HFSC Hearing with Fed Chair Yellen
House Financial Services Committee
“Monetary Policy and the State of the Economy”
Wednesday, February 15, 2017
Key Topics & Takeaways
- Executive Orders: Fed Chair Yellen voiced her support for President Trump’s Executive Order on Core Principles for Regulating the United States Financial System, adding that she will work with Treasury Secretary Mnuchin in identifying regulations that conflict with the principles. When asked if she will volunteer to comply with the Executive Order on Reducing Regulation and Controlling Regulatory Costs, Yellen said that the Fed is looking at notices of proposed rulemaking where there will be “plenty” of opportunity for comments.
- Capital Requirements: Rep. Blaine Luetkemeyer (R-Mo.) cited a report on the Comprehensive Capital Analysis and Review (CCAR) that stated the Fed’s process is restricting lending. Yellen replied that it is a “highly flawed” study and that she disagrees with the findings.
- Orderly Liquidation Authority: Rep. Stephen Lynch (D-Mass.) asked Yellen for her opinion on removing the Orderly Liquidation Authority (OLA). She replied that she does not want to see OLA removed, but that she believes bankruptcy should be the main vehicle for resolving a firm in distress, adding that the OLA is a backup procedure.
- Uncleared Swaps: Rep. Frank Lucas (R-Okla.) noted the temporary grace period the Commodities Futures Trading Commission (CFTC) granted participants in the uncleared swaps market, extending the deadline for posting variable margin from March 1 for an additional 6 months, and asked if the Fed intends to coordinate with the CFTC on providing relief for entities in the uncleared swaps market. Yellen replied that she is aware and monitoring trends and compliance “very closely,” and that she is in touch with the firms involved and will be having discussions with other banking regulators to determine what response may be needed.
Speakers
- The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal Reserve System
Opening Statements
In his opening statement, Chairman Jeb Hensarling (R-Texas) stated that Americans have received disappointing, subpar economic growth, and that after Barack Obama’s eight years in office, there is no evidence that zero percent interest rates lead to a healthy economy. He explained that the Fed’s monetary policy independence is threatened due to having to “unlawfully” pay above interest rates to other countries. Hensarling criticized the Fed for “taking up seats in bank boardrooms,” stressing the need to ensure central bankers do not one day become “central planners.” He noted the three vacancies on the Board of Governors and explained that to build a healthier economy, there must be changes at the Fed, to include more predictable and transparent monetary policy, as well as reforms like the Financial CHOICE Act.
In her opening statement, Ranking Member Maxine Waters (D-N.Y.) said that President Donald Trump has taken the steps to roll back the Dodd-Frank Act based on “false premises,” in addition to eliminating the Department of Labor’s fiduciary rule and threatening a “trade war” with many of our largest trade partners. She stressed that such policies will shrink the economy, reduce exports, lift inflation, and steer the U.S. towards another great depression. Waters criticized her Republican colleagues, stating that they continue to “attack” Fed policies by “doubling down” on efforts to weaken the independence of the Fed.
Rep. Andy Barr (R-Ky.) stated that there are three vacancies on the Board of Governors and noted his concern that the Fed may enact a “new wave” of regulations prior to the vacancies being filled, adding that it is “imperative” the Fed refrain from issuing any new regulations until new Governors have been confirmed.
Testimony
The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal Reserve System
In her testimony, Yellen provided an overview of the current economic situation before pivoting to monetary policy. She explained that since her last report to Congress in June 2016, the U.S. has continued to make progress towards full employment, and noted that since 2010, the country has added nearly 16 million jobs. She also noted that the unemployment rate is now in line with the Federal Reserve Open Market Committee’s (FOMC’s) median estimates of the normal unemployment level, and that wage growth has picked up relative to previous years. Other signs of economic improvement, she continued, are rising consumer spending, household wealth, and income. Yellen said that the current inflation rate, approximately 1.6 percent, is still below the Fed’s two percent target, but that the FOMC expects the economy to expand at a moderate pace in the near term.
