Senate Banking Committee Hearing
Overview
For questions on the note below, please contact Scott Parsons or Edmund Perry at (202) 547-3035.
On May 19th, the Senate Banking Committee held a nomination hearing for the Board of Governors of the Federal Reserve System (Fed) and the Securities and Exchange Commission (SEC). The nominees were:
- Michael Barr to be Vice Chairman for Supervision of the Fed
- Jaime Lizárraga to be a Commissioner of the SEC
- Mark Uyeda to be a Commissioner of the SEC
Below is a summary of the hearing prepared by Delta Strategy Group. It contains several high-level takeaways from the hearing, followed by opening statements and witness testimony, and a summary of the Q&A portion.
Key Takeaways
The following is a summary of some of the topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Committee Ranking Member Pat Toomey (R-PA) said that the Fed and the SEC are becoming increasingly politicized, which is a direct threat to monetary policy and the fundamental independence of financial regulation. Toomey particularly criticized the Fed and the SEC’s recent efforts to address climate change, and he said that financial regulators should not try to direct investment based on partisan policies.
- Senator Bill Hagerty (R-TN) called attention to the quantity of recent rulemakings that the SEC has released and said there should be further economic analysis on how the rules will interact with each other and their cumulative impact.
- Nominee for Vice Chairman of the Fed Michael Barr said that he supports the Fed’s CBDC discussion paper. He agreed with Fed Chairman Jerome Powell that, if it decides a CBDC would be beneficial for the U.S., the Fed should only move ahead with legislative authority from Congress, and it should do so in close coordination with the White House and other financial regulators.
- Senator Cynthia Lummis (R-WY) voiced concerns over the SEC staff’s recent recommendation to digital asset custodians that they should hold customer funds on their balance sheets. She said that investor protections are weakened with the SEC staff’s recommendation in the event of insolvency. SEC Commissioner Nominee Mark Uyeda responded that the recommendation is not an official position of the Commission.
- Senator Elizabeth Warren (D-MA) voiced concerns that stablecoins are not subject to an appropriate audit regime to ensure that they maintain proper reserves.
Summary
Opening Statements and Testimony
Acting Chairman Jon Tester (D-MT)
We have emerged from the worst of the pandemic, but our economy is still in poor shape. Families are seeing higher costs at the pump and the grocery store, and unemployment is at an all-time low. Small businesses have trouble finding and keeping workers. We need to support workers and small businesses by lowering costs for working families and increasing transparency in the marketplace. We must hold bad actors accountable.
Ranking Member Pat Toomey (R-PA)
I am concerned that financial regulators, including the Fed and the SEC, are increasingly straying into contentious political issues wholly unrelated to their mandates and expertise. In particular, the Fed has been involved in issues like global warming, social justice, and even education policy. There is no systemic risk to the banking system posed by gradual changes in the earth’s average temperature. All Fed governors must commit to not exceeding the Fed’s limited statutory mandates. It is important to keep financial regulators apolitical and independent.
Michael Barr, Nominee for Vice Chairman for Supervision, Fed
I have worked hard to advance bipartisan engagement on financial issues. If confirmed, I would be committed to the Fed’s responsibilities to ensure that the financial system is robust and resilient, that innovation flourishes with clear rules of the road, and that the financial system operates fairly. The Fed will work to bring down inflation to target levels consistent with its dual mandate of maximum employment and price stability.
Jaime Lizárraga, Nominee for Commissioner, SEC
Fair and transparent markets benefit all market participants. If confirmed, I will uphold the mission of the SEC to protect investors; promote fair, orderly, and efficient markets; and facilitate capital formation. I will work to ensure regulations keep pace with rapid technological changes in our markets. I will facilitate capital formation for our job-creating small businesses, particularly in underserved areas. Our country’s future prosperity depends on robust oversight to ensure that we have safe and transparent capital markets that foster a level playing field for all market participants with protections for investors and broad access to capital.
Mark Uyeda, Nominee for Commissioner, SEC
I have a deep commitment to the SEC’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
Discussion
Cryptocurrencies/CBDC/Stablecoins
Reed (D-RI): What is your perspective on cryptocurrencies? Barr: I think cryptocurrency could offer some economic benefits but also some significant risks. These risks are different for different types of cryptocurrencies. Generally, the primary concern for cryptocurrencies is investor protection. That is the responsibility of market regulators, not the Fed. There could be financial stability risks stemming from stablecoins, and I think it is important for Congress and regulatory agencies to monitor those risks.
Lummis (R-WY): SEC staff recently recommended that digital asset custodians should hold customer funds on their balance sheets. Do you agree with that? Are you familiar with the Bank for International Settlements’ (BIS) proposed prudential treatment of crypto-asset exposures? If not, can you commit to discussing this further with me? Uyeda: This was a statement made by SEC staff, not a rulemaking voted on by the Commissioners. I would want to look much more into this statement and have a discussion with the staff. If confirmed, I would also want to talk with federal and state banking regulators as to how this works with their regulatory regimes; I have not read the BIS’s prudential regulation proposal. I would be happy to discuss this further with you.
Reed (D-RI): What is your view on the creation of a U.S. CBDC? Barr: I think the development of a CBDC requires a lot more thought and study. I think that the Fed’s CBDC discussion paper is a good starting point. As Fed Chairman Jerome Powell has indicated, I believe that the Fed should only work towards creating a CBDC with the approval of and in coordination with Congress and the White House.
