics there are now two job openings per
unemployed worker in the country. There are about 11 million
jobs that are going unfilled, which has an economic consequence
by virtue of them going unfilled. In short, we just do not have
enough people to replace those who are leaving the labor force.
Now what we do have is thousands of hard-working immigrants
who are willing to work if Congress would simply allow them to
do so. Would addressing the immigration visa backlog help shore
up the labor supply, therefore the supply chain as a whole?
Secretary Yellen. Senator, I agree with you. I think that
it would be very helpful, especially under the conditions that
you described. The labor market arguably is tight with about as
large a supply demand imbalance as we have seen in U.S. postwar
history. We have had a decline in legal immigration, and I
think that taking steps to shore up our workforce--for example,
you referred to the enormous backlog of applications. I believe
that immigrants who have had legal work permits and need to
have them renewed have faced very substantial backlogs. And I
think the White House recently announced that it is taking
steps to make sure that those individuals will be able to work
in spite of the backlog.
Senator Menendez. Well I hope we can get there, because
even leading business groups agree that robust immigration
reform is urgently needed to address our labor shortage, and
they are not necessarily a voice in this regard but they are
because they have come to that conclusion themselves.
Finally, talking about the labor market shortage playing a
major role in the slowed economic recovery, according to the
Peterson Institute for Economics the employment rates of
parents with young children have declined by 4.5 percent over
the pandemic with concentration impacts among women, especially
women of color. This is even more troubling as women with young
children account for 12 percent of the U.S. workforce.
How would investing in childcare strengthen our Nation's
labor market and unleash our capacity for economic growth?
Secretary Yellen. Well I think the ability of a family to
access affordable childcare is a critical prerequisite for
women to be able to participate in the labor force. The United
States does less than many countries in making sure that women
do have affordable childcare, and the President has made
proposals that would serve to make childcare more affordable. I
think he has made proposals for universal access to 2 years of
pre-K, and I think these proposals would certainly boost labor
force participation.
Senator Menendez. Thirteen thousand dollars, on average,
cost a year for childcare. It is, for many families,
prohibitive and if not it takes a significant part, so I agree
with you.
Finally, we had spoken in the past about my efforts and
legislation to create a capital increase for the Inter-American
Development Bank. We are facing China's challenge throughout
the hemisphere. The one entity that can be helpful to use in
meeting that challenge is the Inter-American Development Bank.
And while I see that Treasury has taken some steps to move
forward with an increase I do not believe that we are working
together as I had envisioned. So I would ask you to have some
personal attention to it. Thank you.
Senator Toomey.
Senator Toomey. Thank you, Senator Menendez.
Secretary Yellen, as I mentioned during my opening remarks
I have been encouraged that the Administration has recognized
the importance of stablecoin regulation and the fact that it is
the responsibility of Congress to define the broad parameters
of that. As you know, I released a discussion draft of a bill
that would, in fact, regulate stablecoins. It would protect
consumers by establishing new, standardized Federal disclosure
requirements. Among other things it would also establish a new
Federal license.
So I would like to ask if you can confirm for the record
here that it is still your view that it is important--I would
argue even urgent--for Congress to pass legislation governing
the regulation of payment stablecoins.
Secretary Yellen. Yes, I am happy to confirm that, Senator
Toomey. The President's working group issued a report
concluding that current statutory and regulatory frameworks do
not provide consistent and comprehensive standards for the
risks of stablecoins as a new type of payment product and urges
Congress to enact legislation to ensure that stablecoins and
such arrangements have a Federal prudential framework. I would
urge bipartisan action to create such a framework. We would
look forward to working with you.
I would note that there was a report just this morning in
the Wall Street Journal that a stablecoin known as TerraUSD
experienced a run and had declined in value.
So I think that simply illustrates that this is a rapidly
growing product and that there are risks to financial stability
and we need a framework that is appropriate.
Senator Toomey. I appreciate that. I do think it is
important to note that the stablecoin to which you refer I
believe is an algorithmic stablecoin.
Secretary Yellen. I believe that is correct.
Senator Toomey. And so that means, by definition, it is not
backed by cash or securities as the, if you can call them, more
conventional stablecoins. So I think that is an important
distinction.
But I am grateful for your point. I hope you will agree to
work with me and my colleagues who are interested in getting
something done. Do you think we could shoot for a goal of
getting legislation done this year?
Secretary Yellen. I think it would be highly appropriate.
The outstanding stock of stablecoins is growing at a very rapid
rate and we really need a consistent Federal framework. I
really look forward to working with you and Members of Congress
to devise legislation that would accomplish that.
Senator Toomey. Great. Thank you.
Let me move on to the FSOC's focus on climate change. You
spoke at some length about climate change during your opening
remarks and I have observed that I think 7 of the recent 10
meetings have been about climate change.
So do you subscribe to what I think is the
Administration's, a general paradigm for this that the risk to
the financial system comes in two categories, one physical risk
associated with severe weather events and the other transition
risk that is associated with an evolution away from fossil
fuels. Do you subscribe to that paradigm or do you think there
is another category of risks?
Secretary Yellen. I would agree with you that those are the
main risks.
Senator Toomey. OK. So can you name a single financial
institution in America that has failed as a result of a severe
weather event in the last 50 years?
Secretary Yellen. I am not aware of----
Senator Toomey. So I do not think there has been one, and
every single year we have blizzards, we have hurricanes, we
have wildfires, and sometimes they are horrendous, and some of
them have been recent. But we have never had a single financial
institution fail, much less the entire financial system. So I
think it is pretty clear, and actually I think Chairman Powell
acknowledge, there is really no physical risk that is even
remotely imminent.
So then that brings us to the transition risk. Well, I
suspect that over time we are going to have a transition away
from fossil fuels to other forms of energy. It certainly looks
like that is going to take quite a while. I do not see how that
is much different from the fact that consumer preferences
change in all kinds of products and services.
So I would urge you to consider that risks like
cybersecurity--I mean, I would think you would acknowledge
cybersecurity poses a much more imminent risk to financial
institutions and our financial system than either physical risk
from severe weather or climate change, in general, right?
Secretary Yellen. Well, I think both create risks.
Senator Toomey. But I said more imminent. Is cybersecurity
a more imminent risk?
Secretary Yellen. Cybersecurity is certainly an imminent
risk. It is one that the Council is very focused on. The
Treasury Department has special responsibilities----
Senator Toomey. I understand, but you are choosing not to
acknowledge that cybersecurity is a more imminent risk than
climate risk, and I think that is kind of surprising because it
is so obvious to most people. Cybersecurity is a real-time,
continuous risk to every single financial institution in
America. There are constant bombardments of attacks, and if one
major one gets through it could be devastating. Climate change
does not pose that kind of imminent risk.
Secretary Yellen. I think climate change is an existential
threat to our globe and to our future. You can see that
countries--it is a long-term risk but it is becoming notably
more severe, and you see a growing number of countries take
significant steps to address this risk. Financial institutions
themselves have voluntarily decided that they need to align
their portfolios with a framework of net zero by 2050, and that
is really in the absence of any requirement that they do so.
I do believe that transitions risks are very real as more
and more countries adopt frameworks that are meaningful to
address climate change. We could see significant changes in
asset valuations that pose risks to financial institutions.
Senator Toomey. Well, there is a lot we disagree on there
but my time has expired. I think Senator Warner is with us
remotely. Senator Warner?
Senator Warner. I am, Senator Toomey, and let me follow up
on a couple of items. One, I look forward to working with you
and Secretary Yellen on a rational approach to regulation
around not only stablecoins but crypto generally. I think we
have seen, very recently, certain companies that were maybe
companies in the software business that have gone out and way
overleveraged themselves to buy Bitcoin, and unfortunately
their value is disappearing real time as we see this transition
go through in the market.
I would point out two quick things. In terms of the
physical risks of climate change beyond simply the transition,
there are an awful lot of folks in New Mexico right now who are
experiencing the fires that would say that is a visceral, real
human risk. And I think on a broader basis--and I would hope
our colleagues would want to look at this--literally in India
at this point if they do not get appropriate rains you may have
wide swaths of the Indian population not literally being able
to live with the level of heat exposure. And if you have a
dramatic meltdown in the economy I actually think that will be,
unfortunately, maybe the first direct, immediate physical risk
coming out from climate change. Again, I hope we prove to be
wrong but that seems where we are headed.
Secretary Yellen, I want to get to at least a couple of
questions. One, I commend what you and all of FSOC entities
have been doing in terms of tightening up sanctions on Vladimir
Putin's aggressive actions. Two quick comments, and my first
question, one, any kind of macro idea of how we are doing in
terms of ratcheting down on the Russian economy, and two, I was
really interested in seeing Treasury's announcements on Sunday
to say we are going to go down to the services level, because I
do fear that Putin, the oligarchs, and others are setting up
other shell companies and entities where we could have leakage
in terms of getting away from sanctions.
Frankly, I go back to the crypto arena, where Senator
Warren and I have said we need to make sure that those crypto
exchanges not based in America, where there are some, at least,
basic regulatory framework, but those based abroad, that they
are not sources of leakage.
So can you talk about, on a macro basis, and some of the
things that drove you to your Sunday additional regulations?
Secretary Yellen. Well on a macro basis I think that our
sanctions are having a very severe impact on Russia, and Russia
itself has acknowledged that. Their economy is clearly in a
recession. It is forecast that it will contract at least in the
10 to 15 percent range this year. Inflation has been running
probably around 20 percent this year.
And Russian firms that have been sanctioned are finding it
almost impossible to gain access to goods and services that
they need in global markets. This includes major defense firms
that are unable to buy semiconductors and other components that
they need to restock their defense arsenals as they use up
equipment in Ukraine.
Senator Warner. Could you speak to the question on--because
I do want to get one more question in here.
Secretary Yellen. On sanctions?
Senator Warner. What you meant on the accounting services
and others. Frankly, I am still concerned about leakage through
unregulated, non-American crypto exchanges in terms of
oligarchs trying to get some of their money out.
Secretary Yellen. Yes. We took the actions we did last
Sunday for service providers to make sure--I think some of the
oligarchs use these services to figure out ways to shield their
money from sanctions, and we wanted to clamp down on that and
put an end to it, along with all the other things that we are
doing through the Repo Task Force, DOJ, and Treasury,
exchanging information globally with our partners that have
greatly enhanced our ability to seize oligarch assets.
Senator Warner. Let me just interrupt because I know my
colleagues have gone a couple of minutes over, but Chairman
Brown may be coming back and may cut me off so I want to get my
last piece in here.
One of the things we have been doing on the Intel
Committee, on a bipartisan basis, is bringing in different
industry sectors and talking about the real challenge that
China poses in terms of economic policy, in terms of
technology, in terms of intellectual property theft. We
recently had, in some of the finance industry, and while they
were concerned about Russia it was like the light went off and
then suddenly saying, oh my gosh, we could have this same kind
of potential decoupling with China should President Xi increase
his belligerent and aggressive actions and try to follow the
Putin game plan if he attacks Taiwan.
Do you think the financial sector is appropriately building
in the potential risks of China taking aggressive action and
what might be our and the West's reaction to that?
Secretary Yellen. That is a really difficult question I
probably cannot answer in the time that I have. I think you are
raising a very important issue. What I see, the businesses and
the financial community are becoming much more aware of the
risks that they face in investing in China, and I think this is
something that really demands our intense focus, going forward.
Senator Warner. I hope we can work with my colleagues on
that. Thank you.
Chairman Brown. Thank you, Senator Warner.
Senator Scott, from South Carolina, is recognized.
Senator Scott. Thank you, Chairman, and thank you, Ranking
Member, for holding this hearing. Secretary Yellen, thank you
for being here this morning.
Some of your comments in response to Bob's question I found
troubling, and just for clarity sake, did you say that ending
the life of a child is good for the labor force participation
rate? Let me just quote what you said, that ultimately
increasing access to abortion and reproductive health care
allows for our labor force participation to continue to
increase, that denying women access to abortion increases their
odds of living in poverty or need for public assistance.
As a guy who was raised by a single mom who worked long
hours to keep us out of poverty, I think people can disagree on
the issue of being pro-life or pro-abortion, but I think in the
end framing it in the context of labor force participation just
feels callous to me. I think finding a way to have a debate
around abortion in a meeting for the economic stability of our
country is harsh. I am just surprised that we find ways to
weave into every facet of lives such an important and painful
reality for so many people. To make it sound like it is just
another 0.4 percent added to our labor force participation as a
result of the issue of abortion just, to me, seems harsh.
Secretary Yellen. Well, I certainly do not mean to say what
I think the effects are in a manner that is harsh. What we are
talking about is whether or not women will have the ability to
regulate their reproductive situation in ways that will enable
them to plan lives that are fulfilling and satisfying for them.
And one aspect of a satisfying life is being able to feel that
you have the financial resources to raise a child, that the
children you bring into the world are wanted, and that you have
the ability to take care of them. In many cases abortions are
of teenage women, particularly low-income and often Black, who
are not in a position to be able to care for children, have
unexpected pregnancies, and it deprives them of the ability
often to continue their education, to later participate in the
workforce.
So there is a spillover into labor force participation, and
it means that children will grow up in poverty and do worse
themselves. This is not----
Senator Scott. Let me just--regaining my time on the topic.
Secretary Yellen. Harsh. This is the truth.
Senator Scott. I will just simply say that as a guy raised
by a Black woman in abject poverty I am thankful to be here, as
a United States Senator, first. The second thing I would say is
that we can, at the same time, have a real conversation about
increasing child tax credits that are refundable. We can, at
the same time, have a conversation about the opportunity to
have a more robust system around the issue of childcare, of
early childhood education. We could have the conversation about
financial literacy. There are a lot of ways for us to address
the issue about the child that is here. So that just, to me,
was unusually piercing comments that you made.
I will say, on my prepared question, that in the face of
persistent inflation, I think caused, in many ways, by the $2
trillion package that was approved in early 2021, that was
followed by a $1.2 trillion package that both combined led to
an overheating of our economy, slowing growth caused by a
backlog pipeline driven too much demand with too little supply,
followed by a lagging labor force participate rate. People are
not coming back to work so we have millions of jobs that are
open. The atrophying of the muscle for work seems to be endemic
in this current Biden administration's approach, coupled with
Government debt that is now well over $30 trillion and growing
very fast.