Turning to monetary policy, Yellen said that the FOMC kept interest rates unchanged throughout much of the year to boost inflation and the labor market, but raised rates in December when there were signs of the labor market tightening. She defended the Fed’s gradual rate increases, saying that a rapid rise in rates could disrupt financial markets and the economy. Yellen stated that the FOMC believes the neutral federal funds rate – the rate that is neither expansionary or contractuary – is well below pre-crisis levels, though it should rise gradually over time. She concluded with her belief that the Fed’s monetary policy is “accommodative” and that the reinvesting of proceeds from maturing Treasury securities and maturing mortgage-backed securities (MBS) will help maintain this accommodating posture.
Question & Answer
Executive Orders
Hensarling asked Yellen if she agrees with Trump’s Executive Order on Core Principles for Regulating the United States Financial System which would require more regulatory impact analysis, to which Yellen replied that she does.
Rep. Patrick McHenry (R-N.C.) asked Yellen how she intends to comply with the Core Principles, specifically the net stable funding ratio (NSFR). Yellen replied that it is a good example of a matter discussed by others that may not be effective in the U.S. unless it goes through the rulemaking process with an opportunity for comments.
Rep. Ann Wagner (R-Mo.) stated that she hopes Yellen will work with Treasury Secretary Steven Mnuchin on identifying regulations that conflict with the Core Principles. Yellen replied that she looks forward to working with Mnuchin on the project and will cooperate fully once it is underway, though the process has not started yet.
Wagner then turned to a second Executive Order on Reducing Regulation and Controlling Regulatory Costs. She explained that while she understands the Fed is an independent agency and therefore exempt from such orders, she hopes Yellen will volunteer to comply with them. Yellen replied that there have been similar freezes in the past, and that nothing the Fed has recently put in place was not “well understood” already, and that currently is the Fed is looking at notices of proposed rulemaking where there will be “plenty” of opportunity for comments.
Rep. Keith Rothfus (R-Pa.) asked how the Fed foresees putting the Core Principles into action, specifically when it comes to the designation of firms as systemically important in the U.S. and globally. Yellen replied that the designation of firms for systemically important financial institutions (SIFIs) in the U.S. takes into account their threats to financial stability in the U.S., and that foreign regulators are concerned about the impact of such firms in their own countries, but that the two perspectives may not always “line up.”
Volcker Rule
Hensarling turned to the Fed staff paper that was released in December 2016 that said the Volcker Rule may have serious consequences on the market, and asked for Yellen’s opinion. She replied that the staff paper was not a finding of the Board of Governors as a whole, and that the evidence for the paper’s findings is conflicting. Yellen also said that while the Board continues to look at the paper, she does not intend to take any action based on it.
Asset Managers
Hensarling asked if Yellen is aware of anyone in the new administration directing her or Board Governor Daniel Tarullo to negotiate with the Financial Stability Board (FSB) on asset management regulations. She replied that any regulation put into effect in the U.S. has to go through the rulemaking process, and that she participates regularly in discussions with colleagues.
Hensarling replied that Tarullo was never confirmed by the Senate and asked if he has the authority to negotiate on behalf of the U.S. regarding asset managers. Yellen explained that it is not negotiating and that the Securities and Exchange Commission (SEC) and Treasury Department take part in such discussions.
Federal Reserve Vacancies
Multiple Republicans asked about the vacancies on the Board of Governors, to which Yellen replied that she “looks forward” to eventual nominations including one for the Vice Chair for Supervision.
McHenry asked for Yellen’s assurance that the Fed will “pause” participation in international agreements until the future nominees are confirmed. Yellen explained that nothing will be effective in the U.S. until regulatory agencies go through the normal rulemaking process, and that nothing in international discussions binds the U.S. regulatory agencies to carry out agreements.
