HFSC with Lew on the FSOC Annual Report
House Financial Services Committee
“The Annual Report of the Financial Stability Oversight Council”
Wednesday, June 17, 2015
Key Topics & Takeaways
- Regulation and Financial Stability: Secretary Lew said it is not his view that federal regulation is a risk to financial stability.
- OFR and Liquidity Study: Rep. Stivers (R-Ohio) asked Lew if he, as the head of the FSOC, had directed the OFR to conduct a study on liquidity in financial markets. Lew responded that the OFR has already issued some analysis on liquidity and that its efforts were ongoing. Lew added that it would be a mistake to jump to conclusions regarding possible links between the regulatory environment and liquidity until further analysis had been done.
- SIFI Designation & Asset Managers: Rep. Ross (R-Fla.) asked if Lew was concerned about the possible implications on investors that would result from designating asset managers as SIFIs. Lew responded that he shared Ross’ concerns and that the FSOC has had and open dialogue with asset managers and regulators to examine the industry.
Witness
- The Honorable Jacob J. Lew, Secretary, United States Department of the Treasury
Opening Remarks
In his opening statement, Chairman Jeb Hensarling (R-Texas) said that when the Dodd-Frank Act was enacted, his colleagues on the other side of the aisle claimed it was the “crown jewel” of financial reform. Hensarling said Dodd-Frank supporters did not recognize that the policies are failed and the Financial Stability Oversight Council (FSOC) omits the idea that government agencies could have helped create risks to the financial system. Hensarling added that the FSOC’s 2015 Annual Report ignores the national debt in the United States, but somehow finds a link between weak economic growth and stability in Greece. Hensarling argued that the FSOC is not only part of a “shadow regulatory system” but it is also “secretive” and has “unchecked power.”
In her opening statement, Ranking Member Maxine Waters (D-Calif.) said it is hard to believe that just five years ago the country was coming to terms with the “greatest loss of wealth in a generation.” She highlighted that no regulatory body was looking at the stability of the financial system as a whole prior to the crisis, which is why Congress created the FSOC with the passage of the Dodd-Frank Act. According to Waters, her Republican colleagues are “fighting battles of the past.” She thanked Treasury Secretary Jacob Lew for his efforts with the FSOC to protect against systemic risk. She said she is interested in learning more about the FSOC’s recent efforts and whether her Republican colleagues believe the FSOC has taken any significant actions.
In his testimony, Jacob Lew, Secretary of the Department of Treasury, said “it is clear reforms have made the system safer” and the “FSOC is doing exactly what we asked it to do.” Lew cited the 11 key areas of focus of the Council’s 2015 Annual Report: 1) Cybersecurity, 2) Increased risk-taking in a low-yield environment, 3) Changes in financial market structure and implications for financial stability, 4) Central counterparties, 5) Global economic and financial risks, 6) Financial innovation and migration of activities, 7) Short-term wholesale funding, 8) Risk-taking incentives of large, complex, interconnected financial institutions, 9) Reforms of reference rates, 10) Housing finance reform, and 11) Data quality, collection, and sharing. He said these areas of focus provide clarity and a roadmap for the year ahead.
Lew emphasized the FSOC’s commitment to openness and good governance. He explained that the FSOC has made “enhancements to transparency,” issued supplemental guidance to designations, and continues to conduct an ongoing request for data on asset management products activities. In his view, the FSOC is focused on working with the private sector while it also constantly monitors the markets. Lew concluded that the FSOC cannot “let [its] guard down” and must “promote the safety and stability of the financial system.”
Questions and Answers
Safety and Soundness
Hensarling asked Lew to comment on the Richmond Fed’s Bailout Barometer Report. Lew responded that he cannot comment on a report he has not read, but said the financial system is much safer today than before the Dodd-Frank Act. He added that it is not his view that federal regulation is a risk to financial stability.
SIFI Designation Process
Waters thanked Lew for the FSOC’s efforts to work with Congress and the financial services industry on the designation process for systemically important financial institutions (SIFIs). Lew said this effort has led to the recognition that regulation is needed.
Rep. Dennis Ross (-R-Fla.) asked Lew why the FSOC has not been more prescriptive in explaining its approach to determining SIFI designations for financial institutions. Lew responded that a number of factors are considered when determining if a financial institution should be deemed systemically important. He added that differences in size, complexity, and organizational structure make determining a prescriptive approach to the SIFI designation difficult.