How do we justify looking at the Build Back Broker plan or
the Build Back Better plan and saying to ourselves that more
money in the economy is going to help us to reduce the
inflationary effect where the average person today is paying
$4.37 for the average 87 unleaded gas?
Secretary Yellen. Well, the American Rescue Plan--it is not
Build Back Better--was designed to mitigate what, at the time,
seemed to be the most significant and worrisome risk facing the
economy, which was that unemployment would stay high, the labor
market would remain weak, and especially low-income households
would lose the roofs over their heads and be unable to put food
on the table and be permanently scarred by the pandemic. And at
the time forecasts were really quite dire, including those of
the Congressional Budget Office and outsiders, and no one
really knew just how significant the risks were.
The American Rescue Plan was a large package. It was
targeted at the needs particularly of those who were most
severely affected by the pandemic. And when you look at the
state of the labor market as you describe the fact that it is
so strong, maybe overly strong, overly hot, is, in a way, a
sign of the success of that program and mitigating what could
have been another Great Depression, a risk that we should not
have been willing to take.
Inflation is clearly a problem----
Senator Scott. I think Chairman Brown is going to tell us
both we are out of time, so let me just finish with this, just
perhaps----
Chairman Brown. Make it a statement, not a question.
Senator Scott. ----perhaps--yes, of course--perhaps better
say what I said, which is, number one, the $1.9 trillion Rescue
Plan, followed by the $1.2 Infrastructure Plan, with another
BBB on the table for more spending was a delineation between
the three categories of spending that I believe two already
passed and overheated the economy and then having a third
package on the table to once again continue to provide more
stimulus to an economy that cannot take the stimulus that has
already been provided.
Secretary Yellen. If you look at the President's budget you
will see that it is fully paid for through higher tax
collections and that the budget also incorporates substantial
deficit reduction.
Chairman Brown. Thank you, Senator Scott.
Senator Smith, from Minnesota, from her office.
If not, Senator Cortez Masto is next from her office,
Senator Cortez Masto from Nevada.
Senator Cortez Masto. Thank you, Mr. Chairman, and
Secretary, thank you for being here. Let me just couch a couple
of things in response to Senator Scott. One, let us not forget
we started down this path with $1.9 trillion tax cuts for the
very wealthy that have not been paid for. My colleague seems to
forget that is kind of where we started here. The rest are
bipartisan, and the Bipartisan Infrastructure package not only
is it paid for, it is a benefit to the State of Nevada, and it
is long-term investments over the years. So that is one.
Two, I want to associate myself with Senator Menendez's
comments both about abortion restriction and its economic
impact on women. It is true. There are studies that show that.
I would ask Senator Scott this question. You cannot know
everyone's circumstances. I appreciate his circumstances and he
is very proud of it. I think that is fantastic. But why impose
your experience and your circumstances on others until you walk
in their shoes? That is all we are asking.
And then let me start with, Secretary, the cryptocurrency,
because I do believe--and I want to be a part of this
discussion--we do need a regulatory framework for stablecoins.
Last week, Fabio Panetta, one of the European Central Bank's
six executive board members, noted that the cryptocurrency
market is now larger than the subprime mortgage market, which
triggered a global financial crisis. Nobody knows that better
than us in the State of Nevada. And he says this: ``The $1.3-
trillion-dollar market shows strikingly similar dynamics.''
There are about 10,000 crypto assets now.
So my question, Madam Secretary, is one financial risk
posed by cryptocurrencies is the concentration of ownership. Do
you see any financial risk because professional investors and
high-net-worth individuals hold almost two-thirds of the
Bitcoin supply?
Secretary Yellen. So I am not sure if the concentration of
holdings among high-wealth investors, if that is true, poses,
in and of itself, a financial risk unless those investors
happened to be leveraged so that a decline in the value of the
assets can trigger financial distress, which spills over to
others.
But certainly I think there are many risks associated with
cryptocurrencies, and the President has asked the Treasury and
FSOC to look at those risks. We will issue a comprehensive
report shortly. The President's working group has already
described the risks we see in connection with one form of
crypto assets, which is stablecoins, and there we see run risks
which could threaten financial stability, risks associated with
the payment system and its integrity, and risks associated with
increased concentration if stablecoins are issued by firms that
already have substantial market power. So we definitely see
significant risks here.
Senator Cortez Masto. Thank you. Let me jump to something
else that is impacting us in the State of Nevada, which is
affordable housing and the lack of housing supply. Our Nation
is short 5 million homes. Building homes, especially those
affordable for working families and seniors and so many others
should be our top priority. Can you address the financial
stability risks to our economy posed by the increase in nonbank
mortgage companies providing residential home financing?
Secretary Yellen. Well, it is certainly true that nonbank
mortgage companies are playing a very large role. They tend to
be quite dependent on short-run financing, and if there is
volatility in the markets and a loss of that access I do see
some risks relating to the role of nonbanks in the mortgage
market.
Senator Cortez Masto. Thank you. And then finally, and you
talked about this, the Administration has taken a leading role
in assessing climate-related risks to financial stability,
through some scenario analysis and disclosures. Can you talk a
little bit about what have financial regulatory agencies
learned from those scenario analysis and disclosure
requirements? Is that what you are referring to in some of the
reporting that has been done?
Secretary Yellen. A number of central banks around the
world, I think the Bank of England is most advanced, have been
evaluating the risks to key financial institutions by looking
at how they would fare, what their losses and financial
position would be if particular climate scenarios were to play
out, and looking at different scenarios, one where there is a
gradual imposition of policies to address climate change,
others where there is very little action and then a great deal
of action. They designed these scenarios and then use them to
assess risks to financial institutions.
And many of our supervisors are looking to do similar
exercises, and it makes sense for FSOC to work jointly on
trying to design such scenarios and collect the data that would
be necessary to translate those scenarios into concrete
assessments of risks to the particular financial institutions.
Senator Cortez Masto. Thank you.
Chairman Brown. Thank you, Senator Cortez Masto.
Senator Rounds, from South Dakota, is recognized.
Senator Rounds. Thank you, Mr. Chairman. Madam Secretary,
first of all thanks for coming and sharing with us in front of
this Committee today.
The Federal Reserve wrote in its most recent supervision
and regulation report, released Friday, and I quote, ``The
banking systems remains strong overall with robust capital and
liquidity and improved asset quality,'' unquote.
Would you agree with their statement?
Secretary Yellen. Yes, to the best of my knowledge,
certainly.
Senator Rounds. Thank you. With regard to what we are doing
right now in Russia, I just want to discuss it with you for a
little bit. Up until now bondholders have only been allowed to
receive sovereign bond payments from Russia because of a
special rule put in place by your department in late February.
The General License 9A exemption authorizes U.S. persons to
receive interest, dividend, or maturity payments on debt or
equity of the Russian Government.
Despite the extremely strong sanctions place on their
financial system this has allowed money to flow out of Russia,
depleting their stockpile of U.S. dollars. That exemption is
poised to expire on May 25th. Their next payments are due on
May 27th for bonds maturing in 2026 and 2036, 2 days after the
OFAC exemption is set to expire.
Will Treasury allow this exemption to expire and allow
Russia to default or would you make other accommodations?
Secretary Yellen. So this is something we are actively
examining right now. We want to make sure that we understand
what the potential consequences and spillovers would be of
allowing the license to expire, and we have not yet made a
decision.
Senator Rounds. When would you expect that decision to be
made? I mean, right now we are talking just a little over 2
weeks.
Secretary Yellen. Shortly. We are actively involved in
evaluation of the risks and impact of not renewing the license.
Senator Rounds. There would be some sort of a report from
your department prior to this point. It simply would not be
ignored at this stage of the game.
Secretary Yellen. I sorry?
Senator Rounds. Well, we would not expect that you would
simply allow it to expire without further announcements of what
your plan is.
Secretary Yellen. We would certainly announce if we intend
to allow it to expire.
Senator Rounds. Or other options available.
Secretary Yellen. Yes. Yes.
Senator Rounds. Thank you. Madam Secretary, our debt has a
share of GDP. The most economically and meaningful measure of
debt has climbed above 120 percent. In September and November I
asked you when we should say enough is enough when it comes to
our debt and deficit. You felt that since the cost of servicing
our debt had been negative due to a long stretch of low rates
our debt has been less burdensome. However, due to skyrocketing
inflation the Fed just raised rates by 50 basis points for the
first time since 2000, and we could see five more hikes before
the end of the year.
Do you think it is finally time to start sounding the alarm
bells, and if not now what level of interest rates would alarm
you?
Secretary Yellen. Well I do feel we have to make sure that
the United States is on a sound fiscal path, and that is an
important priority, obviously, for Treasury and for the
Administration.
The projections that were made in the budget assume that
interest rates will rise over time, that they were abnormally
low. And so my statement that real interests costs were quite
low, of course they would rise over time but still remain at
quite low levels even if interest rates increase.
But certainly longer term we have known for a long time
that as we have an aging population that a larger share of U.S.
GDP will go to Social Security, Medicare, Medicaid, and that we
need to address issues in connection with financing those
programs. If we fail to attend to them that most very long run
analyses show debt growing in a manner that could be worrisome.
At the moment, the debt-to-GDP ratio is not increasing.
Revenues are coming in very strong. This year the deficit will
decline by, we expect, over $1.5 trillion, and my guess is that
CBO and others will be revising down somewhat their likely path
for the debt-to-GDP ratio.
Senator Rounds. Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Rounds.
Senator Reed, from Rhode Island, is recognized.
Senator Reed. Thank you very much, Mr. Chairman, and thank
you, Madam Secretary, for your service.
Last year our economy grew by 5.7 percent. Unemployment is
down to 3.6 percent. We have added 8.3 million new jobs under
President Biden, including over 2 million in the last year
alone. In fact, when I go out and talk to any type of business
their major complaint is they cannot find workers, and this is
probably the best year to graduate from high school, college,
or anyplace else, to find a job.
What would our Nation's economy and job news look like if
Congress and the Administration had not passed the American
Rescue Plan last year?
Secretary Yellen. When President Biden assumed office the
unemployment rate was very high and there was a great deal of
uncertainty as to how the pandemic would progress and a real
possibility that unemployment would end up rising to Great
Depression levels.
We worried not only about mean outcomes but also the tail
risk that we could see a very weak labor market, and the memory
of 2008, the fact that it took a decade to recover from the
financial crisis, that the consequence was many people
graduated from college, went into the job market, could not
find anything, and saw a permanent impact on their life
chances. And, of course, so many people lost homes and jobs and
encountered scarring.
At the time we were seeing cars lined up in parking lots
waiting to get food at food banks because they could not keep
enough food on the table and were risking roofs over their
heads. So the focus was on aiding those people and promoting a
strong job market recovery.
Now inflation is absolutely a problem, and it is critical
to address it, but I think at the same time we should recognize
how successful that plan was in leading to an economy where
instead of having large number of workers utterly unable to
find jobs, exactly the opposite is true.
Senator Reed. Thank you very much. And as you point out,
inflation is a difficult issue. My sense is it was triggered by
supply interruptions caused by COVID, and it was exacerbated by
the outbreak of war in Ukraine and the disruption of the world
energy markets. Gasoline is something that is a fairly good
barometer and it has reached historic levels, at least in the
last decade or so.
We have to deal with that, so what are you and President
doing to deal with that?
Secretary Yellen. So let me first say I agree with your
diagnosis that the factors you mentioned have been extremely
important. The President has taken actions in a wide array of
areas. With respect to energy prices, he has announced historic
release of 1 million barrels a day from the Strategic Petroleum
Reserve to hold down gas prices, allowing domestic private
suppliers time to ramp up production.
I think many domestic oil producers expected the recovery
to be weak and oil demand to diminish, and they did not invest
in drilling and producing wells so supply diminished, and it is
going to take a while for them to ramp up supply. And in the
meantime we have these strategic petroleum releases.
On the supply chain side, that has been a very important
source of inflation. The President has worked tirelessly to
deal with backlogs at the ports, to make sure that there is an
adequate supply of truckers, to work to make sure that there is
adequate room for storage of containers that are coming off
ships.
But, you know, the supply disruptions continue. There are
many related to what is happening in Russia, Ukraine, that the
war obviously has impacts on energy markets, and now we have
COVID situation in China that is leading to further supply
disruptions.
So there is a broad program to address inflation.
Obviously, the Federal Reserve has a role. They are recognized
independent and charged with doing what they think necessary.
But we are working on the things that we can as well.
Senator Reed. Thank you very much, Madam Secretary.
Chairman Brown. Thank you, Senator Reed.
Senator Tillis, from North Carolina, is recognized from his
office.
Senator Tillis. Thank you, Mr. Chairman. Madam Secretary,
thank you for being here. I was going to ask a question about
energy but Senator Reed's question and your response to it, I
feel like I have to drill down a little bit--no pun intended.
Within hours of the President being endorsed he signed an
order to pull the permit for the XL Pipeline. We talk about a
shortage of truckers and transportation but this Administration
sent a very clear message on day one that the infrastructure
that energy production requires for those capital expenditures
and expanded drilling in the United States to make sense from a
business perspective, he sent a very clear message before the
sunset on the first day of his presidency that that was not
going to be a priority of this Administration.
It seems to me that we can attribute some of the increase
in energy to what is going on in Ukraine, but is it not
rational to also say that the posture of this Administration
and the message that they have sent for domestic energy
production is also another factor in rising energy prices?
Secretary Yellen. So Senator, I think with respect to the
Keystone Pipeline this is something that does not really have
anything to do with the supply of oil, and it is something that
would be years----
Senator Tillis. No. What it has to do is with the--excuse
me, Madam Secretary, because I do want to get to some of the
questions. But it has to do with the underlying cost and the
long-term certainty than an industry needs before they are
going to make capital expenditure investments.
I do not expect you to answer this question but I do think
it is something that we all have to be intellectually honest
about. Not more than 9,000 permits that the Administration
supposedly says opens the doors to energy exploration here,
only about half of them are viable, and even those are in
question because of other policies that the Administration has
taken on actually authorizing the use of it. We know within a
week of the Administration being in office we have seen the
correspondence out to supervisors among the States saying that
you cannot make decisions to move froward with extraction. That
is something that has to go through the White House.
I do not expect you to get into that, but I do believe that
we have to understand there is a reason for energy prices going
up, and only a portion of which can be attributed to the
geopolitical situation that we are in right now.