Wagner asked what remaining agenda items are being planned until Governor Tarullo leaves the Fed in April. Yellen explained that the Fed has a “relatively light schedule” with one possible rulemaking regarding a stress test capital buffer that came out of the Fed’s five-year review, but that she is unsure of the specific timetable. She continued that any Fed appointee would have the opportunity to weigh in on regulations through the comment period.
McHenry asked if Yellen intends to wait on the Basel IV package to see if the new nominees have an opinion, to which Yellen replied that nothing is effective unless it goes through the rulemaking process and the public has the chance to comment.
Rep. Randy Hultgren (R-Ill.) asked if the Fed is considering incorporating the global systemically important banks (GSIB) surcharge and the Comprehensive Capital Analysis and Review (CCAR) prior to filling the vacancies on the Board. Yellen stated that she is unsure what the timing will be for the changes, but there will be a notice and comment period, and that she hopes to finalize before the 2018 stress tests go into effect.
Fed’s Balance Sheet
Barr noted Yellen’s comments in the Senate that the Fed would not shrink their balance sheet until the federal funds rate is “high enough,” and asked her what that number is. Yellen replied that there is no “unique” level, and that it would depend on the strength of recovery, but that the FOMC will be discussing reinvestment policy in greater detail.
Rep. John Delaney (D-Md.) asked if the Fed has considered other asset classes for the Fed to invest in. Yellen explained that the Fed is restricted to Treasury and Agency debt, and that if Congress were to consider changing the Fed’s authority to purchase different assets there would be costs and benefits to consider.
Too Big to Fail
Rep. Brad Sherman (D-Calif.) stressed the need for Yellen to break up the too big to fail institutions, and asked if she can assure that the current Attorney General will be able to enforce the criminal law fairly, no matter how big the institution. She agreed that the Justice Department should pursue any criminal indictments, and that the living will process will strengthen the capital and liquidity positions of the largest firms, giving the firms a “reasonable chance” to recover in such a crisis.
Sherman asked if reduced capital would increase or decrease the risk that a “giant” institution would need a bailout. Yellen answered that she believes “very strongly” in high capital levels for the largest and most systemic institutions, as it strengthens resilience and reduces the odds of the institution failing.
Hultgren asked if banks are able to “game” a stress test. Yellen explained that banks can understand the particular areas of what scenarios may look like in a stress test that would allow them to make portfolio changes to fair better.
Congressional Oversight
McHenry asked if it is appropriate for Congress to have oversight over the Fed’s rulemaking and regulatory policies, to which Yellen replied “of course.” She also agreed with Congressional oversight regarding discussions with international agencies.
Small/Community Banks
Several Republicans stressed concern over the regulatory burden placed on small and community banks and asked Yellen what the Fed is doing to mitigate such burdens. Yellen replied that it is a “legitimate” concern and that she and other Board members meet with small and community bankers regularly. She continued that the Fed is “heavily” focused on using “every tool” available to reduce the regulatory burden on small and community banks, such as extending exam cycles and reducing the frequency of exams, doing more work off-site, and spending less time and focus on well-managed, well-capitalized firms.
Capital Requirements
Rep. Blaine Luetkemeyer (R-Mo.) cited a report on CCAR that stated the Fed’s process is restricting lending. Yellen replied that it is a “highly flawed” study and that she disagrees with the findings.
Wagner noted a Government Accountability Office (GAO) report on CCAR that included several criticisms on transparency, to which Yellen replied that the Fed accepts the GAO’s recommendations and intends to implement them.
Wagner then asked if the Fed plans on additional comprehensive reviews of how it conducts stress tests, and Yellen stated that they are conducting a 5-year review.
Rep. Ed Royce (R-Calif.) asked about the benefits and costs of a higher leverage ratio. Yellen agreed that it is necessary to weigh the costs and benefits when determining an appropriate level of capital standards. She continued that the Fed participated in the Basel Committee’s analysis of the costs and benefits with Basel III, and that there are current studies, such as the Minneapolis Fed study, that contain a cost-benefit analysis for capital level requirements. She continued that capital requirements need to be risk-sensitive with a leverage ratio as the backup.
