SENATE COMMITTEE ON BANKING, HOUSING, & URBAN AFFAIRS
Annual Report of the Financial Stability Oversight Council
For questions on the note below, please contact the Delta Strategy Group team.
On February 5, the Senate Committee on Banking, Housing, and Urban Affairs 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, which includes several high-level takeaways, followed by summaries of opening statements and discussion.
Key Takeaways
- Chairman Scott (R-SC) emphasized that his priorities for the Committee center on pro-growth and pro-affordability policies, arguing that economic growth and economic security are foundational to long-term financial stability. He highlighted bipartisan efforts on the Committee to improve affordability and promote sustained economic growth.
- Chairman Scott recognized the Treasury Department’s (Treasury) work implementing the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, stating that the framework could strengthen U.S. dollar dominance, increase global demand for dollar-denominated assets such as U.S. Treasuries, reduce systemic risk, and support economic growth and innovation.
- Senators Hagerty (R-TN) and Lummis (R-WY) underscored the importance of regulatory clarity for digital asset markets. Bessent stated that comprehensive market structure legislation is essential, supporting passage of the Digital Asset Market Clarity (CLARITY) Act and outlined how innovation cannot proceed responsibly without clear rules of the road, saying he hoped a bill could be passed this spring.
- Treasury Secretary Bessent outlined four primary policy areas for the Financial Stability Oversight Council (FSOC): Treasury markets, cybersecurity, regulatory modernization, and artificial intelligence (AI). He criticized 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.
- Senator Hagerty discussed requirements that stablecoins be backed by high-quality liquid assets such as U.S. Treasuries in the GENIUS Act. Bessent agreed that stablecoins can support the U.S. dollar’s global dominance and create new demand for Treasury securities, framing the legislation as a way to keep innovation onshore while reinforcing financial stability. He contrasted U.S. private-sector stablecoins with foreign central bank digital assets (CBDAs), asserting that the administration will not pursue CBDAs and expects global markets to favor U.S.-regulated private alternatives.
- Senator Alsobrooks (D-MD) also expressed support for advancing bipartisan digital asset market structure legislation, highlighting productive collaboration with Treasury on both the GENIUS Act and broader market structure efforts, and emphasizing the importance of addressing stablecoin yield and interest payments in a way that protects innovation while safeguarding community banks. Senator Warner (D-VA) called for Treasury input on market structure legislation, particularly regarding decentralized finance (DeFi).
- Senator Ricketts (R-NE) praised Treasury’s update to the 45Z Clean Fuel Production Credit, emphasizing that it supports U.S. farmers and biofuel producers by restricting eligibility to domestic feedstocks and keeping taxpayer dollars in the U.S.
- Senator Britt (R-AL) criticized the Biden administration for failing to support U.S. agriculture, citing unfulfilled trade deals, record inflation, and the absence of a new Farm Bill. Secretary Bessent noted that the Trump administration’s trade agreements with China encouraged soybean purchases, which slowed under Biden due to limited enforcement of the 2020 phase-one agreements.
- Bessent characterized AI as a powerful yet risky emerging technology, emphasizing the importance of public-private collaboration and confirming that Treasury is considering regulatory sandboxes to enable controlled AI testing with guardrails.
SUMMARY
Opening Statements and Testimony
Committee Chairman Tim Scott (R-SC)
I am proud of the bipartisan work this Committee has done to promote economic growth and affordability. FSOC was created to identify and respond to systemic risk. FSOC has focused on a climate agenda that damaged financial stability and treated nearly every sector of the economy, financial market, and major financial institution as a potential financial stability vulnerability. Reassessing bank regulatory and supervisory frameworks is about making sure the financial system works as intended. Businesses should not be caught in the crossfire of conflicting rules, duplicative supervision, or regulatory whiplash. I want to recognize Treasury’s work implementing the GENIUS Act. This framework has the potential to expand dollar dominance, increase global demand for dollar-dominated assets like U.S. Treasuries, reduce systemic risk, and support economic growth and innovation.
Ranking Member Elizabeth Warren (D-MA)
Trump’s economic policies have damaged the economy. Congress created FSOC after the 2008 financial crisis to protect families from large financial institutions that load up on debt and crash the economy. Secretary Bessent has helped get rid of guardrails, so banks can take on more risk.