Secretary Yellen. So----
Senator Tillis. I want to ask--go ahead.
Secretary Yellen. I feel like the real moral of this
situation we face is that as long as we are as dependent as we
are on fossil fuels and our energy supply that we will always
face vulnerabilities from the decisions of Russia or other
countries. We face geopolitical----
Senator Tillis. I agree.
Secretary Yellen. ----risk, and what we need to do is----
Senator Tillis. Secretary Yellen----
Secretary Yellen. ----we need to transition----
Senator Tillis. ----I agree with that----
Secretary Yellen. ----renewables----
Senator Tillis. Secretary Yellen, if I could get you to
yield----
Secretary Yellen. ----and we need to deal with climate
change.
Senator Tillis. ----for a minute, if I could get you to
yield for a minute, you can also see the risk of going too
soon. That is why we have European Nations that are struggling
to figure out because they went so far that they actually
stopped drilling--I will give you a classic example in Germany.
They have energy resources in Germany. They shut them down. And
they just replaced their fossil fuels with fossil fuels coming
from Russia.
So if we do not get the transition right--I have supported
renewables for years. That is why we have a prospering solar
economy in North Carolina. But if we do not get it right and we
are not extracting natural gas, for example, that is a fraction
of the carbon footprint, we are expediting a transition and
putting ourselves at risk in the process.
But I want to move on to something that is in your lane.
One question that I have, with the help of the Chairman and in
collaboration with Senator Tester, we were able to get the
LIBOR transition legislation passed. How is the implementation
going?
Secretary Yellen. I think that is very helpful and I really
appreciate Congress doing that. We are in a transition phase
and we see that banks are now moving off LIBOR as they have
been required to do with a clear end date to when it is going
to be produced. And I think they are making good progress in
transitioning to SOFR.
I would say the progress is a little bit less good when it
comes to loan products. The progress has been very good on
derivatives. We do think it is important that banks choose
indices that are robust, based on strong data. We have some
concerns, that we mentioned in the FSOC report, over credit-
related indices that banks may use. But generally I would say
the transition is going well.
Senator Tillis. OK. Thank you. Thank you, Mr. Chair.
Chairman Brown. Thank you, Senator Tillis.
Senator Warren, from Massachusetts, is recognized.
Senator Warren. Thank you, Mr. Chairman.
In the crash of 2008, we saw how financial institutions
that were not banks could be big enough and risky enough to
bring down our whole economy. It was the collapse of a few
nonbanks, the investment companies Lehman Brothers and Bear
Stearns, the insurance giant, AIG, that triggered the crisis
and caused millions of families to lose their jobs, their
homes, and their retirement savings.
Now in response, Congress created FSOC to prevent such a
crash from ever happening again, and one of the most powerful
tools we gave to FSOC was the ability to designate nonbank
firms as, quote, ``systemically important financial
institutions,'' or SIFIs, and subject to the same oversight as
the too-big-to-fail banks.
Today these nonbank firms include asset managers that
oversee trillions of dollars in assets, exceeding the GDPs of
just about every Nation on Earth, mortgage companies that
originate 60 percent of home loans in the United States, and
hedge funds, private equity firms, and investment companies
that operate in the shadows of the financial system. Those
companies control huge amounts of the U.S. and the worldwide
economy, which means their mismanagement or failure could
threaten the entire economic system.
Even so, in 2019, under the Trump administration, FSOC
issued revised guidance that significantly weakens the
Council's ability to conduct its oversight. But do not take my
word for it. Secretary Yellen, you, along with Fed Chair Ben
Bernanke and former Treasury Secretaries Tim Geithner and Jack
Lew, wrote a letter, in 2019, opposing the revised guidance.
You stated that the changes would, quote, ``neuter the
designation authority,'' close quote, and, quote, ``amount to a
substantial weakening of the postcrisis reforms,'' end quote.
You also say that the 2019 guidance would, quote, ``make it
impossible to prevent the buildup of risk in financial
institutions whose failure would threaten the stability of the
system as a whole,'' end quote.
That sounds pretty serious. Do you still agree with that,
Secretary Yellen?
Secretary Yellen. Yes, I do.
Senator Warren. Good. Under the Trump administration,
regulators chipped away at the rules bit by bit, leaving our
financial system and American families less safe. Restoring
FSOC's ability to prevent giant corporations from taking our
economy down again is a critical step to building those
defenses back up.
So Secretary Yellen, you have already joined others to say
how dangerous you think it is that the 2019 SIFI guidance
change was, and now you have the power to do something about
it. Will you reverse the risky 2019 guidance this year?
Secretary Yellen. We are looking at this very carefully and
examining what our options are. I will be discussing this with
other members of the Council, so I continue to hold the same
set of views.
But I do want to say, designation is not the only tool that
was given to FSOC to address financial stability risks in the
nonbank financial sector. Activity-based regulations are also
relevant, and so there are two kinds of tools. Sometimes
designation is clearly the right too. When there is an
institution whose failure could threaten financial stability it
is the right tool.
But sometimes--and I would give you money market funds as
an example--there is a practice that occurs throughout the
financial sector. Many firms are involved in it. The risk comes
from the activities or the structures that many firms have that
risk. In situations of that sort of an activity-based approach
may be relevant.
And I want to say that FSOC has been very focused, ever
since the day I became Treasury Secretary, on risks in the
nonbank financial sector. We have focused on money market
funds, we have focused on open-end mutual funds where there can
be run risks, and hedge funds. And an activity-based analysis,
or potential regulations in all of these cases, from the SEC or
further data gathering, I think that is the right approach
there as opposed to designation.
Senator Warren. I appreciate that, Secretary Yellen, but we
are going to run out of time here. I just want to remind you,
though, I will quote Yellen to Yellen on this. The letter you
co-led said, quote, ``Activity-based approaches cannot address
risks that are tied to the funding, leverage, and combination
of activities within a corporation,'' end quote. It also says,
quote, ``Congress created the FSOC with both designation
authority and the authority to review and make recommendations
regarding activities. Congress did not intend for one authority
to be used as a prerequisite for the other,'' end quote.
My only point here is that with that 2019 designation that
you wrote this letter against it has altered that balance, and
I want to see that balance come----
Secretary Yellen. I agree with that. I think both tools
should be available and one should not be a prerequisite to
another, in my wife.
Senator Warren. Good.
Secretary Yellen. But we need both tools, and hope to----
Senator Warren. I want to see both as well.
Secretary Yellen. ----look very carefully at the
designation.
Senator Warren. Stronger rules to protect our economy. I
always agree. Thank you.
Secretary Yellen. I agree.
Chairman Brown. Thank you, Senator Warren.
Senator Cramer, of North Dakota, is recognized.
Senator Cramer. Thank you, Mr. Chairman. I cannot resist
getting back to the issue of energy. You said a couple of
questions ago that oil producers in the United States did not
adequately anticipate, or something to this effect, anticipate
the robust return to demand, and that as a consequence they did
not respond by producing quickly enough. Is that basically what
you said?
Secretary Yellen. Well, prices were very low for a time.
Many energy companies suffered losses, although I think they
were gun-shy about putting themselves in a similar position.
And so they cut production and investment and were probably
surprised to see the rapid recovery and runup in oil prices
that resulted.
Senator Cramer. Since that time, though, there has been a
runup in oil prices. I do not necessarily agree with your
assessment of the situation there but giving you the benefit of
the doubt.
Let me tell you what else they respond to. They respond to
chilling market signals being sent by this Administration every
single day, and this hearing is a pretty good example of it.
When I look at FSOC action on climate-related financial risks,
it is one message after another after another--do not produce
more oil in the United States of America. You have got John
Kerry running around the world, saying, ``Do not buy ours. Buy
somebody else's.'' You have got the moratorium on Federal
drilling. You know, now they open up 20 percent of the
available drilling but then they announce that they are not
going to allow any drilling on the 20 percent that are open for
easements.
But FSOC itself, including the SEC evaluating these
disclosure rules, these are chilling messages. The Fed, with
its two committees to better understand climate risk and
incorporate committees into supervision of financial firms.
Even the Department of Defense, as we evaluate the National
Defense Authorization Act, the President's budget, five times
in his opening statement to the Armed Services Committee
Secretary of Defense Lloyd Austin used the words ``climate
change'' five times. Five times, while there is a war being
fought in Europe, where energy has been weaponized, where this
Administration itself has helped weaponize oil.
And you know what else? Earlier Senator Cortez Masto said,
``Inflation started with a $1.9 trillion tax cut'' and that led
to an economy. Let me tell you what they led to. They led to an
economy where we became energy dominant, because not only did
the previous administration cut taxes, it cut regulations. And
we became the No. 1 producer of oil and gas in the world. And
our dominance at that same time lowered greenhouse gas
emissions.
If the goal is better climate action, produce more in the
United States. We are living at time when our friends in Europe
are pleading with us. They voluntarily have cut themselves off
from hostile energy production in Russia and other places. This
Administration went to Venezuela for help, and then they went
to SPR, to your point. And now we have not completely depleted
but less oil in the Strategic Petroleum Reserve at a much
higher price to replenish it. It has done nothing to help
inflation. It has only helped drive up costs.
I could go on and on. I do not want to be the person that
does not give you a minute to all of this, but I am all for
aspirations, and I think a 2050 fantasy is a great aspiration.
But there is a 2022 reality facing the American consumer,
facing the globe, facing national security and international
security, and I just think, let us get every regulator back in
their own lane and let us deal with the reality in 2022.
I will give you a moment to respond.
Secretary Yellen. Well I agree with you that there is going
to be a transition path with respect to energy, and I do not
think that anybody believe that we can switch completely to
renewables in the short term. But while the current situation
certainly emphasizes the need for energy production now from
fossil fuels it should remind us, especially coupled with the
increasingly dire predictions of scientists that our
grandchildren will not be able to have an inhabitable planet if
we do not address the risks associated with climate change. We
should not lose our focus on the need to transition as rapidly
as possible to a path in which fossil fuels play a much less
important role.
And financial institutions themselves have recognized this.
There is an alliance called GFANZ that almost all the large
American banks voluntarily signed up, that they pledged,
voluntarily, to align their own lending portfolios with a net
zero by 2050 approach.
So medium term we need to move away from fossil fuels.
Short term, obviously we have a problem.
Senator Cramer. And in the transition, though, we ought to
be producing more American fossil fuels because as we produce
more American fossil fuels and sell to the global marketplace
we reduce the emissions and we create a transition that is both
useful for the investor and useful, perhaps, for those who are
worried about climate change.
I have gone over my time. I appreciate it. Thank you, Mr.
Chairman.
Chairman Brown. Thank you, Senator Cramer.
Senator Smith, from Minnesota, is recognized from her
office.
Senator Smith. Thank you, Chair Brown, and thank you,
Secretary Yellen. It is wonderful to see you virtually.
I want to just follow up a bit on the questions that
Senator Cramer was raising. I, for one, am pleased that FSOC
has made it a priority to address climate-related risks, both
transition risks and also physical risks. And as I think about
Minnesota--severe drought, flooding in the northwestern part of
the State, right up next to where Senator Cramer is--the risks
just seem so clear it only makes sense to me that we should
have some sort of a systemic way of understanding them and
being able to make comparisons across institutions, which I
think is the goal of what you are working on.
Here is just one example. A family today takes out a 30-
year mortgage that will not pay off until 2052, and by then, by
2052, parts of the country could experience a 15-inch rise in
sea levels, and a 2.5 degree increase Fahrenheit of temperature
rise. So that strikes me as something that financial
institutions need to be paying close attention to. And as you
say, they already are.
So Secretary Yellen, could you just address those, and what
would you say to us about the pace of regulators moving to
address this crisis and what more you want to see.
Secretary Yellen. So I definitely think that financial
institutions--you are absolutely right, they make long-term
loans, whether they are for mortgages or other kinds of loans,
and they definitely need to be taking account of the risks that
are emerging over a long time period. So I think that is
important.
I think we need private sector actors, including financial
institutions, to be taking the long view, and we need to make
sure that they have the information that they need to evaluate
their own risks, that supervisors and regulators need to be
evaluating those risks, as well. And that is an important part
of the agenda of FSOC is to amass the information that will
enable that evaluation of risks, both by financial institutions
and by regulators.
And the SEC proposal on disclosure by firms, I think that
is extremely important because investors, huge investor
community, asset managers want to be able to understand the
risks that they are undertaking when they invest in firms, and
without this kind of disclosure of climate-related risks we are
not providing the investor community the information they know
to allocate capital properly.
So I am very supportive of the SEC proposal to require
disclosure of climate-related risks by firms. I think the SEC's
job is to make sure that investors have the access to the
information that they need to evaluate investments, and many
countries around the globe are requiring this kind of
disclosure as well.
Senator Smith. I completely agree with you, and, of course,
in a free market, a free market functions fairly when there is
great information, widely shared and understood information.
That transparency is a hallmark, and I think that is the goal
here, so that people are not surprised, either investor or
individual consumers or businesses, anybody is not surprised.
And it seems to me that there is a real cost of inaction or
slowness in this area as well, as we think about not like, you
know, a long, long time from now but like right around the
corner, right now risks. I think Senator Warner talked about
the current fires in New Mexico, and we saw this in my State as
well.
I just would say that, you know, I talk to Minnesota
farmers and ranchers about climate change all the time, and
they see this risk as a current risk, not something that is
going to be happening a gazillion years from now.
I just have a minute or two left and I want to go to the
issue of rising home prices. As noted in FSOC's annual report,
home prices rose 18 percent between August of 2020 and August
of 2021, far exceeding the pace in years prior. By one
estimate, rents went up more than 11 percent national in 2021.
This is a deep concern for all of us that want to see our
economy rebound from the pandemic and appreciate that this is a
challenge, a housing challenge that existed before the pandemic
but has really been exacerbated by what is happening.
So Secretary Yellen, could you talk a little bit about what
is your expectation around housing prices and what more we
ought to be doing to stabilize housing prices as we go forward?
Secretary Yellen. Yes. Well, to start with, I think we have
an extreme shortage of housing in the United States. We have
been underbuilding since the 2008 financial crisis. The
pandemic then led to an increase in the demand for housing.
There has been insufficient inventory. And now with the supply
chain problems we have it is actually hard to complete houses
that are under construction. The stock of housing under
construction is at a 50-year high.