Hultgren asked what analysis has been completed to determine if the increased compliance costs to financial institutions are commensurate with the risk and a bank’s ability to provide access to credit. Yellen replied that the Fed completed a 5-year review of stress tests, and that the GAO completed a review of stress testing methodology. She continued that the Fed finalized a rule that exempts over 20 smaller institutions from the qualitative portion of the stress test after concluding that the regulatory burden on the institution exceeded the benefits of the tests.
Agency Coordination
Rep. Bill Huizenga (R-Mich.) asked if Yellen intends on working with Treasury Secretary Mnuchin like she did with former Secretary Jack Lew, to which she replied “absolutely,” and that she looks forward to a “strong” working relationship with Mnuchin.
Dodd-Frank Act
Rep. Stephen Lynch (D-Mass.) asked Yellen for her opinion on removing the Orderly Liquidation Authority (OLA). She replied that she does not want to see OLA removed, but that she believes bankruptcy should be the main vehicle for resolving a firm in distress, adding that the OLA is a backup procedure.
Rep. Dave Trott (R-Mich.) questioned whether taxpayers would be at risk under the OLA. Yellen explained that the Federal Deposit Insurance Corporation (FDIC) would realize any losses and pass them on to the banking industry, rather than taxpayers. Trott stressed his disagreement that taxpayers would not be put at risk.
Border Adjustment
Rep. Sean Duffy (R-Wis.) asked for Yellen’s opinion on the proposed border adjustment tax, to which Yellen declined to comment.
Rep. Warren Davidson (R-Ohio) asked if raising the cost of imports and lowering the cost of exports would fully clear the currency market, and if it would result in a net change in the balance of trade. Yellen explained that work has been completed that such an idea could create an offset, but that there is “great uncertainty” regarding how markets would react to such changes.
Structure of the Federal Reserve System
Rep. Peter King (R-N.Y.) noted his concern over a proposal that would change the composition of the FOMC by removing the New York Fed president as FOMC Vice Chairman. Yellen replied that the New York Fed has a “special and important” role in the Federal Reserve System, as many large banks are headquartered in New York. She continued that the New York Fed president has traditionally been the FOMC vice chair and it has “worked well” and that “we are not looking for changes.”
Diversity
Rep. Joyce Beatty (D-Ohio) noted her concern over the lack of diversity in the Federal Reserve System. Yellen explained that the Fed is focused on achieving diversity in Class C directors and on the Boards of Directors of all banks, adding that diversity is a “very high priority” for the Fed.
Fed Independence
Rep. Jim Himes (D-Conn.) asked if bills such as H.R. 24 (“Audit the Fed”) and H.R. 3189 (the FORM Act) would compromise the independence of the FOMC and monetary policy. Yellen explained that such bills would compromise the Fed’s independence, as the FORM Act would ask the GAO to make policy judgments that second-guess decisions made by the FOMC. She continued that central banks all over the world recognize that an independent gives rise to a better economic environment.
Rothfus disagreed that the FORM Act would compromise the Fed’s independence, stating that it permits the Fed to deviate from the rule, and argued that such a deviation would provide an opportunity for Congress and Americans to see what the Fed is doing. Yellen replied that the Fed does educate the public on what they are doing through testimony, press conferences, and other ways, but that bringing the GAO into the Fed’s routine would compromise the independence of monetary policy.
Uncleared Swaps
Rep. Frank Lucas (R-Okla.) noted the temporary grace period the Commodities Futures Trading Commission (CFTC) granted participants in the uncleared swaps market, extending the deadline for posting variable margin from March 1 for an additional 6 months. He continued that regulators in Asia have given a similar grace period, and that European regulators are open to “wiggle room” on the March 1 deadline. He asked if the Fed intends to coordinate with the CFTC on providing relief for entities in the uncleared swaps market. Yellen replied that she is aware and monitoring trends and compliance “very closely,” and that she is in touch with the firms involved and will be having discussions with other banking regulators to determine what response may be needed.