FSOC Chairman and Treasury Secretary Scott Bessent
Treasury has tirelessly pursued pro-growth policies, and FSOC plays an important role in delivering this agenda. Too often in the past, we have seen regulation by reflex. 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. At the same time, they centered supervision on management and other governance matters that distracted examiners and banks’ risk managers from the real risks. Excessive regulation can lead to economic stagnation, which is a grave threat to financial stability. 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 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, the Council 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 committed to supporting efforts to modernize supervisory and regulatory frameworks. Regulation and supervision should address material risk, enhance transparency, and reduce unnecessary burdens. 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 Scott (R-SC): President Trump has been able to keep inflation under three percent. As a result, are interest rates coming down significantly? Bessent: Yes, we have seen the interest rates come down this year, and the ten-year Treasury had its best year since 2020.
Ranking Member Warren (D-MA): Can you commit that President Trump’s Fed nominee, Kevin Warsh, will not be investigated by the Department of Justice if he does not cut interest rates in the exact way President Trump wants? Bessent: That is up to the President.
Senator Rounds (R-SD): What are the biggest impediments today that prevent banks from adopting AI responsibly for compliance, fraud detection, and risk management? Would a time-limited AI sandbox for financial institutions with clear guardrails help firms test AI tools in a controlled setting? Bessent: The regulatory agencies are working with our private partners to implement a gradual, robust adoption of AI. AI can be a valuable tool, but we also need to recognize that it can pose risks to state and non-state actors. It is a public-private partnership that we are pushing very hard across the agencies and at Treasury. Sandboxes are an option that we are considering moving forward.
Senator Rounds: What does it take to bring down the price of Treasuries regarding the growth of gross domestic product (GDP), and when Treasury rates come down, what does that look like for an average American home buyer who is looking at a thirty-year mortgage? Bessent: A mortgage rate has two components. A derivative of a ten-year bond, and we have seen that decline. Then it is the spread between the ten-year bond and the actual mortgage security, and we have seen that at multi-year lows. What we saw in January was the lowest mortgage rates in almost three years.
Senator Kennedy (R-LA): The foremost reason for tariffs is to prevent other countries from taking advantage of us. If Canada came to the U.S. and said it would eliminate tariffs on U.S. imports, would you eliminate our tariffs and allow them to compete on a level playing field? Bessent: Absolutely not. As we saw when Prime Minister Carney went to China, he lowered tariffs on Chinese electric vehicles (EVs) from 100 percent to six percent. The U.S. has a 100 percent tariff on Chinese EVs. We could not let our northern border be used as a way for Chinese EVs to come into the U.S.
Senator Hagerty (R-TN): How does the U.S. leadership in crypto and stablecoins fit into Treasury’s strategy for maintaining the dollar’s role at the center of the global financial system? Bessent: This can be an important source of funding for the U.S. government as we push for government funding that helps everyday Americans. We believe that, with the U.S. having the safest, soundest, and best practices, we can attract new sources of funding through the stablecoin mechanism.
Senator Hagerty: Passage of the GENIUS Act was a major statement in terms of keeping innovation onshore. What is your perspective on the stability and clarity we provided in the GENIUS Act, and what it means for keeping innovation in the U.S.? Bessent: It is important that we remain a leader in digital asset innovation. We do not want to have CBDAs, which we are seeing in the rest of the world. We are going to see a choice between the American private sector assets with our best practices and regulation, or CBDAs, from jurisdictions like China or Europe. I think the world will choose the U.S. dollar and the private sector. This is why it is vital that we have a robust stablecoin regulatory framework.
Senator Tillis (R-NC): What would a ten percent cap on credit card interest rates do to asset-backed securities and credit card issuers? Bessent: We are still examining its impact on the asset securities market. I think it would depend on the length. The President has called for a one-year. We would also see if they were able to cut costs because we have seen a migration where credit card companies used to compete on annual percentage rate (APR). The profitability of credit cards does not have to be hit if they concentrate more on competing on rates than rewards.
Senator Warner (D-VA): We will address market structure issues such as yields and rewards, but the national security issues around DeFi are real, and we need to avoid creating rules that leave significant exemptions and take away procedural powers that exist today. Can you make it clear that we need to find a compromise on DeFi for crypto market structure? Bessent: I look forward to working with you on that. We have had problems, and historically, there have been problems when technology gets ahead of the legislation.
Senator Lummis (R-WY): Is China trying to use digital assets and blockchain to build an alternative to American financial leadership? Bessent: We do not know that for sure. They have a large sandbox in Hong Kong. The Hong Kong Monetary Authority (HKMA) is actively travelling the world looking at different mechanisms, so I would not be surprised.