So we have a real housing problem, especially affordable
housing, in the United States. House prices are rising very
rapidly. My expectation is with house prices very high relative
to rents and having increased rapidly in an environment of
rising interest rates, mortgage rates have already gone up more
than 200 basis points just in recent months, my guess is that
house prices will begin to level off in the not-too-distant
future. But we do have a significant housing problem.
Senator Smith. Thank you. I know I am out of time, Mr.
Chair. I just want to acknowledge and thank you for your work
on the reconciliation package and many of our work to try to
address some of these deep challenges around housing. And I
hope we will be able to find a way to come back to that
important work because it is so needed right now. Thank you.
Chairman Brown. Thank you, Senator Smith.
Senator Hagerty, from Tennessee, is recognized.
Senator Hagerty. Thank you, Mr. Chairman and Ranking Member
Toomey. Thank you very much for holding this hearing. Secretary
Yellen, good morning to you.
Secretary Yellen, you and I have talked about this before,
in fact, the past two times you have appeared before this
Committee. I have talked with you about the confidential
taxpayer information that ProPublica has been publishing. Each
time I asked you for an update on the source of the leaks and
the investigation that is underway to get to the bottom of
that.
The prior two meetings that we had you were not able to
update me so I want to ask you now. More than a year has passed
since the leaks of confidential taxpayer information had begun
by ProPublica. Can you tell me, can you update this Committee,
the American people, on where you are with respect to the
investigation in terms of the source of the leaks of
confidential taxpayer information and how it continues to be
published?
Secretary Yellen. Senator, I really wish I could update
you. I really am anxious to see some results here as well. I
regret that I am not able to do so. There are investigations
that are ongoing by law enforcement agencies and also by the
inspectors general. I respect these are independent
investigations, as is appropriate, and I certainly respect the
authorities of these independent investigators to complete
their work. I have not seen any information on what is being
found, and I am eager to see it, just as you are.
Senator Hagerty. I am sure it must be every bit as
disturbing to you, if not more so, given your role, that
millions of taxpayers are still required to give their
confidential information to the IRS, and in the face of these
leaks and the publication of this information, in ways that may
be perceived as perhaps partisan. It could be hacking. We do
not know. But it creates a great amount of mistrust among the
American people, and I encourage you to do everything within
your power, Madam Secretary, to encourage this investigation to
come to a conclusion, to get some results for the American
people, certainly for this Committee. I agree with you. It is
quite disturbing.
And going forward, do you have a plan in place, or are you
working on a plan to make certain that this type of leak does
not happen again?
Secretary Yellen. We have done everything within our power
to make sure that there is not inappropriate access to such
data. For example, there are some pieces of Treasury that, for
very good reasons, based on their work, have access to this
information, to individual taxpayer information. And we have
asked our own inspector general to make sure that the controls
that exist, wherever that information is available, are
appropriate and working. And he has reported that he has looked
into it and that is not an issue, that the controls are
adequate and are working.
So that is the kind of thing we can do to make sure there
is nothing in our structure that could create an opportunity
for leaks. The IRS inspector general is also examining similar
issues within IRS.
I could not agree with you more. This is very damaging. I
absolutely want this work to be done and to figure out how this
happened.
Senator Hagerty. Thank you for your efforts on this, and
again, the controls have obviously failed in the past because
the leaks have occurred. However they occurred I hope we get to
the bottom of it, and I hope whoever did it will be made an
extreme example of so that this never happens again.
Secretary Yellen. I agree with you, Senator.
Senator Hagerty. I would like to turn to another point.
Last month, the Department of Treasury released the 1-year
progress report on what the Department calls its Equity Action
Plan. On page 7, Treasury details its efforts to advance racial
equity, including through IRS enforcement.
I find the notion troubling that Treasury should
potentially structure its policies with any particular group of
Americans in mind, rather than advancing economic opportunities
for all Americans, regardless of their race or gender.
So Secretary Yellen, could you elaborate on what specific
plans Treasury may be pursuing, or contemplating pursuing
regarding racial equity in IRS enforcement?
Secretary Yellen. So we simply want to make sure that there
is nothing unintentional in techniques of enforcement used by
the IRS that could result unintentional discrimination. You
know, we certainly can see, for example, that in the conduct of
enforcement that there might be undue attention to certain
kinds of, you know, issues that could unfairly discriminate by
race, and we want to make sure that that is not occurring. So
that is part of our racial equity program.
Senator Hagerty. I hope you can assure us that there will
not be people targeted based on their race or gender or
anything of that nature. Thank you.
Chairman Brown. Thank you, Senator Hagerty.
Senator Tester, of Montana, is recognized.
Senator Tester. Yeah. Thank you, Mr. Chairman and Ranking
Member. I also want to thank you for being here, Secretary
Yellen. It is always good to see you.
It is not breaking news that last year we had a drought
that impacted nearly every State. There might have been a
sliver or two west of the Mississippi. Huge weather event that,
by the way, I am not sure we are out of the woods yet,
certainly not where I live. Seeding this weekend into dry dirt.
If we do not get rain it is not coming up. We have got fires in
New Mexico, and it is not even fire season yet.
We do not do much about climate as far as a Congress goes,
and I think that is unfortunate because, whether we want to
admit it or not, Mother Nature bats last. I am worried about
the impact on small businesses, community banks, agriculture,
and, quite frankly, the economy in general, not to mention the
kind of money that we are putting out in disasters.
So from your seat, how does our financial system need to
prepare for these challenges?
Secretary Yellen. So both the Financial Stability Oversight
Council and individual supervisors, for example, all of the
banking supervisors, have recognized that losses related to
climate change can have an impact on banks, that this is a risk
that individual banks need to monitor and assess, guard
against, and that supervisors also need to be able to do
independent evaluations. And these evaluations can be
complicated and require data that are not so easily available.
So the FSOC has prioritized collecting and disseminating
relevant data as one of its priorities to work with supervisors
to make sure these risks are assessed.
Senator Tester. OK, and I appreciate that. So we have got a
lot of smaller institutions, smaller banks, especially in a
State like Montana, but it probably is this way all over, I
mean, where community banks are really carrying the majority of
the risk out there. How do you gather that information from
those folks without being too burdensome?
Secretary Yellen. Well, we are working with the Office of
Financial Research to try to produce a data base, working with
outside providers and pooling the resources and knowledge of
the different agencies to be able to compile data that is
relevant to evaluating these risks.
Senator Tester. OK.
Secretary Yellen. I think it is something--I agree, it
would be very difficult for individual financial institutions
to be able to do.
Senator Tester. So I want to talk about cybersecurity
threats. What threats, on the cybersecurity side, are of
concern most to you right now?
Secretary Yellen. We are definitely concerned about cyber
risks to the financial sector. This has been a longstanding
concern. Suppliers of software and inputs that many financial
institutions use can be a source, when they contain malware,
can create risks to multiple financial institutions. We are
working carefully with Treasury that has oversight of the
financial sector to quickly disseminate information. Of course,
in connection with Russia and Ukraine we are on heightened
alert with respect to potential cybersecurity risks.
Senator Tester. In the cyber realm does Congress need to do
anything to empower you to deal with this issue or do you have
the capabilities to do it on your own?
Secretary Yellen. I believe we do have capabilities working
with law enforcement agencies, with CISA. This is largely
something that private sector needs to be aware of, have the
information. Information dissemination is sometimes imperfect
and we need to make sure that when a risk is identified that
firms know about it.
I would be happy to get back to you with potential
legislative needs.
Senator Tester. I think it is good. I mean, I think it is,
in my opinion, where the next war will be fought or a good
portion of it. Thank you.
Chairman Brown. Thank you, Senator Tester.
Senator Daines, also of Montana, is recognized.
Senator Daines. Thank you, Mr. Chairman. I would like to
start by associating myself with Senator Tim Scott's remarks,
because I also take issue with the characterization of abortion
as a way to boost the economy.
When I think about the loss of 63 million lives that have
been lost to abortion in the United States over the past 50
years I think of how many more scientists, engineers, farmers,
teachers, artists, doctors that our Nation could have. And I
think just look at low birth rates coupled with an aging
population are a threat to our future economic prosperity. So I
just want to state that I firmly disagree with your prior
characterization.
Turning to my remarks. Secretary Yellen, I believe the
Treasury is done a good job rationing up sanctions over the
past several months, but I do not believe we are moving fast
enough. Ukraine has proven they are very capable of winning
this war and we must do everything we can to ensure that they
not only win but they win as soon as possible to stop the
ongoing atrocities and the war crimes being committed by
Vladimir Putin.
Our current sanction regime is full of holes, and enforcing
entities that are currently sanctioned is severely lacking.
Today, online commercial registry data allows sanctioned
entities to be monitored in near real time. This data is
publicly available to Treasury's Office of Foreign Asset
Controls. I do believe the use of real-time data needs to be
stepped up in a significant manner.
I also think sanctions need to be personalized to Putin. He
spent decades building a massive commercial and financial
network with money hidden all over the world. We need to act
swiftly, deliberately in working with the international
community to pursue these illicit financial assets.
I did send a letter to you yesterday which outlined
specific steps I believe should be taken in short order.
Namely, I believe we should take the following actions. Here
are a few: designate Bank Russii and all of its related
entities as a primary money-laundering concern under 311 of the
Patriot Act; second, revise the 50 percent rule to provide the
OFAC more flexibility; and third, levy new sanctions on GAZPRM,
GAZPRM Bank, and Rosneft.
I recognize these actions come with tradeoffs, but I
believe the prolonged war in which war crimes that I personally
witnessed myself in Bucha a few weeks are repeated in city
after city is simply an unacceptable outcome.
My question, Secretary Yellen, I know the letter was just
sent yesterday, if you have had a chance to read that letter,
and whether Treasury would consider and would take any of these
actions, and if not, why?
Secretary Yellen. Well, Senator, first of all, we are
working very closely with our allies to remain coordinated on
sanctions. We are in the process of ratcheting up sanctions and
periodically, almost every week, we have announced further
steps to tighten our sanctions. So we wish to take every action
that we possibly can to raise the pain to Russia and to end
this war as soon as possible.
I have not had a chance to look at your letter.
Senator Daines. Thank you.
Secretary Yellen. I will do so. My staff can get back to
you to discuss----
Senator Daines. Thank you. We have got some very specific
actions that like to consider recommending.
Secretary Yellen. It is a valuable set of suggestions.
Senator Daines. And I think, also, we have got to continue
to think about what a prolonged conflict might have on our
financial stability and the world's financial stability as we
see what is going on right now in terms of energy as well as
food security. You know, Russia is occupying the port city of
Kherson, and they aim to control Odessa. In the last 48 hours
you have got significant attacks her on Odessa and, of course,
the Black Sea.
Given that Ukraine and Russia produce more than a quarter
of the global wheat supply -Ukraine alone is 10 percent--they
are equivalent to the United States in terms of global wheat
exports. What will happen if the production and the export of
the food supply here from that part of the world is taken
offline for years?
Secretary Yellen. Senator, we are terribly concerned about
global food supplies. The IMF World Bank meetings were here a
couple of weeks ago, and I convened a meeting of the heads of
all the multilateral development banks and finance ministers to
discuss this issue, to come up with an action plan. We have 275
million people globally who are at risk in terms of
starvation----
Senator Daines. That letter I sent was meant to be helpful
in trying to look at some other targeted sanctions here, to
maybe ratchet up the pressure here so the Ukrainians can win
this war.
Secretary Yellen. We share your goal.
Senator Daines. Thank you. I want to switch to a question
on cyber. Senator Tester brought this up too. I believe that
Treasury and FSOC are not placing enough emphasis on
cybersecurity as it is a threat to our financial stability. I
just spent a couple of hours at Fort Meade with General
Nakasone to see this first-hand in a classified brief.
But in your testimony you spend 158 words talking about
climate-related financial risk. By comparison, you spent 1 word
discussing cybersecurity. So do you believe that climate change
poses orders of magnitude greater threats to financial
stability than the threat posed by inadequate cybersecurity?
Secretary Yellen. Cyber is a critical risk. We identify it
as such in the report.
Senator Daines. But 158 times climate change----
Secretary Yellen. Look. You know, climate change has not
ever previously received attention by FSOC, and it, from a long
run standpoint, over decades, it is a great or greater risk to
humanity. It is certainly on a level with cybersecurity. And I
think it is appropriate for us to ratchet up attention given
that it has received so little. But not trying to say that
cybersecurity is not an utterly critical risk. It is.
Senator Daines. 158 to 1 sends a pretty strong message, but
thank you.
Chairman Brown. Thank you, Senator Daines.
Senator Warnock, from Georgia, is recognized.
Senator Warnock. Thank you so very much, Chairman Brown,
and thank you, Secretary Yellen, for testifying before the
Committee.
As I was saying last week, one of the most effective things
that the President of the United States can do to lower costs
for Georgians and to help close the racial wealth gap is to
cancel student debt. This would have a transformative change on
young Americans across the country, freeing an entire
generation from this crushing economic burden of student debt.
I know a little about student loans. I borrowed in order to
make it through college, the first college graduate in my
family, but it was a different time, I must admit, over 30
years ago. Our kids now are graduating and they have a mortgage
before they have a mortgage.
Secretary Yellen, the average Georgian with student debt
has to pay $277 per month. Without that monthly burden, would
it be easier for Georgia borrowers to save for a downpayment,
say, on their first home?
Secretary Yellen. Sure. Senator, I agree that student debt
is a substantial burden to many people, especially those who
end up with low incomes or have gone to colleges or for-profit
institutions that they have not actually completed their
degrees or have not found themselves with enhanced skills that
enable them to do well in the job market. It kind of makes it
hard to buy a house, sir.
Senator Warnock. Absolutely. And a lot of folks who are
under the load of this crushing debt actually do not have a
degree.
Secretary Yellen. Yes. A lot of people do not finish their
degrees, and that is a huge problem.
Senator Warnock. Do you think if we cancel student debt it
might encourage entrepreneurship, the starting of small
businesses?
Secretary Yellen. Well, it would provide greater resources
to do so.
Senator Warnock. It would make it easier. And collectively,
are those things good for the economy or bad for the economy?
Secretary Yellen. Well, they could be good for the economy.
There are some tradeoffs involved that need to be analyzed.
Senator Warnock. OK. As Secretary of the Treasury, of
President Biden issues an Executive order to cancel student
debt are you and the Treasury Department prepared to fully
support the implementation of such an order?