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House Financial Services Committee
“Monetary Policy and the State of the Economy”
Wednesday, February 15, 2017
Key Topics & Takeaways
- Executive Orders: Fed Chair Yellen voiced her support for President Trump’s Executive Order on Core Principles for Regulating the United States Financial System, adding that she will work with Treasury Secretary Mnuchin in identifying regulations that conflict with the principles. When asked if she will volunteer to comply with the Executive Order on Reducing Regulation and Controlling Regulatory Costs, Yellen said that the Fed is looking at notices of proposed rulemaking where there will be “plenty” of opportunity for comments.
- Capital Requirements: Rep. Blaine Luetkemeyer (R-Mo.) cited a report on the Comprehensive Capital Analysis and Review (CCAR) that stated the Fed’s process is restricting lending. Yellen replied that it is a “highly flawed” study and that she disagrees with the findings.
- Orderly Liquidation Authority: Rep. Stephen Lynch (D-Mass.) asked Yellen for her opinion on removing the Orderly Liquidation Authority (OLA). She replied that she does not want to see OLA removed, but that she believes bankruptcy should be the main vehicle for resolving a firm in distress, adding that the OLA is a backup procedure.
- Uncleared Swaps: Rep. Frank Lucas (R-Okla.) noted the temporary grace period the Commodities Futures Trading Commission (CFTC) granted participants in the uncleared swaps market, extending the deadline for posting variable margin from March 1 for an additional 6 months, and asked if the Fed intends to coordinate with the CFTC on providing relief for entities in the uncleared swaps market. Yellen replied that she is aware and monitoring trends and compliance “very closely,” and that she is in touch with the firms involved and will be having discussions with other banking regulators to determine what response may be needed.
Speakers
- The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal Reserve System
Opening Statements
In his opening statement, Chairman Jeb Hensarling (R-Texas) stated that Americans have received disappointing, subpar economic growth, and that after Barack Obama’s eight years in office, there is no evidence that zero percent interest rates lead to a healthy economy. He explained that the Fed’s monetary policy independence is threatened due to having to “unlawfully” pay above interest rates to other countries. Hensarling criticized the Fed for “taking up seats in bank boardrooms,” stressing the need to ensure central bankers do not one day become “central planners.” He noted the three vacancies on the Board of Governors and explained that to build a healthier economy, there must be changes at the Fed, to include more predictable and transparent monetary policy, as well as reforms like the Financial CHOICE Act.
In her opening statement, Ranking Member Maxine Waters (D-N.Y.) said that President Donald Trump has taken the steps to roll back the Dodd-Frank Act based on “false premises,” in addition to eliminating the Department of Labor’s fiduciary rule and threatening a “trade war” with many of our largest trade partners. She stressed that such policies will shrink the economy, reduce exports, lift inflation, and steer the U.S. towards another great depression. Waters criticized her Republican colleagues, stating that they continue to “attack” Fed policies by “doubling down” on efforts to weaken the independence of the Fed.
Rep. Andy Barr (R-Ky.) stated that there are three vacancies on the Board of Governors and noted his concern that the Fed may enact a “new wave” of regulations prior to the vacancies being filled, adding that it is “imperative” the Fed refrain from issuing any new regulations until new Governors have been confirmed.
Testimony
The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal Reserve System
In her testimony, Yellen provided an overview of the current economic situation before pivoting to monetary policy. She explained that since her last report to Congress in June 2016, the U.S. has continued to make progress towards full employment, and noted that since 2010, the country has added nearly 16 million jobs. She also noted that the unemployment rate is now in line with the Federal Reserve Open Market Committee’s (FOMC’s) median estimates of the normal unemployment level, and that wage growth has picked up relative to previous years. Other signs of economic improvement, she continued, are rising consumer spending, household wealth, and income. Yellen said that the current inflation rate, approximately 1.6 percent, is still below the Fed’s two percent target, but that the FOMC expects the economy to expand at a moderate pace in the near term.
