HOUSE FINANCIAL SERVICES COMMITTEE
ANNUAL REPORT OF FINANCIAL STABILITY OVERSIGHT COUNCIL
For questions on the note below, please contact the Delta Strategy Group team.
On February 4, the House Financial Services Committee held a hearing, “The Annual Report of the Financial Stability Oversight Council.” The witness in the hearing was Treasury Secretary and Financial Stability Oversight Council (FSOC) Chairman Scott Bessent, with his testimony available here.
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways, followed by summaries of opening statements and discussion.
Key Takeaways
- Treasury Secretary Bessent outlined four primary policy areas for FSOC: Treasury markets, cybersecurity, regulatory modernization, and artificial intelligence (AI). He outlined the importance of pro-growth policies, criticizing previous regulation by reflex over crisis preemption, alongside the Biden administration’s approach to material risks and supervision. He stressed how economic stagnation is a financial stability risk and that FSOC should identify vulnerabilities before recommending regulation, calling for paring back regulations that stifle lending, capital formation, and innovation.
- Bessent referenced the need to fix static regulatory thresholds and tailor regulation to risk, especially for geographically concentrated financial institutions like those in farming regions. He cited that farmers are most dependent on community banks, and that the Department of the Treasury (Treasury) is determined to increase those banks’ lending capacity and proclivity to lend.
- Bessent discussed how the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act is an important step in reestablishing U.S. leadership in digital asset regulation and creation. He noted that the Federal Reserve (Fed) has been cooperative and forward-thinking on stablecoin policy under the GENIUS Act, stating that the administration is moving with deliberate speed in regulatory implementation.
- Bessent agreed on the importance of keeping stablecoin activity onshore and under U.S. oversight, highlighting the need to embed U.S. best practices as codified in the GENIUS Act. He affirmed that the administration is not developing a central bank digital currency (CBDC), citing President Trump’s executive order prohibiting it.
- Democrats, led by Ranking Member Waters (D-CA), criticized the administration’s use of tariffs, questioning Bessent on why tariffs are justified and why tariffs are being imposed on goods the U.S. does not produce, such as coffee and bananas. Bessent framed how tariffs are a necessary tool providing leverage in negotiations as well as distinguished between generalized inflation and one-time price increases, citing San Francisco Fed data showing tariffs do not cause inflation.
SUMMARY
Opening Statements and Testimony
Chairman French Hill (R-AR)
It is encouraging to have financial regulators and policymakers who understand the fundamental reality that economic growth is essential for financial stability and aim to foster a regulatory environment that considers how both new and existing regulations alter and impact economic growth. President Trump has built on the critical work achieved in his first administration to make further progress in rolling back overly burdensome regulations that stifle innovation and economic growth. These efforts go beyond reducing regulatory red tape, fostering an environment where financial institutions can thrive and contribute to economic stability and growth, despite the doom-and-gloom economic predictions. Inflation came in nearly one percentage point lower than forecasted. The unemployment rate never increased beyond 4.5 percent. No recession has materialized, and GDP is on track to have three consecutive quarters above three percent growth. The budget deficit is on track to fall to approximately 5.4 percent of GDP. Under President Trump’s leadership and Secretary Bessent’s steady hand, the economy is back on track, reversing the damage of the previous administration. Committee Republicans remain steadfast in our goal of reinvigorating the commercial banking system and affordability. The Main Street Capital Access Act, designed to right-size regulations intended for large, complex institutions, aligns with the administration’s efforts to right-size regulation and reflects Committee Republicans’ dedication to ensuring financial regulation focuses on safety and soundness with a tailored approach to supervisory complexity. More here.
Ranking Member Maxine Waters (D-CA)
Trump’s trade wars are driving up the price of goods, and small businesses and farmers feel it. Instead of directing FSOC to address threats to our economy, it appears they are using it to do the exact opposite and deregulate Wall Street. Trump’s Justice Department is conducting a baseless criminal investigation into Jerome Powell to bully the Fed so they serve Trump’s agenda. Republicans need to stand up to Trump, defend our regulators, protect consumers, and put families ahead of Wall Street.