Secretary Yellen. You know, certainly we will support
anything that President Biden decides is his policy, and he is
the process of thinking through how he wishes to approach
student debt.
Senator Warnock. Yeah, I understand he is thinking it
through and he has talked about it publicly. I just think that
this is a real transformational possibility and I hope we do it
in a way that will actually make a real difference for people's
lives.
I want to switch topics here. Last week I chaired a
subcommittee hearing examining overdraft fees and their effects
on working families. We heard testimony about the predatory
practices of overdraft services offered by some banks. My
office will be releasing a white paper showing the stark
contrast between how banks and the American public view these
fees--the way banks see it, the way their customer see it. If
overdrafts have become a necessary financial safety feature
then the public should not view them as predatory or illegal,
as the white paper concludes.
We also heard that some banks rely on these overdraft fees
to stay solvent. Imagine that. The bank relying on overdraft
fees so that the bank can remain solvent. Do you believe that a
bank that relies on exorbitant overdraft fees to make any
profit is a safe and sound financial institution?
Secretary Yellen. Well, I would certainly hope that that is
not the major source of profit for a bank that is serving the
public, and certainly some of these fees, at least to my mind,
are abusive.
Senator Warnock. Yeah. I would think that of all
businesses, a bank ought to be able to keep a healthy balance
sheet without pilfering the folks who are literally putting
their money in the bank.
How do you plan on working with other regulators to hold
banks that use overdraft fees to stay afloat accountable?
Secretary Yellen. So this is not an issue that FSOC has
taken up. I think it is one that is in the domain of the
Consumer Financial Protection Bureau and also individual
supervisors. But it seems to me like a natural thing for CFPB
to be paying attention to.
Senator Warnock. Well some of the banks are already moving
in the right direction. As Secretary of the Treasury, would you
encourage banks to follow their peers? Do you think it would be
a good idea if they followed their peers instead of continuing
these predatory practices?
Secretary Yellen. I think it would be a positive
development if they do so.
Senator Warnock. OK. Thank you so much.
Chairman Brown. Thank you, Senator Warnock.
Senator Sinema, from Arizona, is recognized from her
office.
Senator Sinema. Thank you, Mr. Chairman, for holding this
hearing today. Secretary Yellen, thanks for joining us.
Arizonans continue to be concerned about inflation and
rising prices. Both parties need to work together to address
supply chain bottlenecks, reduce costs for families, and fight
inflation, just like we worked together to pass the Bipartisan
Infrastructure law.
While I have been concerned about inflation for some time,
I have also heard that recently many leading market analysts,
like Goldman Sachs, could have begun revising their inflation
projects downward. Now this is potentially an indication that
economic conditions may be improving and that inflation may be
cooling off, and it is promising news for Arizona families and
businesses who are struggling in this current economic
environment.
So, Secretary, what do you think analysts are seeing in the
market that is causing them to adjust their forecasts, and do
you find those arguments persuasive?
Secretary Yellen. So inflation has been very high, but many
analysts think that it has recently peaked, and at least on a
year-over-year basis it is likely to come down. The Federal
Reserve has begun to, I think, address inflation in a forceful
way, and that is another factor that people see that the Fed
has expressed a commitment to take the steps that are necessary
to bring inflation down. And, of course, the Administration is
focused on everything that we can do to also bring inflation
down, from steps ranging from opening up the Strategic
Petroleum Reserve to respond to the pressures in energy markets
from Russia's invasion of Ukraine to continuing work to address
supply chain bottlenecks.
But, you know, the course of inflation remains very
uncertain. It depends, in part, on the pandemic, which, you
know, continues to affect the economy. We are seeing lockdowns
in China that continue to build supply chain pressures and
problems. And in the United States, I think, consumer spending
patterns are returning to something more normal, shifting
somewhat away from goods and back toward services, which should
be helpful. But the inflation outlook still remains quite
uncertain.
Senator Sinema. Thank you. You know, on Friday we learned
that the price of used cars, a traditional leading indicator of
inflation has dropped for the third consecutive month. In my
mind, this means that used cars are depreciating in value
again, which is another sign of economic activity returning to
normal.
So how do you think about this indicator and how do these
data points inform the FSOC's thinking and work when it comes
to inflation?
Secretary Yellen. I guess when I think about the car market
the major thing I think is we had a huge runup in the prices of
both new and used cars. It contributed almost a third to the
pick-up in inflation we saw and it partly reflected a rapid
recovery and consumer demand to buy cars as the economy was
recovering from the pandemic coupled with a shortage of
semiconductors that actually depressed the ability of the
industry to produce cars. And so we saw a drying up of
inventories, extreme shortages, and huge pressure on the prices
of new cars that spilled over to used cars as well, dramatic
pick-up in prices, and that is beginning to mitigate now as the
economy continues its recovery. So prices are finally beginning
to come down a bit, but they remain very high until the
semiconductor situation is resolved.
Senator Sinema. Secretary, I am glad you mentioned the
semiconductor issue because of course, as you know, that is
very important not just to our Nation's consumer issues but
also for national security, and it is important to Arizona's
economy.
My last question. As you know, I chair the Financial
Innovation Caucus as the Democratic cochair, and I am committed
to ensuring that we address systemic risk while cultivating an
ecosystem that encourages responsible innovation, and
especially that applies to Web3 and crypto.
In February, the Financial Stability Board recommended that
regulators improve coordination and information sharing to
better address the cross-border and cross-sectoral nature of
crypto assets. That is an important goal, and alongside that I
would like to see greater regulatory clarity for crypto
companies so that they know the rules of the road and we can
build valuable products and services that help everyday people.
And I want this innovation happening in the U.S. so that we are
creating jobs and opportunities for people.
But clarity and coordination ensures that companies are not
simply built to exploit temporary regulatory gaps, so action by
regulators to provide clarity to companies will provide clarity
to consumers. That ensures that companies are focused on
creating value and lowering costs rather than just taking
advantage of regulatory loopholes or a lack of understanding or
enforcement by the regulators.
The FSOC and the regulatory entities that comprise its
membership sit at the center of this dilemma. So how are these
objectives being incorporated into the work going forward?
Secretary Yellen. Let me first say that I completely agree
with the discussion that you just gave that there can be
benefits from innovation in these areas, and we want to make
sure that there is a solid regulatory framework in place so
that firms and consumers understand what the rules of the road
are and we do not end up with regulatory arbitrage that is
critical also from an international perspective. And we are
working, certainly, with our G7 colleagues and through the FSB,
Financial Stability Board, to make sure that our rules, to the
best of our ability, are coordinated globally since these firms
can locate in many different places.
The Financial Stability Oversight Council has been directed
by the President, as part of his Executive order, to issue a
report on the risks, the financial stability risks associated
with cryptocurrencies, and we are in the process of doing that.
Chairman Brown. Thank you, Senator Sinema.
Senator Ossoff, from Georgia, is recognized.
Senator Ossoff. Thank you, Mr. Chairman, and thank you,
Secretary Yellen, for joining us.
You noted, and FSOC has noted, cyber risks as a threat to
financial stability. I am working to protect credit unions and
credit union customers in Georgia and across the country from
cyber risks. I would like you to comment on the authorities
that the National Credit Union Administration lacks and, in my
view, should have to ensure that third-party services provided
to credit unions, such as data processing, loan underwriting.
Increasingly, credit unions rely on third-party service
providers to undertake those tasks, but there is no requirement
that those credit union service providers notify the NCUA of a
cyberattack nor does the NCUA have the authority to examine
those credit union service providers for cyber vulnerabilities,
whereas a traditional bank, commercial bank regulators do have
such authorities.
Do you agree that empowering NCUA--and I am developing
legislation to do this--to examine credit union service
providers for cyber risks and requiring mandatory reporting of
cyber incidents would help protect credit unions and their
customers from cyber risk?
Secretary Yellen. I would be glad to have a detailed look
at the legislation that you are proposing and would be glad to
provide technical advice. I am not an expert in this area but I
am aware that NCUA lacks some of the ability to supervise, look
at servicers that the bank regulatory agencies have. And if I
understand that properly, that certainly seems like an
important gap that deserves to be filled.
Senator Ossoff. Thank you, Madam Secretary. I am going to
ask you for your assistance identifying the appropriate
official at Treasury or elsewhere in the Administration for
designation to work with parties in Georgia on a range of
issues of concern to my constituents. I am hoping that you can
briefly commit, as I work through these issues, to helping me
identify that official and working to connect them with the
appropriate authorities in Georgia.
Secretary Yellen. Absolutely, yes.
Senator Ossoff. Thank you. I want to begin with the Port of
Savannah and the Port of Brunswick. Senator Warnock and I
worked with your staff and the White House and the Georgia
Ports Authority last year to establish a pop-up container yard
to relieve some of the congestion in the Port of Savannah. At
the Port of Brunswick we worked last year to add a roll-on,
roll-off berth. There is a lot of car shipment through the Port
of Brunswick. I have just introduced legislation to expand the
navigation channel, to expand the capacity.
Will you please work with my office to identify the
appropriate official designated to work with the Georgia Ports
Authority on an ongoing basis to relieve congestion at the
ports and improve shipping operations, and in so doing address
supply chain bottlenecks and rapidly rising costs for American
consumers?
Secretary Yellen. Absolutely. I promise you that we will
work with you on that.
Senator Ossoff. Thank you, Secretary Yellen. I want to
raise, as well, the challenge posed by rapidly rising rents and
home prices. I want to focus in on metro Atlanta, and I am
asking for your commitment that you will identify the
appropriate Treasury official, other Administration official to
work with the Office of the Mayor of Atlanta, the Atlanta
Regional Commission, other local, municipal, and county
officials to develop a regional housing plan, with the
assistance and consultation of the appropriate Federal
agencies. Will you help me with that?
Secretary Yellen. Certainly. I mean, it might be that HUD
should be involved in that as well. I am not sure what our
division of responsibilities is, but I would be glad to connect
you with the appropriate people in Treasury.
Senator Ossoff. Great. I appreciate that.
I want to also discuss the State Small Business Credit
Initiative. This, as I understand it, has been useful for small
businesses in Georgia. Last year, Congress authorized an
additional $10 billion to expand access to capital for small
businesses through the State Small Business Credit Initiative,
and Georgia expects to receive about $200 million through our
Department of Community Affairs to support lending to small
businesses.
So I am asking for a similar commitment that you will work
with my office to determine how we can expedite the full
provision of that resource to the State of Georgia, to help
Georgia small businesses?
Secretary Yellen. Yes, of course, we are working very hard
on getting the money out under that initiative, and we will
work closely with you to make sure it is successful.
Senator Ossoff. Thank you. With my brief remaining time
just a quick macroeconomic question for you, and, of course, in
your experience previously as the Fed chair I am curious to get
your view on the following. What economic purpose has been
served and what has been the effect of continued bond buying
through quantitative easing programs at the Fed since last
summer? I know that is now being wound down.
And I am not asking you to comment on future Fed policy or
weigh in on what the Fed should be doing. What I want to
understand is what is your understanding of the purpose and the
effect of continuing that bond buying through quantitative
easing even as the price level has continued to rise.
Secretary Yellen. The Fed has ceased the bond buying under
that program. The purpose of it was to ease financial
conditions at a time when the economy appeared to require
support when it was weak. By buying longer-term bonds it tends
to flatten the yield curve or push down the term premium in
longer-term bonds and promote spending on housing or other
things that rely on long-term financing.
But the program has ended and the Fed has announced that it
is going to be diminishing its holdings over time, and that
serves to tighten financial conditions.
Chairman Brown. Thank you, Senator Ossoff.
Senator Van Hollen is recognized, from Maryland.
Senator Van Hollen. Thank you, Mr. Chairman. Welcome, Madam
Secretary. Great to have you here.
I do want to start by recognizing the good news in the jobs
market. Jobs have come roaring back, much faster than anybody
anticipated, as a result of the American Rescue Plan. We have a
tight labor market and I want to associate myself with those of
my colleagues who say one thing we could do right now is to
reduce the cost of quality childcare so that more people could
enter the workforce.
My questions to you are going to focus mostly on the
situation in Ukraine and the sanctions, and I want to applaud
you and the President for the actions you took at the G7 to
further tighten sanctions. Of course, our goal is to make sure
that Russia feels the pain of the sanctions more than others
around the world. Obviously, the war is creating all sorts of
economic repercussions. So we have to make sure that we target
those sanctions and make it felt.
Here at home we are working to close any loopholes. As you
know, I chair the subcommittee on the Appropriations Committee
that oversees the Treasury Department, and this emergency
proposal we have made includes an addition $52 million for
FinCEN as well as the IRS Criminal Investigations group to go
after any efforts of Russian money-laundering, and we need to
accelerate the implementation of the Corporate Transparency Act
and the Anti-Money Laundering Act, and I look forward to
working with you on that.
But I am concerned that as we are plugging these holes here
at home other countries are opening doors to more purchases
from Russia overseas, and it does not do us a lot of good to
batten down the hatches here if we are just opening up escape
and pressure valves overseas.
So I asked Secretary Blinken last week whether we had used
any of our secondary sanctions authority, whether the Biden
administration used any secondary sanctions authority to go
after countries, banks, others that could be found to be
evading our sanctions. His answer last week was no. My
understanding is to date we have not applied any secondary
sanctions. Is that correct?
Secretary Yellen. Well, we make it clear when we put in
place sanctions that any entity that provides material support
to help a sanctioned entity evade those sanctions can
themselves be sanctioned. And that is something that we are
prepared to do, and we think our willingness and ability to do
so is having a very substantial impact. When you look around
the world you find that financial institutions, whether they
are in China or in other countries, that may not be terribly
supportive of our views on the war that Russia has waged in
Ukraine, they are very worried about themselves being the
target of sanctions for providing material help in evading
sanctions.
Senator Van Hollen. Madam Secretary, if I could, I do not
think--maybe it is--is it your testimony that no financial
institutions around the world are providing material support
to----
Secretary Yellen. I am not going to go so far as to say no.
Senator Van Hollen. If I could, let me--because I have
limited time--I just want to read you a couple of headlines,
recent headlines. BBC, ``Wealthy Russians Flee to Dubai To
Avoid Sanctions,'' reads, ``Russian billionaires and
entrepreneurs have been arriving in the United Arab Emirates in
unprecedented numbers. Property purchases in Dubai by Russians
surged by 67 percent in the first 3 months of 2022.'' I have to
believe that some Dubai banks that have connections to the
United States banking system have been involved.