Turning to monetary policy, Yellen said that the FOMC kept interest rates unchanged throughout much of the year to boost inflation and the labor market, but raised rates in December when there were signs of the labor market tightening. She defended the Fed’s gradual rate increases, saying that a rapid rise in rates could disrupt financial markets and the economy. Yellen stated that the FOMC believes the neutral federal funds rate – the rate that is neither expansionary or contractuary – is well below pre-crisis levels, though it should rise gradually over time. She concluded with her belief that the Fed’s monetary policy is “accommodative” and that the reinvesting of proceeds from maturing Treasury securities and maturing mortgage-backed securities (MBS) will help maintain this accommodating posture.
Question & Answer
Executive Orders
Hensarling asked Yellen if she agrees with Trump’s Executive Order on Core Principles for Regulating the United States Financial System which would require more regulatory impact analysis, to which Yellen replied that she does.
Rep. Patrick McHenry (R-N.C.) asked Yellen how she intends to comply with the Core Principles, specifically the net stable funding ratio (NSFR). Yellen replied that it is a good example of a matter discussed by others that may not be effective in the U.S. unless it goes through the rulemaking process with an opportunity for comments.
Rep. Ann Wagner (R-Mo.) stated that she hopes Yellen will work with Treasury Secretary Steven Mnuchin on identifying regulations that conflict with the Core Principles. Yellen replied that she looks forward to working with Mnuchin on the project and will cooperate fully once it is underway, though the process has not started yet.
Wagner then turned to a second Executive Order on Reducing Regulation and Controlling Regulatory Costs. She explained that while she understands the Fed is an independent agency and therefore exempt from such orders, she hopes Yellen will volunteer to comply with them. Yellen replied that there have been similar freezes in the past, and that nothing the Fed has recently put in place was not “well understood” already, and that currently is the Fed is looking at notices of proposed rulemaking where there will be “plenty” of opportunity for comments.
Rep. Keith Rothfus (R-Pa.) asked how the Fed foresees putting the Core Principles into action, specifically when it comes to the designation of firms as systemically important in the U.S. and globally. Yellen replied that the designation of firms for systemically important financial institutions (SIFIs) in the U.S. takes into account their threats to financial stability in the U.S., and that foreign regulators are concerned about the impact of such firms in their own countries, but that the two perspectives may not always “line up.”
Volcker Rule
Hensarling turned to the Fed staff paper that was released in December 2016 that said the Volcker Rule may have serious consequences on the market, and asked for Yellen’s opinion. She replied that the staff paper was not a finding of the Board of Governors as a whole, and that the evidence for the paper’s findings is conflicting. Yellen also said that while the Board continues to look at the paper, she does not intend to take any action based on it.
Asset Managers
Hensarling asked if Yellen is aware of anyone in the new administration directing her or Board Governor Daniel Tarullo to negotiate with the Financial Stability Board (FSB) on asset management regulations. She replied that any regulation put into effect in the U.S. has to go through the rulemaking process, and that she participates regularly in discussions with colleagues.
Hensarling replied that Tarullo was never confirmed by the Senate and asked if he has the authority to negotiate on behalf of the U.S. regarding asset managers. Yellen explained that it is not negotiating and that the Securities and Exchange Commission (SEC) and Treasury Department take part in such discussions.
Federal Reserve Vacancies
Multiple Republicans asked about the vacancies on the Board of Governors, to which Yellen replied that she “looks forward” to eventual nominations including one for the Vice Chair for Supervision.
McHenry asked for Yellen’s assurance that the Fed will “pause” participation in international agreements until the future nominees are confirmed. Yellen explained that nothing will be effective in the U.S. until regulatory agencies go through the normal rulemaking process, and that nothing in international discussions binds the U.S. regulatory agencies to carry out agreements.
Wagner asked what remaining agenda items are being planned until Governor Tarullo leaves the Fed in April. Yellen explained that the Fed has a “relatively light schedule” with one possible rulemaking regarding a stress test capital buffer that came out of the Fed’s five-year review, but that she is unsure of the specific timetable. She continued that any Fed appointee would have the opportunity to weigh in on regulations through the comment period.