Subcommittee on Financial Institutions Chairman Andy Barr (R-KY)
Common-sense legislation like the Main Street Capital Access Act is exactly the type of pro-growth proposal to promote financial stability that FSOC highlighted in its annual report. The TIER Act and the Community Bank Regulatory Tailoring Act will modernize outdated statutory thresholds that impose disproportionate regulatory burdens on our financial system, allowing them to thrive under right-sized regulation. Regulatory tailoring helps protect the diversity of our financial system, which is key to promoting financial stability.
Subcommittee on Financial Institutions Ranking Member Bill Foster (D-IL)
We have a multi-trillion-dollar asset bubble underpinned by opaque and conflicted financial mechanisms that nobody understands by design, being willfully ignored by partisan financial deregulators. You can hardly open any financial news source without seeing a discussion of the pending collapse of the AI circular investment bubble.
Financial Stability Oversight Council Chairman Scott Bessent
President Trump has focused on building an era of economic expansion where Wall Street and Main Street can grow together. Treasury has tirelessly pursued pro-growth policies, and FSOC plays an important role in delivering on this agenda. Rather than preempting crises, regulators have frequently reacted to them after the fact, leading to a regulatory myopia that has undermined safety and soundness. Under President Biden, bank regulators preoccupied themselves with reputational risk, climate-related financial risk, and other risks with no clear nexus to safety and soundness. The result was the second-, third-, and fourth-largest bank failures in U.S. history in 2023. Beyond undermining safety and soundness, regulation by reflex has driven excessive regulation that can lead to economic stagnation, and economic stagnation is itself a grave threat to financial stability. In calibrating regulations, federal agencies must avoid the temptation to create a zero-risk financial system. FSOC should aim to identify vulnerabilities that could lead to systemic crises and encourage the private sector to mitigate those risks before recommending additional regulation. FSOC should also work with its members to support efforts to avoid or pare back existing regulations that stifle pro-growth lending, capital formation, and innovation. Economic growth creates capital buffers that reduce the risk of defaults and financial stress, and economic security reinforces domestic production capacity while reducing vulnerability to external shocks and supply chain disruptions. FSOC’s annual report prioritizes economic growth and economic security accordingly, with a specific focus on four policy areas: Treasury markets, cybersecurity, regulatory modernization, and artificial intelligence. FSOC is ensuring that the U.S. Treasury market remains the deepest and most liquid in the world and supporting efforts by member agencies to strengthen this market against future shocks, including through the interagency working group on Treasury market surveillance and the market resilience working group. FSOC is taking action to protect our financial system from increasingly sophisticated cyberattacks. To address this risk, FSOC is supporting expanded information sharing, joint monitoring, and scenario-based exercises, and it is emphasizing the need for regulated firms to manage cyber risk tied to third-party service providers. FSOC is prioritizing the responsible use of AI to strengthen financial stability and is working with public and private partners, including international counterparts, to enhance system resilience while closely monitoring emerging risks.
DISCUSSION
Chairman Hill (R-AR): How do strong, well-capitalized community banks and the benefits of tailoring help accomplish faster economic growth and support the rise of the rest, particularly in light of the regulatory environment that has left many community banks too small to succeed? Bessent: Due to onerous regulation, community and small banks became too small to succeed. More than fifty percent of community banks have disappeared not during, but since, the Great Financial Crisis (GFC). There have been virtually no de novo banks created, whereas before the GFC, there were more than fifty per year. Small and community banks are not only the anchor for community-based lending, but they also provide the bulk of the lending for agriculture. A thriving community bank infrastructure and ecosystem is essential.
Chairman Hill (R-AR): What is your assessment of how the regulatory process is progressing for implementation of the GENIUS Act? Bessent: The GENIUS Act was an important piece of legislation for bringing back onshore into the U.S. the regulation and creation of digital assets. The GENIUS Act and the stablecoins that will be created with it could be an important feature of financing the U.S. government. We are moving with deliberate speed to round out the House’s and the Senate’s intention.
Chairman Hill (R-AR): How do you think about overseeing artificial intelligence in the financial services industry and among financial supervisors? Bessent: We are working with private sector partners on best practices. There are two pieces to this. There is service improvement and financial security, alerting everyone to the risk of what is going on.
Ranking Member Waters (D-CA): If tariffs are not inflationary and are paid by foreign countries, then why did you announce in November that reducing tariffs on goods like coffee and bananas would quickly bring prices down? Why impose tariffs on goods America does not produce in the first place? Bessent: There is a difference between the definition of generalized inflation versus one-time price increases. According to the San Francisco Fed with 150 years of data, tariffs do not cause inflation.