Here is a Financial Times first sentence: ``China's
independent refiners start buying Russian oil at steep
discounts.'' New York Times, ``India finds Russian oil
irresistible deal despite the diplomatic pressure.''
You have some countries that are actually increasing the
volume of their imports of Russian----
Secretary Yellen. We have not said that it is not a
violation of our sanctions for countries to buy Russian oil.
Senator Van Hollen. Right. So that is my question. I thank
you for raising that. Here is the question. I hope you would
agree that we do not want countries increasing their exports of
Russian oil above what they were before the war. Would you
agree that that is something that is not in our interest?
Secretary Yellen. Well, I think, personally, what I think
is in our interest is depriving Russia of revenue from selling
oil in global markets, and that is a somewhat different thing
than saying that we wish to hold Russian oil off of global
markets, because when we do that we can end up driving up the
price of oil globally which, counterintuitively, can raise
Russian revenues rather than lower them.
So I think we have to be very careful----
Senator Van Hollen. No, I appreciate that balance.
Secretary Yellen. ----about that.
Senator Van Hollen. I appreciate that balance. We are
paying increased prices for oil in the United States because of
the global markets. Others are too. It seems to me we should be
taking strong action against those that are sort of taking
advantage and war profiteering, effectively, off of this
situation.
We are going to pursue this. I have had conversations with
Senator Toomey about secondary sanctions. It seems me we have
enough flashing, you know, lights here, indicating that
sanctions are being violated that it triggers the material
support provisions. And I look forward to following up with you
and your team.
Secretary Yellen. I would like to work with you on that
because it is an important issue.
Chairman Brown. Thank you, Senator Van Hollen.
I will now do my questions. I did not go in the round of
questions.
Secretary Yellen, we know how important financial stability
is as we face the global uncertainty of the pandemic, supply
chain disruptions, and Russia's attack on Ukraine. Putin's
price hike is causing pain at the pump and market distortions
in our country. What are the long-term financial stability
impacts of Russia's illegal actions?
Secretary Yellen. Well they certainly are causing pain in
the United States and around the globe, and we are very
worried. The IMF issued a recent report showing there is
diminished prospects for global growth and higher inflation. We
are likely to see, and are seeing, tighter monetary policy all
around the world, so we are in an environment of high inflation
and rising interest rates.
A global downturn would have many repercussions on the
United States, which could impact the well-being and earnings
of financial institutions, including American banks. And in an
environment of rising interest rates with high inflation there
certainly are risks to banks and to borrowers who are indebted.
Our financial stability report looks at some of those risks,
generally. Although debt burdens of companies are high, debt
service ratios are not very high, which suggests good prospects
there.
Supervisors regularly evaluate banks with respect to
interest rate risks. As interest rates rise that tends to
diminish the value of assets that they hold on their portfolio,
but it has the contrary effect of tending to raise net interest
margins, but there certainly are, in parts of the financial
system where there may be leverage.
The Federal Reserve issued its financial stability report
just yesterday and noted insurance companies and some hedge
funds as leveraged entities that could be vulnerable in a
rising interest rate environment.
Chairman Brown. Thank you. As you talk about the Fed's role
in fighting inflation caused by Russia's war, as inflation
caused by the pandemic, caused by supply chain interruptions,
distortions, and as interest rates rise and risks could bubble
up on Wall Street, walk through why it is important for
financial firms to have sufficient capital liquidity and other
safeguards to protect against economic shock from those risks.
Secretary Yellen. It is critically important, and I think
we have Dodd-Frank to thank for the fact that banks have
adequate capital and liquidity, and certainly look from the
Fed's stress tests like they would be able to fare very well in
a stressful environment and did very well when the pandemic
struck in March of 2020.
Chairman Brown. And I know you recognize that banks did
well through this pandemic. A number of banks did stock
buybacks. Executive compensation was stratospheric. But I am
also concerned, as I know you are from comments in the past,
about risks in the shadow banking system.
Secretary Yellen. Those remain, and they are high on our
agenda to address, but they have not yet been addressed, money
market funds, maybe hedge funds, open-end mutual funds.
Chairman Brown. Thank you. My last question. You have
warned a number of times that the last thing we need is for
risky new financial products to crash our financial system.
Stablecoin companies claim that they are backed by supposedly
safe assets but they have proven to be wildly volatile. Just
look what happened yesterday in the markets, rife with
speculation and fraud, no recourse for consumers who have been
the victims of scams. Why is it critical for FSOC, the member
agencies of FSOC, which you chair, why is it critical for them
to be united on a strong regulatory structure for stablecoins?
Secretary Yellen. Well, I think it is important for us to
agree on what kind of structure is needed to ensure that these
are introduced in a safe and sound fashion and do not create
financial stability risks. And our strong recommendation to
Congress is that you work on a bipartisan basis to put in place
a comprehensive national regulatory framework, and we would be
glad to work with you on such an initiative.
Chairman Brown. Thank you, Madam Secretary.
As is the custom, the Ranking Member will do his close, and
I understand he is going to yield to Senator Scott, and then I
will do my close.
Senator Toomey. Thank you, Mr. Chairman. Yes, I will yield
to Senator Scott.
Senator Scott. Thank you, Mr. Chairman. Thank you,
Secretary Yellen, for investing your time with us, and
certainly a hard banking hearing for many.
I know that Senator Cortez Masto said, ``Why should I
impose my circumstances on others?'' Well, I think because my
circumstances is like so many others. Millions and millions of
kids being raised in poverty by single-parent households who
happen to be Black. Telling Black teenage moms that there is
only one alternative for them is a depressing and challenging
message.
So sitting through and listening to so many folks
stereotype the necessity of making a life-altering decision as
if it is the option to me is not right. And I understand that
this issue, the issue of abortion, is a difficult issue, but
let us remember that the rate of abortion for teenage moms is
at the lowest we have seen ever. The New York Times says it is
under 10 percent.
And so what I am talking about is the importance of
understanding the reality that even during tough financial
times and households like the in which I was raised, there is
still hope. There is hope because we have seen the consequences
of good policies, and unfortunately we have had to experience
the consequences of bad policies.
You are talking about the challenges in many of the
minority communities around this country. We have seen, in the
last couple of years, a 44 percent increase in homicides around
this Nation. Eighty-five percent of that increase have been
African Americans and Hispanics being killed. That impacts the
labor force participation rate, without any question, and it
does so so negatively.
When I think about the reasons why we should be hopeful and
send a message of optimism and opportunity to single moms
around this country challenged with too much month at the end
of the money, it is the policies where Senator Cortez Masto
talked about the tax reform. Well, the tax reform of 2017 cut a
single mom's taxes by 70 percent on the Federal level, led to
$4,000 more dollars in the average pocket of the average
household in this Nation. We created 7 million jobs, two-thirds
of those jobs going to African Americans, Hispanics, and women.
These are facts. It is a 50-year low in unemployment.
So the labor force participation rate at that time was
going up, not down, and because of the increase in the labor
force participation rate you do not always expect that the
unemployment rates will continue to drop, but they did. They
dropped significantly. We saw the lowest unemployment rate for
African Americans in this country, under 6 percent, for the
first time, Hispanics under 5 percent for the first time, I
believe, Asians under 3 percent. We saw a 70-year low for
women. In 2019, we saw the lowest rate recorded in our Nation's
history, it is my understanding, for poverty.
And so what I am suggesting is that, yes, people on the
left and people on the right can work together to bring about
positive policy changes that can transform the lives of those
living in poverty. It is one of the reasons why I am thankful
for Senator Warner and Senator Van Hollen and Senator Booker
working in a bipartisan fashion on opportunity zones. This is
an opportunity for us to weigh the impact in some of the most
devastated ZIP codes in America, where private sector has
increased wages, reduced unemployment, reduced poverty, and
increased property values, without gentrifying those
neighborhoods.
So when we are going to have a conversation about those
issues that improve the economic reality of those living in
poverty, when we are going to have a conversation about
improving the outcome of this Nation's poorest Americans, I
think we should have that conversation. I am frankly willing to
have the debate with anyone, anywhere, at any time, on my lived
experience versus anyone else's, because I believe that America
is the solution, not the problem.
I believe that we can work, both left and right together,
to find those solutions, and not only debate them but try them
in the public forum. And when we do so, I believe America is
better, not when we demonize one side or the other side. I
refuse to have a conversation about wrong on one side and right
on the other side. I am simply saying that the experience of so
many of us, millions of us, in poverty, I conclude is a reason
to be hopeful about what is possible, even for those incredibly
positive, powerful women making really hard choices.
Chairman Brown. Thank you, Senator Scott, and Senator
Toomey, I heard no stereotype from Senator Cortez Masto in her
comments. I appreciate Secretary Yellen and Senator Cortez
Masto noting that women should have the right to decide when to
have children. I did hear revisionist history again about the
Trump tax cut which blew a hole in the deficit and which
clearly helped 70 percent of them went to the richest 1
percent.
I also heard talk of the lowest poverty rates. The lowest
poverty rates came when we passed the child tax credit, the
fully refundable child tax credit, which dropped poverty rate
among children by 40 percent. Senator Scott voted against it
twice, about a year ago, 14 months ago, and joined by every
single Republican. Every Democrat passed it.
We know what this is all about. Let us not make it about
Senator Scott. It is Senator McConnell just wants to distract
from the real issue and that is if Roe is overturned every
American woman is going to have her freedom and make her own
personal health decisions taken away and handed over to
politicians. And it should not be handed over to me. It should
not be handed over to Secretary Yellen. It should not be handed
over to Mitch McConnell. And like Senator Cortez Masto, I am
opposed to having the Government take away women's freedom to
make their own personal health care decisions.
Thank you, Secretary Yellen, for joining us. For Senators
who wish to submit questions for the record they are due 1 week
from today, Tuesday, May 17th. Secretary Yellen, please submit
your response within 45 days from the day you receive them.
The Committee is adjourned. Thank you.
[Whereupon, at 12:09 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
Today we will hear testimony from the Secretary of the Treasury on
the Financial Stability Oversight Council's Annual Report for the first
time in 4 years.
This is the first time Secretary Yellen has been before this
committee since Vladimir Putin's invasion of Ukraine. I want to commend
you for Treasury's work helping implement our massive, historic
multilateral sanctions and export control effort against Russia--
punishing them economically and isolating them politically and
diplomatically.
Putin has been shocked by two things--he was shocked by the courage
of the Ukrainian people and the tenacity of their resistance.
And he was shocked by how effectively President Biden and you and
this Administration put together this broad international coalition.
This past weekend's announcements by the G7 to further limit
dependence on Russian energy will bite even harder.
In the weeks and months to come we must sustain and expand our
efforts to help Ukraine--including intensified sanctions, export
controls, and other means of ratcheting up the economic pressure on
Russia.
Financial stability allows Americans to trust their money is safe
in the bank. It means they can get an affordable mortgage without fear
that they will lose their home. It means they can count on their
retirement savings, knowing their investments won't be gambled away by
reckless speculators.
And it means taxpayers are not forced to shell out billions to bail
out the biggest banks that gambled with our whole economy.
That's why Congress created the Financial Stability Oversight
Council in the Dodd-Frank Wall Street Reform and Consumer Protection
Act.
Americans are still living with the consequences from the last time
Wall Street took too many risks. Families who lost their homes after
2008 still haven't recovered all the wealth the crisis took from them.
Whenever big banks or hedge funds come up with some new scheme that
goes wrong, they're never the ones that pay the price. It's ordinary
Americans whose homes, retirement savings, and livelihoods are at risk.
And it's taxpayers. People in this town act like they've forgotten
the bailouts. In too many cases, they probably have.
Americans have not forgotten. When families who are already
struggling with lost jobs, lost homes, lost savings are then forced to
use their tax money to bail out some of the richest elites in the
country--that stays with most people.
We created this watchdog to make sure it never happens again.
Under the Biden-Harris administration and with Secretary Yellen's
leadership, we once again have an FSOC that is looking out for those
risks to our financial system.
They've turned the page on the prior Administration's Wall Street-
first mentality.
The last White House--always looking out for its corporate allies--
did everything in its power to stop this agency from doing its job.
They ignored shadow banks that grew in size and created risks to
the system.
They gutted the agency from the inside out, diminishing career
public servants dedicated to protecting our economy.
They abandoned their responsibilities. They did nothing to identify
and address risks to financial stability.
So when the global coronavirus pandemic froze our financial
markets, big and small companies weren't prepared to withstand the
shock, and our Government had to step in to prevent a market meltdown
and stabilize the economy.
What we've seen over the past 2 years is that risks to the economy
can come at any time, in any form.
Today, FSOC is keeping watch on all the potential risks to our
economy, so working families don't have to.
These public servants are looking at ways to improve financial
system resilience in the face of climate-related financial risks.
Their job is also to make sure our financial markets are efficient
and fair. We've seen market frenzies like GameStop and hedge fund
blowups like Archegos. These have the potential to cause dangerous
volatility. And FSOC is watching out for asset bubbles, so that risky
bets that go bad don't hurt the real economy.
This watchdog is also working with financial institutions to shore
up cyber defenses and protect our financial system from cyberattacks.
And they're tackling risks posed by cryptocurrency and digital
assets. So many Americans are searching for an alternative to the Wall
Street system that has burned them time and again, but we can't allow
them to be left holding the bag when an inevitable crash or hack comes.
FSOC also monitors international risk. And today they are clear-
eyed about the threats to the U.S. and global economy--a pandemic, a
broken global supply chain, Putin's invasion of Ukraine.
Finally, the agency is doing its job again, working to prevent
corporate greed, overleveraged deals, and risky bets on Wall Street
from crashing our financial system as interest rates rise.
For the first time in decades, workers are seeing real wage gains
and more bargaining power.
Over the past year, median wages for the lowest-income workers
increased an average of 6 percent. The unemployment rate is 3.6
percent--the lowest in five decades.
But for many Americans, those gains don't go as far when you're
paying more at the gas pump and grocery store.
Corporations blame workers and claim they just have to raise prices
to keep up with costs.
Of course they don't have to raise prices to keep making a profit.
They could cut their own executive bonuses or do fewer stock buybacks--
and still enjoy healthy profits. But instead they'd rather price gouge
working families.
Don't take it from me--listen to the CEOs who brag about their
enormous pricing power every quarter on investor calls.