Ross also asked if Lew was concerned about the possible implications for investors that would result from designating asset managers as SIFIs. Lew responded that he shared Ross’ concerns and that as the FSOC has had and open dialogue with asset managers and regulators to examine the industry.
FSOC & FSB
Garrett asked Lew about his role in the Financial Stability Board (FSB). Lew responded that there is an open process through which stakeholders and government entities share their views with the FSB, but that the process is different than the FSOC process. Lew likened the two processes to “apples and oranges.”
FSOC and Cybersecurity
Rep. Nydia Velazquez (D-N.Y.) asked Lew to elaborate on the FSOC’s plan to respond to a cyber threat. Lew said this is a huge issue in every sector of our economy. He contended that the financial sector has been a leader and the largest firms are putting systems in place to prevent and counteract a cyber threat. According to Lew, the government has encouraged the private sector to use best practices, but he thinks that exposure to a threat is increased when a third party connects to a firm. He added that legislation is needed to make the collaboration between firms easier and less risky.
Rep. Al Green (D- La.) asked Lew to elaborate on concerns over cybersecurity raise in the FSOC annual repot. Lew responded that he believed that the threat from cyber attacks is great but that the financial sector was at the leading edge of cyber security.
National Debt and Financial Stability
Rep. Blaine Luetkemeyer (R-Miss.) asked Lew why the report does not mention the national debt. Lew responded that the economy is in a much better financial situation and he does not think the national debt will be what holds the economy back in 20 years. Luetkemeyer told Lew that he “missed the mark.”
Rep. Robert Pittenger (R-Texas) asked if Lew saw the debt limit as an economic threat to national security. Lew said he does not believe that debt levels are as big of a threat compared to his views in 2008 due to the way government has controlled growth of the U.S. national debt. He added that the government has reduced the deficit as a percentage of GDP from 10% to 3% under the current administration.
Asset Management
Rep. Gregory Meeks (D-N.Y.) asked Lew if we should be concerned about the practice of herding. Lew responded that the Treasury must be willing to ask these questions and follow them to a logical conclusion.
Meeks also asked if pension funds have barriers that prevent more diversification among managers. Lew said some asset managers are successful and some are not successful.
Liquidity
Hensarling noted that several regulators have attributed the decline in liquidity to the Volcker. Lew said regulators are constantly looking at the question of liquidity.
Rep. Sean Duffy (R-Wis.) said he has concerns about liquidity in the bond market and asked Lew if the rules and regulations since the crisis have had any impact on liquidity in the bond market. Lew replied that it would take too long to provide a complete answer to this question. Duffy said one of the causes of the liquidity crisis could be the new regulatory regime, to which Lew replied that regulators are considering all factors.
Rep. Carolyn Maloney (D-N.Y.) said it is important to focus on the $12 trillion Treasury market that impacts the borrowing power of other markets. She asked Lew if the lack of liquidity drove price swings on October 15th, 2014. Lew replied that Treasury works with other agencies to try to understand what happened. He added that market structure has evolved.
Rep. John Delaney (D-Md.) asked for Lew’s thoughts regarding the importance of banks providing liquidity when markets are stressed and whether he was concerned over the possibility of regulation restricting banks from responding as they traditionally have in times of crisis. Lew said that he did not believe that regulation had put banks in a position where they would be unable to respond under stressed market conditions.
Rep. Steve Stivers (R-Ohio) asked Lew if he, as the head of the FSOC, had directed the Office of Financial Research (OFR) to conduct a study on liquidity in financial markets. Lew responded that the OFR has already issued some analysis on liquidity and that its efforts are ongoing. Lew added that it would be a mistake to jump to conclusions regarding possible links between the current regulatory environment and liquidity until further analysis had been done.
Rep. Andy Barr (R-Ky.) asked Lew if bankers had voiced concerns to him that the Volcker Rule and other regulations had made it less likely that they would engage in market making. Lew acknowledged that bankers had expressed the view that regulation had made large block trade more difficult to execute but contended that he thought the difficulty was more a result of changes in market structure.
Role of FSOC & Reducing Risk
Ross asked if the ultimate goal of the FSOC was to reduce risk in the banking system. Lew responded in agreement that one goal of the FSOC was to reduce systemic risk, however he added that the ultimate goal of the FSOC was to achieve financial stability.
