On May 10th, the Senate Banking Committee held a hearing entitled “The Financial Stability Oversight Council Annual Report to Congress.” The sole witness in the hearing was Department of Treasury (Treasury) Secretary Janet Yellen.
Below are some takeaways from the hearing prepared by Delta Strategy Group.
Committee Chairman Sherrod Brown (D-OH):
- Congress created the Financial Stability Oversight Council (FSOC) to keep banks from recklessly risking Americans’ money with expectation of government bailouts. We must ensure that hedge funds do not try risky new schemes to get rich at the expense of the rest of the country. Under President Trump, the FSOC did everything possible to strengthen and support the richest on Wall Street and did nothing to assess and prepare for financial risks such as the volatility associated with the GameStop crisis and the collapse of Archegos or risks associated with climate change. Under Secretary Yellen, the FSOC is once again taking these risks seriously.
- There are new and serious risks associated with cryptocurrencies. We cannot allow retail participants to be holding the bag when an inevitable major crash or hack shuts down these markets. Stablecoins have proven to be wildly volatile, not stable, as recent collapses have shown. Cryptocurrency markets have been rife with fraud with no recourse for harmed investors.
- Corporations in the oil and gas industry claim that they have to keep raising prices to keep up with costs, but they do not need to raise prices to remain profitable. These corporations would rather price gouge Americans than lower executive salaries and limit corporate buybacks.
- We must expand our efforts to aid Ukraine through further sanctions and export controls against Russia.
Committee Ranking Member Pat Toomey (R-PA):
- In the past, FSOC’s process for designating non-bank financial institutions as systemically important has been opaque and has needlessly imposed bank-like regulations on non-bank financial institutions such as asset managers. I was glad to see that FSOC adopted an activities-based process for identifying systemically important institutions.
- I am concerned that FSOC is becoming politicized on certain issues such as climate change. FSOC has shown undue attention to the politicized topic of climate change and ignored far more pressing threats such as cyber-attacks. Physical climate risks do not threaten financial security. The real climate risk is political and the biggest threat is the use of financial regulators to allocate money away from certain industries to achieve aggressive climate goals. As we deal with skyrocketing energy prices, we do not need financial regulators to make it even more difficult for Americans to afford gas.
- I disagree with the President’s Working Group’s (PWG) recommendation to require stablecoin issuers to be insured depository institutions, but I was glad that the report acknowledged that it was the responsibility of Congress to establish these rules. My recent stablecoin legislation will help unlock the promising potential of stablecoins to improve payments and transactions.
Senator Tim Scott (R-SC)
- In the face of consistent inflation caused by excessive government spending, we cannot justify a spending package such as Build Back Better.
Senator Catherine Cortez Masto (D-NV):
- We need a regulatory framework for stablecoins. Cryptocurrency markets have grown larger than the subprime mortgage market, and they have strikingly similar characteristics. A particularly serious risk is the concentration of ownership in cryptocurrency markets.
Senator Kirsten Sinema (D-AZ):
- We must create more clear rules of the road for cryptocurrency regulation if we want to encourage beneficial innovation and industry in our country. This industry will create strong job opportunities for the U.S. Clear regulation will also benefit consumers by giving them certainty in their investments.
Janet Yellen, Secretary, Treasury:
- Digital Assets
- New products and technologies may present opportunities to promote innovation and increase efficiencies, but digital assets may pose risks to the financial system, and they require increased regulatory oversight. FSOC is working on reports on these issues as requested by President Biden’s Executive Order. Ownership concentration in these markets could be a risk if the largest owners are using leverage in a way that could distress others in the markets.
- We are working to ensure that payment stablecoins and their arrangements are subject to a federal prudential framework on a consistent basis. Current standards are not sufficient to ensure that stablecoins have a federal prudential framework. Treasury has real concerns regarding run-risks on stablecoins. It is important for these new regulations to originate in Congress. It would be appropriate for Congress to pass legislation this year.
- Market Structure Reform
- The Dodd-Frank reforms increased the resiliency of the American financial system, but market turmoil in March 2020 demonstrated that liquidity mismatch and the use of leverage by non-bank financial institutions can make these markets vulnerable to acute financial stresses. These stresses can be transmitted and amplified to the broader financial system. FSOC reestablished its hedge fund working group to establish an interagency risk monitoring system to mitigate identified risks in these markets. We support the Securities and Exchange Commission’s (SEC) efforts to reform money market funds and open-end funds.
- We also support improving resiliency in Treasury markets. Potential steps to serve this goal include improving data quality and availability, evaluating expanded central clearings, and enhancing tracing venue transparency and oversight. We support the SEC’s proposals to increase transparency and oversight over alternative trading systems (ATSs) and update the definition of a government securities dealer to include market participants that play an increasingly significant liquidity providing role in these markets.
- Inflation
- As the Federal Reserve (Fed) is raising interest rates, we continue to study and address inflation concerns. President Biden has announced releases from the Strategic Petroleum Reserve (SPR) to allow domestic suppliers to ramp up production in response to fuel prices. It will take a while for these producers to ramp supply back up. We are still working with ports and truckers to address the supply chain side of inflation. We believe that the Fed’s actions and subsequent market responses are a sign that inflation will begin coming down.
- Russian Sanctions
- Our sanctions have been successful in damaging Russia’s economy. We have seen their inflation rise steeply as their currency value falls. We are seeing their military industrial complex struggle to buy the equipment it needs to continue this war. We are working to ensure that we close off all financial services providers to Russian oligarchs. We had concerns that oligarchs would use foreign cryptocurrency exchanges to evade sanctions and have taken actions to prevent this.
- Climate Change
- I believe that the main risks from climate change can be broken into physical and transitional risks. Climate change is an existential threat to our future. It is a long-term risk, but it is becoming increasingly severe. We recognize that it is not possible to switch entirely to renewable energy sources today, but we should continue to pursue a world where fossil fuels play a smaller role in our energy supply.