Warren (D-MA): Are stablecoins currently providing audited disclosures that verify that they are backed by quality assets? Lizárraga: To the best of my knowledge, no.
Market Structure
Tester (D-MT): What is your view on the impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) on our financial system? Barr: During the passage of S. 2155, I supported aspects of the legislation and was concerned about other aspects of it. I think the community bank provisions and other protections added to veterans and service members were good and strong. I expressed concern that some aspects of the bill could weaken capital or liquidity rules for larger firms, like credit card companies and foreign firms.
Moran (R-KS): Do you think that any change to current ESG disclosure rules, which would more than double the current cost of disclosures with an outsized impact on smaller companies, should be subjected to robust public debate before those rules are finalized? Do you believe smaller firms should have the same opportunities as the largest firms to list exchange-traded products to compete and serve investors? Lizárraga: I believe in competition in all of the segments of our markets. Uyeda: I would like to point out that consideration of competition is statutorily mandated by Congress. Under the Regulatory Flexibility Act, the SEC must look at the economic impact of any new rule on small entities. However, the number within those definitions of what is a small entity in the asset management space is potentially outdated and needs updating.
Cortez Masto (D-NV): What are your thoughts about market manipulation on social media and what roles should the SEC take to curb this practice? Uyeda: The SEC has longstanding authority to pursue enforcement actions for manipulation of the securities markets. Social media is one of the avenues in which manipulation can occur but the use of the internet to engage in manipulating prices including the pump and dump schemes is nothing new. There is an ever-expanding set of technological tools to identify manipulative behaviors. Lizárraga: Robust enforcement of our securities laws lowers the risk in our capital markets, protects investors, and lowers the cost of capital to the extent that there is fraud and market manipulation whenever it occurs. I think the SEC has an obligation to pursue social media in some instances that facilitates these relations. Chairman Gensler has added additional resources to the enforcement division to address these issues in the digital space which may include monitoring what happens on social media.
Cortez Masto (D-NV): What are your thoughts about market manipulation on social media and what roles should the SEC take to curb this practice? Uyeda: The SEC has longstanding authority to pursue enforcement actions for manipulation of the securities markets. Social media is one of the avenues in which manipulation can occur but the use of the internet to engage in manipulating prices including the pump and dump schemes is nothing new. There is an ever-expanding set of technological tools to identify manipulative behaviors. Lizárraga: Robust enforcement of our securities laws lowers the risk in our capital markets, protects investors, and lowers the cost of capital to the extent that there is fraud and market manipulation whenever it occurs. I think the SEC has an obligation to pursue social media in some instances that facilitates these relations. Chairman Gensler has added additional resources to the enforcement division to address these issues in the digital space which may include monitoring what happens on social media.
Monetary Policy
Tester (D-MT): Why is it important for the Fed to remain independent? Is it a mistake to allow politics to influence the nation’s monetary policy? Barr: The Fed’s independence is longstanding and critical to its effectiveness. The market needs to have confidence that the Fed’s decisions are made based solely on the evidence in front of it and the American public’s needs. It would be a mistake to allow politics to influence the Fed because it reduces the effectiveness of the monetary policy. If confirmed, I will be firmly committed to the independence of the Federal Reserve.
Ossoff (R-GA): What is your assessment of the distributional effects of monetary policy decisions? What is the impact of the dovish stance by the Fed on asset valuations? Why have many central banks maintained low rates and continued to purchase bonds since 2008? Barr: I think the Fed has simple tools to impact monetary policy. When the Fed is doing its job properly, the economy is working well for everyone, especially for low and moderate-income workers who are late to the job market. In general, when interest rates are low, asset prices tend to rise. The two main reasons for low rates and high bond-buying were to mitigate financial stability risks facing the economy at the time and to effectuate an accommodative monetary policy. Some of the change has to do with changing demographics in advanced industrial economies. Some of it has to do with very high saving rates in most but not all of the advanced industrial economies. The Fed’s current primary monetary policy goal is to bring inflation down to the target level of 2 percent.
Climate Change
Toomey (R-PA): Do you agree that the Fed does not have the authority to use climate-related stress tests to penalize banks for lending to energy companies for instance? Barr: The only purpose of Fed stress-testing or other measures should be to understand the risks that climate might pose to the financial system and to work with financial institutions to manage those risks.
Daines (R-MT): Do you believe that climate change is among the top three threats to financial stability? Barr: I have not thought about a priority ranking of the threats facing the financial sector. The Fed’s job is to evaluate emerging threats to the financial system, then design a regulatory approach with financial institutions to create a consistent risk management framework. A pandemic was not on anybody’s list of next threats to the financial sector, so it is important to be humble about our understanding of those sets of risks.
Cybersecurity
Cortez Masto (D-NV): Can you talk about your experience in cybersecurity and data privacy and safety? What role does cybersecurity play in fostering stability, integrity, and efficiency in our economy? Barr: Cybersecurity is essential for risk mitigation in the financial system. Cyber risk is a very urgent risk with us today. I think both the Fed and other federal regulatory agencies in the financial sector must continue to invest and try to stay ahead. I have written about the need for international coordination in efforts to address risk from cybersecurity in a way that continues competition and advances the ability of financial institutions to serve countries around the world.
SEC Rulemaking
Hagerty (R-TN): Do you believe that it is important to consider how rules proposed by the Commission interact with one another? Lizárraga: Yes.