For more information on this event, please click here.
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House Financial Services Committee
“The Annual Report of the Financial Stability Oversight Council”
Wednesday, June 17, 2015
Key Topics & Takeaways
- Regulation and Financial Stability: Secretary Lew said it is not his view that federal regulation is a risk to financial stability.
- OFR and Liquidity Study: Rep. Stivers (R-Ohio) asked Lew if he, as the head of the FSOC, had directed the OFR to conduct a study on liquidity in financial markets. Lew responded that the OFR has already issued some analysis on liquidity and that its efforts were ongoing. Lew added that it would be a mistake to jump to conclusions regarding possible links between the regulatory environment and liquidity until further analysis had been done.
- SIFI Designation & Asset Managers: Rep. Ross (R-Fla.) asked if Lew was concerned about the possible implications on investors that would result from designating asset managers as SIFIs. Lew responded that he shared Ross’ concerns and that the FSOC has had and open dialogue with asset managers and regulators to examine the industry.
Witness
- The Honorable Jacob J. Lew, Secretary, United States Department of the Treasury
Opening Remarks
In his opening statement, Chairman Jeb Hensarling (R-Texas) said that when the Dodd-Frank Act was enacted, his colleagues on the other side of the aisle claimed it was the “crown jewel” of financial reform. Hensarling said Dodd-Frank supporters did not recognize that the policies are failed and the Financial Stability Oversight Council (FSOC) omits the idea that government agencies could have helped create risks to the financial system. Hensarling added that the FSOC’s 2015 Annual Report ignores the national debt in the United States, but somehow finds a link between weak economic growth and stability in Greece. Hensarling argued that the FSOC is not only part of a “shadow regulatory system” but it is also “secretive” and has “unchecked power.”
In her opening statement, Ranking Member Maxine Waters (D-Calif.) said it is hard to believe that just five years ago the country was coming to terms with the “greatest loss of wealth in a generation.” She highlighted that no regulatory body was looking at the stability of the financial system as a whole prior to the crisis, which is why Congress created the FSOC with the passage of the Dodd-Frank Act. According to Waters, her Republican colleagues are “fighting battles of the past.” She thanked Treasury Secretary Jacob Lew for his efforts with the FSOC to protect against systemic risk. She said she is interested in learning more about the FSOC’s recent efforts and whether her Republican colleagues believe the FSOC has taken any significant actions.
In his testimony, Jacob Lew, Secretary of the Department of Treasury, said “it is clear reforms have made the system safer” and the “FSOC is doing exactly what we asked it to do.” Lew cited the 11 key areas of focus of the Council’s 2015 Annual Report: 1) Cybersecurity, 2) Increased risk-taking in a low-yield environment, 3) Changes in financial market structure and implications for financial stability, 4) Central counterparties, 5) Global economic and financial risks, 6) Financial innovation and migration of activities, 7) Short-term wholesale funding, 8) Risk-taking incentives of large, complex, interconnected financial institutions, 9) Reforms of reference rates, 10) Housing finance reform, and 11) Data quality, collection, and sharing. He said these areas of focus provide clarity and a roadmap for the year ahead.
Lew emphasized the FSOC’s commitment to openness and good governance. He explained that the FSOC has made “enhancements to transparency,” issued supplemental guidance to designations, and continues to conduct an ongoing request for data on asset management products activities. In his view, the FSOC is focused on working with the private sector while it also constantly monitors the markets. Lew concluded that the FSOC cannot “let [its] guard down” and must “promote the safety and stability of the financial system.”
Questions and Answers
Safety and Soundness
Hensarling asked Lew to comment on the Richmond Fed’s Bailout Barometer Report. Lew responded that he cannot comment on a report he has not read, but said the financial system is much safer today than before the Dodd-Frank Act. He added that it is not his view that federal regulation is a risk to financial stability.
SIFI Designation Process
Waters thanked Lew for the FSOC’s efforts to work with Congress and the financial services industry on the designation process for systemically important financial institutions (SIFIs). Lew said this effort has led to the recognition that regulation is needed.
Rep. Dennis Ross (-R-Fla.) asked Lew why the FSOC has not been more prescriptive in explaining its approach to determining SIFI designations for financial institutions. Lew responded that a number of factors are considered when determining if a financial institution should be deemed systemically important. He added that differences in size, complexity, and organizational structure make determining a prescriptive approach to the SIFI designation difficult.