And when big corporations have concentrated power and no
competition, the usual rules of capitalism can't rein them in.
This Wall Street business model incentivizes anything that juices
stock prices, including excessive risk-taking, at the expense of long-
term stability and broad economic growth.
We need to build and maintain a resilient financial system with
strong safeguards in place at the biggest Wall Street firms, so that
they can withstand economic shocks without wrecking the real economy.
That is FSOC's job--to serve as the Wall Street watchdog looking
out for working Americans on Main Street. At this critical moment in
our economic recovery, FSOC's job is more important than ever.
Secretary Yellen, I look forward to hearing how FSOC is carrying
out that mission.
______
PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
Thank you, Mr. Chairman. And Secretary Yellen, welcome.
Today's hearing is an opportunity to discuss FSOC's 2021 annual
report. I have long been skeptical of FSOC's process for designating
nonbank financial institutions as systemically important, or SIFIs.
FSOC's process has been opaque and previous designations have lacked
sufficient cost-benefit analysis.
This approach also needlessly imposed bank-like regulations on
nonbank financial institutions, such as insurance companies and asset
managers. More fundamentally, the act of designating a firm as a
nonbank SIFI signals to the market that the firm is ``too big to fail''
and would be bailed out if it became insolvent.
For these reasons, I was glad to see FSOC in 2019 unanimously
approved an activities-based approach to identify and assess potential
risks, as well as an enhanced cost-benefit analysis for potential
designations. These changes marked significant improvements over the
previous approach with respect to both process and substance. I have
been encouraged that you have recognized the value of this approach,
and I urge FSOC to retain it going forward.
I have also been concerned that FSOC-like other financial
regulators--is becoming politicized. Consider global warming. FSOC has
held 10 meetings under your leadership, and seven of those meetings
have focused on global warming, according to the public readouts. By
contrast, not a single one of those meetings included a discussion of
cybersecurity, which presents a much more imminent and significant
threat to the financial system.
In October of last year, FSOC issued a lengthy report that
audaciously claimed global warming is an ``emerging threat to the
financial stability of the United States.'' FSOC uses this supposed
risk to justify its recommendation that financial regulators consider
sweeping changes to their rules.
The actual data show that ``physical risks'' associated with global
warming--that is, severe weather events--don't threaten financial
stability. Economic damage from weather-related events as a percentage
of GDP has actually trended down steadily over the past 30 years. And
we're not aware of a single bank failure in the modern era caused by
any weather event.
As I have previously warned, the real risk is political. Some
unelected financial regulators want to accelerate our transition to a
lower-carbon economy by misusing their powers to allocate capital away
from traditional energy companies.
At a time of skyrocketing energy prices, we certainly don't need
financial regulators making it even more expensive for Americans to
fill up their gas tanks or heat their homes. Addressing global warming
requires difficult political decisions involving tradeoffs. In a
democratic society, these tradeoffs must be made by elected
representatives accountable to the American people through a
transparent and deliberative legislative process.
Instead of pursuing political issues that are outside the mandate
and expertise of financial regulators, the FSOC should enhance
coordination across regulators on existing threats to the financial
system. To this end, I was encouraged that the FSOC annual report
identified certain issues that are worthy of regulatory attention, such
as enhancing the resilience of the U.S. Treasury market, and improving
the cybersecurity resilience of the financial sector. But I worry that
progress on addressing these challenges is being stalled because of
FSOC's focus on political issues.
Finally, in your role as chair of the President's Working Group on
Financial Markets, or PWG, you released a report last November on
stablecoins. Although I disagree with the report's recommendation that
all stablecoin issuers must be insured depository institutions, I was
glad to see the report acknowledge that it is the responsibility of
Congress to create new rules for stablecoins.
To that end, last month, I released a discussion draft of a bill--
the Stablecoin TRUST Act--to establish a regulatory framework for
stablecoins. There are tremendous potential societal benefits from
stablecoins. Today, stablecoins primarily facilitate trading of digital
assets.
But tomorrow stablecoins could be widely used in the physical
economy for payments and automating transactions.
Because of the dollar price stability of stablecoins, they have the
potential to serve all the traditional functions of money, including
acting as a medium of exchange. Stablecoins could also improve upon
traditional forms of money by increasing payment speed, reducing
transaction costs, helping to combat illicit finance through an
immutable and transparent record, and enabling programmable contracts.
The proposed regulatory framework I've released will allow
stablecoins to continue flourishing while protecting consumers and
minimizing potential risks from stablecoins to the financial system.
It's critical that Congress provide clarity in this area as soon as
possible.
Congress needs to enact a sensible regulatory framework before
something bad happens with a stablecoin that harms consumers. If that
were to happen, Congress will rightfully share some of the blame.
Thankfully, I am optimistic that the administration is working with
Members of Congress and that we can find common ground on bipartisan
legislation that addresses the risks of stablecoins while also
encouraging innovation and competition.
Secretary Yellen, I look forward to hearing your testimony and
discussing these and other important issues with you today.
______
PREPARED STATEMENT OF JANET L. YELLEN
Secretary, Department of the Treasury
May 10, 2022
Thank you, Chairman Brown, Ranking Member Toomey, and Members of
the Committee. I am pleased to speak with you today about the Financial
Stability Oversight Council's (Council) 2021 annual report. The report
is a collaborative effort of the Council member agencies. It is a
vehicle for providing Congress and the public with the Council's
collective assessments of potential risks to U.S. financial stability.
Today, I will highlight a few topics in the report and provide an
update on the Council's activities since the report's publication.
First, the report discusses vulnerabilities in the nonbank
financial sector, which were highlighted by the turmoil in financial
markets in March 2020. While the Dodd-Frank Act reforms increased the
resiliency of the U.S. financial system, the market turmoil in March
2020 demonstrated that the liquidity mismatch and use of leverage by
some nonbank financial institutions can make them vulnerable to acute
financial stresses, and these stresses can be transmitted and amplified
to the broader financial system. The Council has taken steps to examine
these risks, including re-establishing its Hedge Fund Working Group to
develop an interagency risk-monitoring system and to propose options to
mitigate identified risks. And earlier this year, the Council issued a
statement to express support for the Securities and Exchange
Commission's (SEC) efforts to reform money market funds and their work
to consider potential reforms of open-end funds.
The Council is also working to support improving the resilience of
the Treasury market and is coordinating with the Interagency Working
Group on Treasury Market Surveillance (IAWG). Potential steps to be
taken include improving data quality and availability, evaluating
expanded central clearing, and enhancing trading venue transparency and
oversight. The SEC has proposed certain reforms to enhance transparency
and oversight over alternative trading systems that trade Government
securities. The SEC has also proposed updating the definition of a
Government securities dealer to include market participants that play
an increasingly significant liquidity providing role in overall trading
and market activity. Additionally, the Office of Financial Research is
working to fill identified data gaps for uncleared bilateral repurchase
agreements through a pilot data collection, which should improve
visibility into a major source of financing for nonbank financial
institutions in Treasury markets.
Additionally, the Council is working to ensure that financial
institutions better understand their climate-related financial risks.
In its October 2021 Report on Climate-Related Financial Risk, the
Council outlined how climate change can be a source of shocks to the
financial system and increase risks to financial stability. To address
these risks, the Council recommended that regulators build their
capacity and expand their efforts to address climate-related risks,
improve the availability of data, enhance and standardize disclosures,
and assess and mitigate risks to financial stability. The Council has
also formed its staff-level Climate-related Financial Risk Committee,
which will serve as a coordinating body for the Council to share
information, facilitate the development of common approaches and
standards, and foster communication across FSOC members. In addition,
the Council is establishing the Climate-related Financial Risk Advisory
Committee. This advisory body, which will include a broad array of
external stakeholders, will help the Council gather information and
analysis on climate-related financial risks.
With respect to digital assets, new products and technologies may
present opportunities to promote innovation and increase efficiencies.
However, digital assets may pose risks to the financial system, and
increased and coordinated regulatory attention is necessary. On March
9, 2022, President Biden signed an Executive order calling for
comprehensive approach to digital asset policy. The Council is drafting
a report that will identify financial stability risks and regulatory
gaps. I look forward to working with you on the issues and
opportunities posed by digital assets. We are also eager to work with
you to ensure that payment stablecoins and their arrangements are
subject to a Federal prudential framework on a consistent and
comprehensive basis.
Finally, there is the potential for continued volatility and
unevenness of global growth as countries continue to grapple with the
pandemic. Russia's unprovoked invasion of Ukraine has further increased
economic uncertainty. The U.S. financial system has continued to
function in an orderly manner, though valuations of some assets remain
high compared with historical values. We stand firmly with the people
of Ukraine and have implemented an unprecedented suite of sanctions on
Russia that have been implemented by financial institutions. On
February 28, I convened the Council in the wake of the invasion, and we
will continue to monitor developments and coordinate actions as the
risks and threats evolve.
The Council's report also discusses other potential emerging
threats and vulnerabilities that the Council continues to monitor,
including short-term wholesale funding markets, central counterparties,
alternative reference rates, cybersecurity, corporate credit markets,
and real estate markets.
The Council remains committed to its mission of identifying and
responding to risks to U.S. financial stability, and I look forward to
working with this Committee to promote a more robust and resilient
financial system. Thank you.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM JANET L. YELLEN
Q.1. Stablecoins and Cryptocurrency--Does Treasury have a
working definition of ``algorithmic stablecoins''?
A.1. Stablecoins are a type of digital asset designed to
maintain a stable value relative to fiat currency or other
reference asset. Most stablecoins attempt to maintain a stable
price through the use of fiat-denominated reserve assets (e.g.,
sovereign debt, securities, or bank deposits). Stablecoins that
are purportedly convertible for an underlying fiat currency are
distinct from a smaller subset of stablecoin arrangements that
use other means to attempt to stabilize the price of the
instrument (sometimes referred to as ``synthetic'' or
``algorithmic'' stablecoins) or are convertible for other
assets. These stablecoins attempt to maintain a stable value
through collateral or through smart contracts that adjust the
supply of the stablecoin as needed to maintain a stable price.
DAI is an example of such an arrangement.
Q.2. What were the main factors that led the President's
Working Group on Financial Markets to assert that DAI is an
algorithmic stablecoin?
A.2. See above.
Q.3. Regarding algorithmic stablecoins, does Treasury think it
appropriate to regulate fiat-backed stablecoins issued by a
company in the same manner as a stablecoin that has no
centralized decision-making process?
If yes, how would such regulations be enforced without a
centralized entity responsible for ensuring compliance?
If no, how does Treasury believe that decentralized
stablecoins should be regulated?
A.3. Treasury believes it is critical for stablecoins to be
subject to regulations that protect against risks to consumers,
the broader financial system, and the economy, and that prevent
stablecoins from being used in connection with illicit
financial transactions. Because stablecoins are an emerging and
rapidly developing type of financial instrument, regulators
will need flexibility to address risks across a variety of
organizational structures, including structures of varying
degrees of formal or informal organization and
decentralization.
Q.4. Has Treasury considered outlining factors that would be
indicative of a decentralized cryptocurrency protocol?
A.4. See response above.
Q.5. Should stablecoin issuers that do not control any
underlying assets (e.g., no legal right, authority, or ability
to obtain upon demand) be subject to the same standards as
entities that do custody assets to control the value of their
stablecoin?
A.5. Treasury believes it is critical for stablecoins to be
subject to regulations that protect against risks to consumers,
the broader financial system, and the economy, and that prevent
stablecoins from being used in connection with illicit
financial transactions. Because stablecoins are an emerging and
rapidly developing type of financial instrument, regulators
will need flexibility to address risks across a variety of
organizational structures.
Q.6. Foreign Tax Credit Final Regulations--In the closing days
of December of 2021, the U.S. Department of Treasury (Treasury)
and the Internal Revenue Service (IRS) released final
regulations (T.D. 9959, 87 FR 276 (Jan. 4, 2022)) on foreign
tax credits, which was published in the Federal Register on
January 4, 2022. These final regulations built on proposed
regulations issued by the previous administration but took on
new issues far exceeding the creditability of novel digital
services taxes that had been the initial focus of the project.
Unfortunately, the effect of the final regulations is to deny
Americans tax credits that have been creditable for decades.
Denial of these credits for foreign taxes paid results in
double-taxation on American businesses, making the U.S. a less
competitive place to do business.
When will Treasury and IRS release clear guidance to
taxpayers on these regulations and what do you anticipate this
guidance will cover?
A.6. The Treasury Department's Office of Tax Policy is actively
engaged with stakeholders and evaluating whether refinements,
clarifications, guidance, or further rulemaking would help
illustrate how the final regulations are intended to apply to
certain foreign taxes or otherwise be appropriate. Different
types of guidance have different timelines and subject to
different administrative procedural requirements. Taxpayers
would be given the opportunity to comment on any new proposed
rules.
Q.7. In the meantime, will IRS and Treasury delay
implementation of the final regulations until 2023 in order to
give taxpayers time to receive this guidance without the policy
applying retroactively to January 1, 2022?
A.7. The final regulations largely adopted the substantive
provisions of the proposed regulations released in 2020, which
proposed rules of general application that were not limited to
digital services taxes. The final regulations, however,
included many clarifying changes to the proposed rules in
response to comment letters received from many stakeholders
addressing various aspects of the proposed rules. These changes
meaningfully improved the administrability and certainty of the
final regulations. The effective date of the final regulations
follows the effective date specified in the 2020 proposed
regulations, and the final regulations were promulgated in
accordance with the relevant administrative procedural
requirements.
Q.8. Financial Stability Oversight Council (FSOC) Secondary
Market Review--On September 25, 2020, FSOC released a statement
on its activities-based review of the secondary mortgage
market. FSOC's statement affirmed the overall quantity and
quality of the regulatory capital required by the Federal
Housing Finance Agency's (FHFA) June 30, 2020, proposed rule to
establish a new regulatory capital framework for Fannie Mae and
Freddie Mac (each, a GSE or an Enterprise). Specifically, FSOC
stated that ``risk-based capital requirements and leverage
ratio requirements that are materially less than those
contemplated by the proposed rule would likely not adequately
mitigate the potential stability risk posed by the
Enterprises.'' FSOC also concluded ``it is possible that
additional capital could be required for the Enterprises to
remain viable concerns in the event of a severely adverse
stress.'' (emphasis added) FSOC committed to ``continue to
monitor . . . FHFA's implementation of the regulatory framework
to ensure potential risks to financial stability are adequately
addressed.'' On December 17, 2020, FHFA finalized the
regulatory capital framework for the GSEs largely along the
lines of the June 30, 2020, proposed rule.