Senator Lummis: What is your opinion about the importance of having clear rules of the road through market structure legislation in the U.S? Bessent: It is impossible to proceed without it. We must get the CLARITY Act across the finish line, and any market participants who do not want it should move to El Salvador. We have to bring safe, sound, and smart practices and the oversight of the U.S. government, while also allowing the freedom that is crypto. The balance is being worked out. It was worked out in the GENIUS Act, and I am confident that, with leadership on both sides of the aisle, we can get CLARITY across the finish line this year. Over time, digital asset companies may offer similar products to traditional banks. I have been a champion of small banks, and deposit volatility is very undesirable because it is the stability of those deposits that allows them to lend into their communities, agriculture, small businesses, and real estate. We will continue working to ensure there is no deposit volatility associated with this.
Senator Lummis: I am working on a tax package for digital assets, and I would appreciate guidance on the de minimus for bitcoin and other digital assets that might be used as a means of exchange. Will de minimus be a capital gain, or exempt from capital gain when it is used as a means of exchange? If it is going to be subject to capital gain, how do you calculate what the capital gain is? Bessent: It is a very complicated subject, and we would be happy to have our office of tax policy work with your team.
Senator Smith (D-MN): Would you consider food and agriculture to be an important part of the U.S. economy? When can farmers expect the market turbulence to stop and input prices to begin to stabilize or at least come down for them? Bessent: It is market-based, and as someone who was involved in the agriculture sector until last year, I can tell you it was a record harvest. It is an abundance problem, but input costs remain high, which we are trying to bring down.
Senator Britt (R-AL): Can you speak to the work that you and FSOC agencies are doing to more properly calibrate our regulatory framework, whether it is capital rules, stress testing, or adjusting to outdated thresholds? Bessent: We are looking at all the thresholds. We do not want to see our small banks go under. We want to see the success of regulation on the system.
Senator Ricketts (R-NE): Secretary Yellen replaced the first Trump administration’s FSOC guidance with her own, which turned a safeguard into a tool that could be weaponized and stifle innovation and restrict access to capital that would grow our economy. Do you agree with the characterizations of the 2023 guidance that could do all these things and cause market distortions? Bessent: I believe in the activity-based guidance, and we are moving back to that.
Senator Ricketts: Despite the improvements in the U.S. economy, we are not seeing consumer confidence rebounding in the way the economy seems to be. What can the Senate be doing to help consumer confidence? Bessent: Other than telling consumers to turn off MSNBC, it is a survey problem where Democrats vote very low, and Republicans are more realistic.
Senator Cramer (R-ND): I am leading the three percent budget resolution in the Senate, and the goal is to reduce the federal deficit to three percent of GDP. Is a goal of three percent by 2030 realistic? Bessent: My target is for something that begins with a three by the end of President Trump’s term. Over the past three quarters, we have averaged 4.1 percent GDP growth, and we had fiscal contraction last year. We reduced spending, which is one reason our bond market performed well.
Senator McCormick (R-PA): Can you talk about permitting reform and how important those reforms are to unlock additional growth beyond what we have seen so far? Bessent: The President’s economic program is a three-legged stool of trade, tax, and deregulation. Permitting reform is an important part of the deregulatory agenda, and, as we have seen, more supply reduces inflation and increases economic growth. It is the most unsung part of the President’s agenda.
Senator McCormick: Can you discuss the condition in the U.S. Treasury market and the trends you are monitoring? Bessent: The market has been very resilient. We have had some of our best auctions in a long time this year. We are seeing strong foreign interest, but we need to get the trajectory back on track. We need to get back to a three handle in front of the deficit-to-GDP ratio.
Senator Alsobrooks (D-MD): Can you explain why a targeted expansion of deposit insurance can strengthen our community banking system, as well as boost business and consumer confidence? Bessent: We have seen fifty percent of our small banks disappear since the financial crisis in 2008. That is one reason why Main Street has lagged, and a large part of that is overregulation. Another part is moral hazard, which occurs during times of stress, resulting in deposit volatility. As you get a decrease in deposits through the fractional banking system, there is a reverse multiplier for lending, so the banks lower deposits, and less lending is available for Wall Street. This is an extremely important part of legislation, and I would encourage your colleagues to pass it. If there is anything I can do to advocate for it, please let me know.