Ross also asked if Lew was concerned about the possible implications for investors that would result from designating asset managers as SIFIs. Lew responded that he shared Ross’ concerns and that as the FSOC has had and open dialogue with asset managers and regulators to examine the industry.
FSOC & FSB
Garrett asked Lew about his role in the Financial Stability Board (FSB). Lew responded that there is an open process through which stakeholders and government entities share their views with the FSB, but that the process is different than the FSOC process. Lew likened the two processes to “apples and oranges.”
FSOC and Cybersecurity
Rep. Nydia Velazquez (D-N.Y.) asked Lew to elaborate on the FSOC’s plan to respond to a cyber threat. Lew said this is a huge issue in every sector of our economy. He contended that the financial sector has been a leader and the largest firms are putting systems in place to prevent and counteract a cyber threat. According to Lew, the government has encouraged the private sector to use best practices, but he thinks that exposure to a threat is increased when a third party connects to a firm. He added that legislation is needed to make the collaboration between firms easier and less risky.
Rep. Al Green (D- La.) asked Lew to elaborate on concerns over cybersecurity raise in the FSOC annual repot. Lew responded that he believed that the threat from cyber attacks is great but that the financial sector was at the leading edge of cyber security.
National Debt and Financial Stability
Rep. Blaine Luetkemeyer (R-Miss.) asked Lew why the report does not mention the national debt. Lew responded that the economy is in a much better financial situation and he does not think the national debt will be what holds the economy back in 20 years. Luetkemeyer told Lew that he “missed the mark.”
Rep. Robert Pittenger (R-Texas) asked if Lew saw the debt limit as an economic threat to national security. Lew said he does not believe that debt levels are as big of a threat compared to his views in 2008 due to the way government has controlled growth of the U.S. national debt. He added that the government has reduced the deficit as a percentage of GDP from 10% to 3% under the current administration.
Asset Management
Rep. Gregory Meeks (D-N.Y.) asked Lew if we should be concerned about the practice of herding. Lew responded that the Treasury must be willing to ask these questions and follow them to a logical conclusion.
Meeks also asked if pension funds have barriers that prevent more diversification among managers. Lew said some asset managers are successful and some are not successful.
Liquidity
Hensarling noted that several regulators have attributed the decline in liquidity to the Volcker. Lew said regulators are constantly looking at the question of liquidity.
Rep. Sean Duffy (R-Wis.) said he has concerns about liquidity in the bond market and asked Lew if the rules and regulations since the crisis have had any impact on liquidity in the bond market. Lew replied that it would take too long to provide a complete answer to this question. Duffy said one of the causes of the liquidity crisis could be the new regulatory regime, to which Lew replied that regulators are considering all factors.
Rep. Carolyn Maloney (D-N.Y.) said it is important to focus on the $12 trillion Treasury market that impacts the borrowing power of other markets. She asked Lew if the lack of liquidity drove price swings on October 15th, 2014. Lew replied that Treasury works with other agencies to try to understand what happened. He added that market structure has evolved.
Rep. John Delaney (D-Md.) asked for Lew’s thoughts regarding the importance of banks providing liquidity when markets are stressed and whether he was concerned over the possibility of regulation restricting banks from responding as they traditionally have in times of crisis. Lew said that he did not believe that regulation had put banks in a position where they would be unable to respond under stressed market conditions.
Rep. Steve Stivers (R-Ohio) asked Lew if he, as the head of the FSOC, had directed the Office of Financial Research (OFR) to conduct a study on liquidity in financial markets. Lew responded that the OFR has already issued some analysis on liquidity and that its efforts are ongoing. Lew added that it would be a mistake to jump to conclusions regarding possible links between the current regulatory environment and liquidity until further analysis had been done.
Rep. Andy Barr (R-Ky.) asked Lew if bankers had voiced concerns to him that the Volcker Rule and other regulations had made it less likely that they would engage in market making. Lew acknowledged that bankers had expressed the view that regulation had made large block trade more difficult to execute but contended that he thought the difficulty was more a result of changes in market structure.
Role of FSOC & Reducing Risk
Ross asked if the ultimate goal of the FSOC was to reduce risk in the banking system. Lew responded in agreement that one goal of the FSOC was to reduce systemic risk, however he added that the ultimate goal of the FSOC was to achieve financial stability.
For more information on this event, please click here.