McHenry asked if Yellen intends to wait on the Basel IV package to see if the new nominees have an opinion, to which Yellen replied that nothing is effective unless it goes through the rulemaking process and the public has the chance to comment.
Rep. Randy Hultgren (R-Ill.) asked if the Fed is considering incorporating the global systemically important banks (GSIB) surcharge and the Comprehensive Capital Analysis and Review (CCAR) prior to filling the vacancies on the Board. Yellen stated that she is unsure what the timing will be for the changes, but there will be a notice and comment period, and that she hopes to finalize before the 2018 stress tests go into effect.
Fed’s Balance Sheet
Barr noted Yellen’s comments in the Senate that the Fed would not shrink their balance sheet until the federal funds rate is “high enough,” and asked her what that number is. Yellen replied that there is no “unique” level, and that it would depend on the strength of recovery, but that the FOMC will be discussing reinvestment policy in greater detail.
Rep. John Delaney (D-Md.) asked if the Fed has considered other asset classes for the Fed to invest in. Yellen explained that the Fed is restricted to Treasury and Agency debt, and that if Congress were to consider changing the Fed’s authority to purchase different assets there would be costs and benefits to consider.
Too Big to Fail
Rep. Brad Sherman (D-Calif.) stressed the need for Yellen to break up the too big to fail institutions, and asked if she can assure that the current Attorney General will be able to enforce the criminal law fairly, no matter how big the institution. She agreed that the Justice Department should pursue any criminal indictments, and that the living will process will strengthen the capital and liquidity positions of the largest firms, giving the firms a “reasonable chance” to recover in such a crisis.
Sherman asked if reduced capital would increase or decrease the risk that a “giant” institution would need a bailout. Yellen answered that she believes “very strongly” in high capital levels for the largest and most systemic institutions, as it strengthens resilience and reduces the odds of the institution failing.
Hultgren asked if banks are able to “game” a stress test. Yellen explained that banks can understand the particular areas of what scenarios may look like in a stress test that would allow them to make portfolio changes to fair better.
Congressional Oversight
McHenry asked if it is appropriate for Congress to have oversight over the Fed’s rulemaking and regulatory policies, to which Yellen replied “of course.” She also agreed with Congressional oversight regarding discussions with international agencies.
Small/Community Banks
Several Republicans stressed concern over the regulatory burden placed on small and community banks and asked Yellen what the Fed is doing to mitigate such burdens. Yellen replied that it is a “legitimate” concern and that she and other Board members meet with small and community bankers regularly. She continued that the Fed is “heavily” focused on using “every tool” available to reduce the regulatory burden on small and community banks, such as extending exam cycles and reducing the frequency of exams, doing more work off-site, and spending less time and focus on well-managed, well-capitalized firms.
Capital Requirements
Rep. Blaine Luetkemeyer (R-Mo.) cited a report on CCAR that stated the Fed’s process is restricting lending. Yellen replied that it is a “highly flawed” study and that she disagrees with the findings.
Wagner noted a Government Accountability Office (GAO) report on CCAR that included several criticisms on transparency, to which Yellen replied that the Fed accepts the GAO’s recommendations and intends to implement them.
Wagner then asked if the Fed plans on additional comprehensive reviews of how it conducts stress tests, and Yellen stated that they are conducting a 5-year review.
Rep. Ed Royce (R-Calif.) asked about the benefits and costs of a higher leverage ratio. Yellen agreed that it is necessary to weigh the costs and benefits when determining an appropriate level of capital standards. She continued that the Fed participated in the Basel Committee’s analysis of the costs and benefits with Basel III, and that there are current studies, such as the Minneapolis Fed study, that contain a cost-benefit analysis for capital level requirements. She continued that capital requirements need to be risk-sensitive with a leverage ratio as the backup.