As Chairperson of FSOC, do you accept each of the findings
and recommendations made in the FSOC statement? If not, please
identify each finding or recommendation with which you disagree
and your rationale for the disagreement.
A.8. I am committed to a housing finance system that expands
fair and equitable access to home ownership and affordable
rental opportunities, protects taxpayers, and promotes
financial stability. The GSEs are a central part of the housing
finance system. It is critical to the stability of the broader
financial system that the GSEs operate in a safe and sound
manner and do not amplify or transmit market stress. FSOC
regularly monitors financial market developments based on its
responsibilities to identify risks to the financial stability
of the United States, promote market discipline, and respond to
emerging threats to the stability of the U.S. financial system.
Q.9. In particular, do you accept FSOC's finding that ``risk-
based capital requirements and leverage ratio requirements that
are materially less than those contemplated by the proposed
rule would likely not adequately mitigate the potential
stability risk posed by the Enterprises''?
A.9. See response to Question 8.
Q.10. Do you accept FSOC's finding that ``[t]he alignment of
market participants' credit risk capital requirements across
similar credit risk exposures would mitigate risk to financial
stability by minimizing market structure distortions''?
A.10. See response to Question 8.
Q.11. Do you accept FSOC's recommendation that ``FHFA and other
regulatory agencies . . . coordinate and take other appropriate
action to avoid market distortions that could increase risks to
financial stability by generally taking consistent approaches
to the capital requirements and other regulation of similar
risks across market participants, consistent with the business
models and missions of their regulated entities''?
A.11. See response to Question 8.
Q.12. Under what circumstances should FSOC determine under
section 113 of the Dodd-Frank Act that a GSE should be
supervised by the Board of Governors of the Federal Reserve
System?
A.12. See response to Question 8.
Q.13. Reduction in the GSE Capital Requirements--On September
27, 2021, FHFA proposed amendments that would have materially
reduced the GSEs' regulatory capital requirements. On February
25, 2022, FHFA finalized those amendments largely as proposed.
The amendments reduced the tier 1 capital that must be
maintained by a GSE to avoid restrictions on capital
distributions from 4 percent to roughly 3 percent of the GSE's
adjusted total assets. The amendments also reduced Freddie
Mac's combined capital requirements from 4 percent to 3.6
percent as of September 30, 2021, with further reductions
likely to follow due to continued house price appreciation,
among other things. Fannie Mae's combined capital requirements
also could further decline as it reverts to prepandemic levels
of credit risk transfer coverage (about twice the year-end 2021
levels according to its annual reports on Form 10-K).
As Chairperson of FSOC, what steps do you think FSOC should
take with respect to FHFA's now-finalized amendments to fulfill
FSOC's commitment to ``continue to monitor . . . FHFA's
implementation of the regulatory framework to ensure potential
risks to financial stability are adequately addressed''?
A.13. As mentioned in response to Question 8, it is critical to
the stability of the broader financial system that the GSEs
operate in a safe and sound manner and do not amplify or
transmit market stress. Appropriately calibrated GSE capital
requirements are important to the resiliency of the financial
system. FSOC, in collaboration with FHFA and the other member
agencies, regularly monitors financial market developments
based on its responsibility to identify risks to the financial
stability of the United States, promote market discipline, and
respond to emerging threats to the stability of the U.S.
financial system.
Q.14. In light of FSOC's commitment, does the absence of any
comment by FSOC on FHFA's now-finalized amendments pose a risk
to the credibility of FSOC or risk politicizing FSOC?
A.14. See response to Question 13.
Q.15. Do you agree that these new risk-based capital
requirements and leverage ratio requirements, as amended by
FHFA, are ``materially less than those contemplated by the
proposed rule'' and are not adequate to ``mitigate the
potential stability risk posed by the Enterprises''?
A.15. See response to Question 13.
Q.16. GSE Conservatorships--The terms of Treasury's senior
preferred shares and warrants for common shares in each GSE
preclude the GSE from issuing new common shares.
Will Treasury commit to working with FHFA in the near term
to resolve the open questions relating to Treasury's equity
interests in each GSE?
A.16. Treasury is considering housing finance policy options
that promote financial stability, protect consumers and
taxpayers, and provide stability and affordability to
households. Treasury continues to work with FHFA to address a
range of issues at the GSEs while subject to the
conservatorship. See responses to Questions 8 and 13.
Q.17. Who is or will be the specific Treasury official charged
with being directly responsible for navigating and managing an
end to the GSE conservatorships?
A.17. I am committed to a housing finance system that expands
fair and equitable access to home ownership and affordable
rental opportunities, protects taxpayers, and promotes
financial stability.
Q.18. Related to this, on January 14, 2021, Treasury and each
GSE, acting through FHFA as its conservator, entered into a
letter agreement amending the Amended and Restated Preferred
Stock Purchase Agreement dated September 26, 2008, between
Treasury and the GSE (each, a ``PSPA''). Pursuant to section IX
of that letter agreement, Treasury committed to develop a
proposal to resolve the conservatorships and transmit that
proposal to both Houses of Congress on or prior to September
30, 2021. As of May 13, 2022, I had not received this proposal.
When does Treasury expect to transmit this proposal?
A.18. We continue to work with FHFA to address a range of
issues at the GSEs while subject to the conservatorship. While
we have no news at this time, we will brief Members of Congress
with any new policy views or developments. See responses to
Questions 8 and 13.
Q.19. Pursuant to section IX of that letter agreement, Treasury
also ``commit[ted] to work to restructure Treasury's investment
and dividend amount in a manner that facilitates the orderly
exit from conservatorship, ensures Treasury is appropriately
compensated, and permits the [GSE] to raise third-party capital
and make distributions as appropriate.''
What actions does Treasury expect to perform to satisfy
that commitment? When will each of those actions be performed?
A.19. We continue to work with FHFA to address a range of
issues at the GSEs while subject to the conservatorship. While
we have no news at this time, we will brief Members of Congress
with any new policy views or developments. See responses to
Questions 8 and 13.
Q.20. Has Treasury retained any financial, legal, or other
advisors to support Treasury's effort to resolve the GSEs'
conservatorships or otherwise assess or modify its rights or
obligations under the PSPAs?
A.20. No. Treasury has not retained any financial, legal, or
other advisors at this time.
Q.21. Housing Finance Reform--In its recent annual reports to
Congress, FHFA has recommended that Congress provide FHFA with
chartering authority similar to that of the Office of the
Comptroller of the Currency. Treasury made similar
recommendations in its September 2019 Housing Reform Plan.
Do you support Congress authorizing FHFA to charter
competitors to the Enterprises?
A.21. See responses to Questions 8 and 13.
Q.22. Do you believe the duopoly market structure increases the
systemic importance of each GSE, fosters a market perception
that the Federal Government will not permit the GSE to default
on its financial obligations, undermines market discipline over
its risk taking, and thereby fosters excessive risk taking by
the GSE and exposes taxpayers to risk of future bailouts?
A.22. See responses to Questions 8 and 13.
Q.23. GSE Resolution Framework--FSOC's statement on its
activities-based review of the secondary mortgage market
encouraged FHFA to continue its efforts to enhance the GSEs'
regulatory framework, including resolution planning
requirements. In May 2021, FHFA finalized a rule that requires
each GSE to develop a plan to facilitate its rapid and orderly
resolution in the event FHFA is appointed receiver. These
resolution plans are intended to, among other things,
``foster[] market discipline by making clear that no
extraordinary Government support will be available to indemnify
investors against losses or fund the resolution of an
Enterprise.'' Specifically, ``[i]n developing a resolution
plan, each Enterprise shall: . . . [n]ot assume the provision
or continuation of extraordinary support by the United States
to the Enterprise to prevent either its becoming in danger of
default or in default (including, in particular, support
obtained or negotiated on behalf of the Enterprise by FHFA in
its capacity as supervisor, conservator, or receiver of the
Enterprise, including the Senior Preferred Stock Purchase
Agreements entered into by FHFA and the U.S. Department of the
Treasury on September 7, 2008, and any amendments thereto).''
Related to this, Treasury's Housing Reform Plan released in
September 2019 recommended that ``[a] credible resolution
framework can ensure that shareholders and unsecured creditors
bear losses, thereby protecting taxpayers against bailouts,
enhancing market discipline, and mitigating moral hazard and
systemic risk.''
In light of the risks to financial stability that could be
posed by a future insolvency event at GSE, do you agree with
the recommendation in Treasury's September 2019 Housing Reform
Plan that ``[a] credible resolution framework can ensure that
shareholders and unsecured creditors bear losses, thereby
protecting taxpayers against bailouts, enhancing market
discipline, and mitigating moral hazard and systemic risk''?
A.23. As mentioned in response to Question 13, it is critical
to the stability of the broader financial system that the GSEs
operate in a safe and sound manner and do not amplify or
transmit market stress. Appropriately calibrated GSE capital
requirements are important to the resiliency of the financial
system. We continue to work with FHFA to address a range of
issues at the GSEs while subject to the conservatorship. In
2021, FHFA issued a final rule requiring the GSEs to submit
resolutions plans for FHFA's review. The resolution plans are
due in April 2023.
Q.24. Do you agree with FHFA's requirement that ``each
Enterprise shall: . . . [n]ot assume the provision or
continuation of extraordinary support by the United States to
the Enterprise to prevent either its becoming in danger of
default or in default (including . . . the Senior Preferred
Stock Purchase Agreements entered into by FHFA and the U.S.
Department of the Treasury on September 7, 2008, and any
amendments thereto)''?
A.24. See responses to Questions 8, 13, and 23.
Q.25. As you noted in your hearing opening statement on May 10,
2022, FSOC has issued a statement to express support for the
Securities and Exchange Commission's efforts to reform money
market funds and its work to consider potential reforms of
open-end funds. Given FHFA's policy that, notwithstanding the
PSPAs, unsecured creditors of each GSE should be at risk of
loss upon an insolvency event affecting the GSE, do you think
the Securities and Exchange Commission's regulations governing
money market mutual funds, registration requirements, or other
market activity should continue to give the GSEs special
treatment (e.g., by treating them as Government securities for
certain purposes)?
A.25. The FSOC expressed support for the SEC's engagement on
reforms that would improve the resilience and functioning of
short-term funding markets. The FSOC will continue to monitor
this effort. In addition, the FSOC's working groups on open-end
funds and on hedge funds are assessing the risks posed by these
types of firms and will evaluate whether actions are necessary
to address their vulnerabilities. It is encouraging that
regulators are considering substantive reform options for money
market mutual funds, and I support the SEC's efforts to
strengthen short-term funding markets.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
FROM JANET L. YELLEN
Q.1. Do you agree with the sentiments expressed in GAO reports
and the recent Treasury Inspector General for Tax
Administration report that there should be more granular data
collected and available with regards to the Low Income Housing
Tax Credit Program?
A.1. The reports you reference found that the IRS has
incomplete and inaccurate data regarding some low-income
housing credit (LIHTC) projects. I believe the IRS can and
should take steps to address these data quality issues. In
particular, in its January 2022 report, TIGTA made several
recommendations to the IRS which I understand the IRS agrees
with and is working to implement.
These include:
System validity checks.
A quality review system for LIHTC form processing.
Changes to the process for selecting returns for
examination, to additionally check for certain
inconsistencies between tax forms.
Revising tax forms so taxpayers may not claim
LIHTCs for buildings placed into service prior to 2008.
Q.2. What is Treasury and the IRS going to do to address the
problems highlighted in these reports to ensure this program is
free from fraud?
A.2. The statutory scheme of the LIHTC tax incentive gives
State or local housing credit agencies (HCAs) the
responsibility for allocating potential credits to LIHTC
building projects from a finite pool of statutorily allocated
credit amounts. By statute, these pools of credits are
partially replenished each year. The statute also gives the
HCAs another responsibility--determining the amount of LIHTCs
that are needed for financial feasibility. Allocations of
LIHTCs that are more than necessary for financial feasibility
of the project as determined by the HCA are barred by the
statute.
The discretion statutorily vested in the HCAs limits the
extent to which the IRS or the Treasury Department can control
the HCAs' conduct. For example, the statute requires each HCA
to publish a Qualified Allocation Plan (QAP) that establishes
the criteria the HCA will use in allocating potential LIHTCs.
The Federal tax statute contains three preferences and ten
selection criteria that must be included in every QAP. Each QAP
should also contain additional State or local provisions to
align LIHTC allocations with local needs and the entire QAP
must be approved by a non-Federal governmental authority.
(Sometimes, this authority is the State legislature.) In
theory, an allocation of potential LIHTCs not made pursuant to
the QAP is ineffective. On the other hand, if an HCA makes an
allocation of potential LIHTCs that is not in accordance with
the HCA's established priorities and selection criteria, the
HCA can just make a written explanation available to the
general public.
Moreover, in the absence of explicit authorization by
Congress, IRS and the Treasury Department are limited in their
ability to regulate or examine either the efficiency of the
competitive processes that an HCA uses to allocate potential
credits or the accuracy of its economic determinations of the
potential LIHTC amount needed for a LIHTC building's financial
feasibility.
Q.3. What can be done to improve the regulation of stablecoin
arrangements and ensure that stablecoins do not pose a risk to
consumers or the financial system? Would requiring stablecoin
issuers to be insured depository institutions be the most
effective way to address risks to stablecoin users and guard
against stablecoin runs?
A.3. Congress should enact legislation to ensure that
stablecoins and stablecoin arrangements are subject to a
Federal prudential framework, on a consistent and comprehensive
basis. The PWG report recommends that, as part of this
framework, legislation should require stablecoin issuers to be
insured depository institutions, which would mitigate the risk
of runs.
Q.4. Treasury has recently ended its CDFI streamlined
application program, which had been a useful way to certify
community lenders and efficiently get CDFI dollars to those in
need. Are there plans to replace this program with another
similar initiative?
A.4. Treasury does not have a CDFI streamlined application
program. However, the NCUA recently ended its streamlined data
collection service for credit unions seeking CDFI
certification. The CDFI Fund continues to work with regulators
to share data so as to minimize burden on CDFI certification
and program applicants and avoid the need to collect
duplicative information.