Representative Huizenga (R-MI): How are you ensuring FSOC’s current work continues to prioritize an activity-based, transparent, analytically rigorous approach grounded in cost-benefit analysis and coordination with functional regulators when evaluating potential risks in non-bank financial markets? Bessent: That is done primarily through the Office of the Comptroller of the Currency (OCC) and the FDIC, and those chairs are intent on tailoring the rules for small banks so that we do not have another fifty percent decrease in mainstream lending.
Representative Huizenga (R-MI): What actions will you and the administration take to support achieving the three percent deficit-to-GDP goal by 2030? Bessent: I look forward to working with you on that. The deficit to GDP in calendar year 2024 was seven percent, the highest level not at war and not in recession. In calendar year 2025, it is down to 5.4 percent.
Representative Sherman (D-CA): Does FSOC plan to revert to the 2019 interpretive guidance from the first Trump administration that prioritized an activities-based approach over an entity-based approach in defining a Systemically Important Financial Institution (SIFI)? Bessent: Yes, we prefer an activities-based approach rather than an institutional-based approach.
Representative Sherman (D-CA): Does Treasury or any component of the FSOC have the authority to direct banks to buy Bitcoin or to invest U.S. taxpayer dollars in Bitcoin or TrumpCoin, or to change banking regulations to encourage such purchases? Is taxpayer money going to be deployed into crypto assets? Bessent: Within the context of asset diversification within banks, they could hold many assets. I do not have the authority to do that, and as Chair of FSOC, I do not have that authority. Of that $1 billion of Bitcoin that was seized, $500 million was retained, which has become over fifteen billion.
Representative Lucas (R-OK): Would our banking system be safer with a narrow, targeted expansion of deposit insurance, such as giving the FDIC authority to raise coverage levels for non-interest-bearing transaction accounts in a data-driven way to create a level playing field? Why is it important that Congress act now on targeted deposit insurance reform to reduce systemic risk? Bessent: It would permit small and community banks to continue competing and stem deposit flight during a period of stress, which is one of the biggest threats to financial stability. It is very important for small banks to have one non-interest-bearing account that can have a much higher level of insurance so that they are able to retain deposits during a stress period. This is one of the reasons that we have seen assets leave small banks and one of the reasons that we have seen fifty percent of small banks disappear. Deposit volatility, when deposits are moving during a stressed time, does not benefit anyone in the long run.
Representative Lucas (R-OK): How would reforms to banking regulations, such as the Liquidity Coverage Ratio (LCR) and stress tests, help incentivize market intermediation by banks and improve Treasury market stability and liquidity? Bessent: It brings more of our Treasury market onshore. There were periods of stress last year, which the market successfully navigated. At the end of January, we had the third-highest volume in the Treasury market, and the bid-ask spreads stayed right in the center line. We are at a five-year low in bond market volatility.
Representative Lynch (D-MA): Can you explain why FSOC’s 2025 report shifts focus from the 2024 report’s warnings about AI-related risks to prioritizing the removal of regulatory impediments, despite consumer protection concerns still being relevant? Is the lack of explainability in AI-driven credit decisions a concern? Bessent: We are charged with financial stability, and we are focused on leveraging AI strength and financial system resilience, with an economic growth and security lens. Explainability could be a concern, but we do not view it as a priority for financial stability.
Representative Wager (R-MO): How important is capital formation reform to maintaining U.S. economic leadership and long-term growth? Bessent: Reforms are vital. Since the early 2000s, the number of public companies available to invest in has greatly diminished, and it has developed into a network of private assets. For small businesses, it is a duality of regulation and access to finance. With President Trump’s agenda, businesses now have tax certainty through the One Big Beautiful bill, with 100 percent deductibility of equipment, factories, and structures. We are pulling back the regulatory morass that was highly harmful.
Representative Barr (R-KY): Can you discuss how indexing the current static regulatory thresholds would enable banks of all sizes to grow, and how that growth would support financial stability? Bessent: The regulatory straitjacket that emerged pushed lending outside the traditional banking system, and small banks became too small to succeed. We have to fix that and tailor regulations to the risk for people who know their communities and are concentrated geographically. If you are in Iowa, you are concentrated in farming.