Hultgren asked what analysis has been completed to determine if the increased compliance costs to financial institutions are commensurate with the risk and a bank’s ability to provide access to credit. Yellen replied that the Fed completed a 5-year review of stress tests, and that the GAO completed a review of stress testing methodology. She continued that the Fed finalized a rule that exempts over 20 smaller institutions from the qualitative portion of the stress test after concluding that the regulatory burden on the institution exceeded the benefits of the tests.
Agency Coordination
Rep. Bill Huizenga (R-Mich.) asked if Yellen intends on working with Treasury Secretary Mnuchin like she did with former Secretary Jack Lew, to which she replied “absolutely,” and that she looks forward to a “strong” working relationship with Mnuchin.
Dodd-Frank Act
Rep. Stephen Lynch (D-Mass.) asked Yellen for her opinion on removing the Orderly Liquidation Authority (OLA). She replied that she does not want to see OLA removed, but that she believes bankruptcy should be the main vehicle for resolving a firm in distress, adding that the OLA is a backup procedure.
Rep. Dave Trott (R-Mich.) questioned whether taxpayers would be at risk under the OLA. Yellen explained that the Federal Deposit Insurance Corporation (FDIC) would realize any losses and pass them on to the banking industry, rather than taxpayers. Trott stressed his disagreement that taxpayers would not be put at risk.
Border Adjustment
Rep. Sean Duffy (R-Wis.) asked for Yellen’s opinion on the proposed border adjustment tax, to which Yellen declined to comment.
Rep. Warren Davidson (R-Ohio) asked if raising the cost of imports and lowering the cost of exports would fully clear the currency market, and if it would result in a net change in the balance of trade. Yellen explained that work has been completed that such an idea could create an offset, but that there is “great uncertainty” regarding how markets would react to such changes.
Structure of the Federal Reserve System
Rep. Peter King (R-N.Y.) noted his concern over a proposal that would change the composition of the FOMC by removing the New York Fed president as FOMC Vice Chairman. Yellen replied that the New York Fed has a “special and important” role in the Federal Reserve System, as many large banks are headquartered in New York. She continued that the New York Fed president has traditionally been the FOMC vice chair and it has “worked well” and that “we are not looking for changes.”
Diversity
Rep. Joyce Beatty (D-Ohio) noted her concern over the lack of diversity in the Federal Reserve System. Yellen explained that the Fed is focused on achieving diversity in Class C directors and on the Boards of Directors of all banks, adding that diversity is a “very high priority” for the Fed.
Fed Independence
Rep. Jim Himes (D-Conn.) asked if bills such as H.R. 24 (“Audit the Fed”) and H.R. 3189 (the FORM Act) would compromise the independence of the FOMC and monetary policy. Yellen explained that such bills would compromise the Fed’s independence, as the FORM Act would ask the GAO to make policy judgments that second-guess decisions made by the FOMC. She continued that central banks all over the world recognize that an independent gives rise to a better economic environment.
Rothfus disagreed that the FORM Act would compromise the Fed’s independence, stating that it permits the Fed to deviate from the rule, and argued that such a deviation would provide an opportunity for Congress and Americans to see what the Fed is doing. Yellen replied that the Fed does educate the public on what they are doing through testimony, press conferences, and other ways, but that bringing the GAO into the Fed’s routine would compromise the independence of monetary policy.
Uncleared Swaps
Rep. Frank Lucas (R-Okla.) noted the temporary grace period the Commodities Futures Trading Commission (CFTC) granted participants in the uncleared swaps market, extending the deadline for posting variable margin from March 1 for an additional 6 months. He continued that regulators in Asia have given a similar grace period, and that European regulators are open to “wiggle room” on the March 1 deadline. He asked if the Fed intends to coordinate with the CFTC on providing relief for entities in the uncleared swaps market. Yellen replied that she is aware and monitoring trends and compliance “very closely,” and that she is in touch with the firms involved and will be having discussions with other banking regulators to determine what response may be needed.
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