Representative Barr (R-KY): Can you discuss Treasury’s new obligations under the Comprehensive Outbound Investment National Security Act, and how you intend to implement it to prevent capital flows into companies linked to China’s military-industrial complex? Bessent: This is another arrow in our quiver. As the lead negotiator with China on the economic front, it is very useful for me to be able to say that I am happy to refer things to Congress.
Representative Cleaver (D-MO): What is your view on the Fed’s dual mandate of stable prices and maximum employment? Do you believe in the independence of the Fed? Bessent: The Federal Reserve Act of 1913 evolved into the dual mandate. The dual mandate is a very delicate balance between maximizing economic growth while maintaining low levels of inflation. I believe in the independence of the Fed, but also in accountability. The Fed should be independent for monetary policy, and every other program it undertakes impinges monetary policy independence, such as whether it is offering political opinions.
Representative Williams (R-TX): What is the importance of tailoring and right-sizing regulations, how a one-size-fits-all approach undermines community-based lending, and how layered regulations and rising compliance costs affect growth and overall economic outcomes? What benefits would result from greater clarity in the bank merger review process? Bessent: Regulatory certainty for any business is important, and especially for those that do not have legions of consultants or legions of lawyers. The ability to grow through acquisition is also important. We want regulators to put down and stick to the framework, not to regulate through supervision. A lot of the burdensome regulation has come out of the Fed, but also the FDIC and the OCC, and removing that can get Main Street lending going again. We are pushing for the regulated financial system, to get back on an even, safe, sound, and smart level through deregulation, but not deregulation at any cost. One-size-fits-all regulation is a disaster.
Representative Loudermilk (R-GA): Will you use your authority to modernize and streamline the outdated reporting rules and increase the thresholds in implementing Authority for Anti-Money Laundering and Countering the Financing of Terrorism (AMLA)? How can you ensure financial institutions can focus on real illicit finance risks? Bessent: We are studying this carefully and are also trying to use common sense for geographical targeting, so that we can lower thresholds for areas where we see disturbing trends. We have done a very iterative process, especially with the small banks. FinCEN has been on the road regionally asking for best practices, and we are working to incorporate that to get the right mix of enforcement and common sense.
Representative Loudermilk (R-GA): Do you believe that modernizing and making the BSA regime more effective would hinder or undermine law enforcement efforts? When can Congress expect to see Treasury’s proposed changes to the BSA program? Bessent: If it were done in a very smart way that optimizes looking for criminal activity, not at all. I will get back to you on proposed changes, but we are working with all deliberate speed.
Representative Davidson (R-OH): Given China’s dominant position in many critical mineral supply chains, and the Export-Import Bank’s (ExIm) expanding use of financing tools to address vulnerabilities, does ExIm need additional capital or authorities to scale its support for supply chain resilience? Bessent: ExIm is the linchpin toward our move toward regaining our sovereignty and national security. At FSOC, we are talking about economic security and national security as well.
Representative Davidson (R-OH): Should the primary Defense Production Act (DPA) authorities remain within Treasury to ensure a whole-of-economy approach in addressing supply chain vulnerabilities? Bessent: We are working well with the Department of War (DOW), and I can tell you that the defense priorities are the same across the economy, and it really starts with critical minerals. DOW is leading that along with Ex-Im Bank.
Representative Davidson (R-OH): Are you aware of any ongoing government or Fed efforts to develop a U.S. CBDC within the administration? Does the President’s executive order stating that the U.S. will not develop a CBDC apply to the Fed as well? Bessent: Absolutely not. President Trump has made it clear that a CBDC is anathema to the creation of the U.S. as a digital powerhouse. I cannot speak for what goes on at the Fed, but I would assume that they would not be part of that either. The Fed has been very cooperative in terms of the regulation and are a bit forward thinking with the GENIUS Act, what is happening with stablecoins, and how that fits within the financial and payment system. I agree with you that CBDC international development is moving fast, and the U.S. has to keep the lead.
Representative Rose (R-TN): Do you believe that raising deposit insurance limits would directly translate into more lending capacity, such as for farms? Bessent: In a fractional banking system, deposits finance lending. When deposits flow out, the ability to have capital to lend is greatly diminished.
Representative Steil (R-WI): With the STABLE Act requiring Treasury to complete implementing regulations by July 18 of this year, are you going to hit the deadline and are there any impediments preventing you from doing so? Bessent: I do not see any impediments at present, and if we are going to hit them, we will notify you and the Committee.
Representative Casten (D-IL): Did you say this summer that tariffs are inflationary? Bessent: I was mistaken when I said the tariffs could be inflationary because we are seeing inflation drop to 2.1 percent.
Representative Timmons (R-SC): Is the purpose of the last year to renegotiate our trade agreements to make the U.S. economy more competitive in the global economy? Bessent: One hundred percent. There are numerous goals, but it is to make the U.S. economy more resilient. We are now seeing 4.1 percent growth for the past three quarters. We are seeing inflation drop. Tariff inflation was the dog that did not bark.
Representative Meuser (R-PA): How will modernizing the capital framework improve credit access and affordability, such as for farmers who ultimately bear the costs of excessive capital requirements? Bessent: They are the most dependent on community and small banks. We are determined to increase their lending capacity and proclivity to lend, and we want to do it on a safe, sound, and smart basis.
Representative Meuser (R-PA): Are the capital frameworks imposed beyond international peers, including the G-SIB surcharge, SCB, and Tier 1 leverage ratios, being reviewed holistically to better support lending and economic growth? Bessent: We are not going to let outside regulators determine what is best for the U.S. financial system. The strength of the U.S. financial system is its depth and breadth, and we do not want to end up like Canada with five banks, Switzerland with one, or France with three.
Representative Gottheimer (D-NJ): How is FSOC threading the needle to enable broad AI adoption in financial markets while addressing vendor concentration and encouraging competition, and where can Congress help get this right? Bessent: It is important to work together because what we see many times in these very quick technology cycles is that the technology gets ahead of the regulation. Working together to keep the regulation in sync with the technology, whether it is for the financial system or anywhere else.
Representative Gottheimer (D-NJ): Are markets starting to price in a sustained shift away from U.S. assets, given the softer dollar and higher gold prices? What specific indicators do you watch to assess whether foreign investors are pulling back? Bessent: We saw a record amount of foreign inflows into Treasury auctions last year, despite the popular narrative. We are still seeing very good and massive flows into U.S. equities, and very substantial foreign direct investment.
Representative Stutzman (R-IN): Are tariffs putting the U.S. in a position to compete with China? Bessent: I was with the President in Iowa and to combine two of your themes, manufacturing and the farm economy, we were with the CEO of John Deere, and he is building a new factory in Indiana. When asked why, he said the tariffs.
Representative Torres (D-NY): Does the President have the constitutional authority to remove the Fed Chair solely because of a policy disagreement? Do you believe that the unitary executive theory applies to the Fed? Bessent: I do not have an opinion, and we will have to wait and see what the Supreme Court says.
Representative Torres (D-NY): Does the administration regret imposing tariffs on goods that cannot be produced domestically at scale in the U.S., such as coffee and bananas? Are you willing to commit to no longer imposing tariffs on any product that has neither a domestic substitute nor a national security rationale? Bessent: We use it as leverage with other countries to take down non-tariff barriers. Tariffs are leverage and have led to countries negotiating in a more wholesome manner. Committing to that would be foolish in negotiations.
Representative Garbarino (R-NY): What is Treasury working on related to payment modernizations? Bessent: We are constantly working on payment modernizations and are working with the Fed to modernize FedNow. We are looking at ways on digital assets also.
Representative Garbarino (R-NY): What is the administration doing to strengthen cybersecurity across the federal financial regulatory agencies? Bessent: Treasury is committed to making risk-informed resources. We constantly work on emerging threats and are in close collaboration with our financial sector partners.
Representative Lawler (R-NY): Do you agree that, as Treasury implements stablecoin legislation, U.S. rules should preserve enough flexibility for U.S. issuers to remain competitive so dollar-denominated stablecoin activity stays onshore, transparent, and under U.S. oversight rather than moving offshore as foreign jurisdictions and countries like China offer incentives for digital currency adoption? Bessent: Stablecoins can go around the world, and we will continue to see adoption, especially in emerging economies or among individuals who want to hold the U.S. dollar. It is paramount, as was done with the GENIUS Act, to put in U.S. best practices.