HFSC Hearing on Monetary Policy
House Financial Services Committee
“Monetary Policy and the State of the Economy”
Wednesday, June 22, 2016
Key Topics & Takeaways
- SIFI Designation: Rep. Westmoreland (R-Ga.) stressed that the designation of banks and nonbanks as systemically important financial institutions (SIFIs) is creating the notion that large banks are “too big to fail” (TBTF), and that there must be a more distinct classification between banks and their size. Yellen agreed and explained that she wants to tailor regulations so they are appropriate to institutions’ risks, and that the Fed is likely to make changes to the stress testing regime that would reduce the burden on small banks.
- Orderly Liquidation Authority: Rep. Moore (D-Wis.) asked how the orderly liquidation authority (OLA) will work. Yellen explained that the OLA will be used by the Federal Deposit Insurance Corporation (FDIC) as a “backstop” should it be impossible to resolve the firm under the bankruptcy code. She continued that the OLA is “very important” for the FDIC and if a bank were to fail without it, she is uncertain what the consequences would be.
- EU Delay on Margin Requirements: Members of Congress on both sides of the aisle questioned the report of the EU’s delay on margin requirements for uncleared derivatives, stressing that the U.S. should also delay its effective date due to the un-level playing field it will create globally. Yellen agreed that there should be a level playing field but stressed that the Fed has worked hard to implement the rules; however, she noted that the Fed will be monitoring the impact of the delay on the U.S. economy and will “work closely with the Europeans.”
Speakers
- Janet Yellen, Chair, Board of Governors of the Federal Reserve System
Opening Statements
In his opening statement, Chairman Jeb Hensarling (R-Texas) expressed his disappointment in the economy’s slow recovery from the financial crisis He criticized President Obama for being the only President in U.S. history who has failed to deliver three percent economic growth during his presidency, and claimed the President was on track for overseeing the worst period of economic growth in U.S. history. He expressed his disappointment in the Fed’s complicity with “Obamanomics,” and claimed there is a revolving door between the Department of the Treasury, the Federal Reserve (Fed) and the Obama Administration.
Hensarling further argued there is a better way forward, as he suggested reforming the Fed to better comport with its mandate and highlighted the Republicans’ introduction of the Financial CHOICE Act. He argued that the Fed’s data-dependent monetary policy compromises transparency, as he stated the policy says nothing about what data the agency is using and how the data matters. He then suggested a policy to reestablish Fed independence with a data-dependent framework, and warned that if nothing changes, the central bank will soon become the “central planner.”
Ranking Member Maxine Waters (D-N.Y.) praised Yellen and the Federal Reserve, saying that the Fed clearly cares about American families and has made progress on their behalf, and that the work of the Fed has a profound impact on the day-to-day lives of millions of Americans. She also praised the Obama Administration for overseeing the longest ever streak of private sector job growth, rising job prices, and overall gains in household wealth.
Waters stated that Congress, not the Fed, must take responsibility for many of the disparities in the U.S. economies, and that too many years of fiscal austerity have “robbed the economy of its full potential.” She highlighted the culmination of Republican efforts to kill Dodd-Frank to argue how the Republicans want to undermine financial reform. Waters cited the upcoming UK referendum as a reminder as why the United States must preserve the Fed’s independence in monetary policy, asserting that “foolish” proposals that seek to put U.S. monetary policy on autopilot must be rejected.
Rep. Bill Huizenga (R-Mich.) criticized the Fed for going beyond its authority by setting interest rates on reserves higher than the general level of short term interest rates. He stated the Fed’s balance sheet, which, at $4.5 trillion is 25 percent of U.S. gross domestic product (GDP), is far too large and has no sign of shrinking. He argued the Fed’s plan mimics monetary policy, leaving experts unsure of what data will inform its decision making, and stated that the Fed’s monetary policy is far outside its bounds and shows no sign of return, threatening dependence.
Rep. Gwen Moore (D-Wis.) applauded Yellen and the Obama Administration for their forceful reaction to the financial crisis and smart reforms. She argued that since these reforms, the U.S. has become the envy of the world compared to Europe, China and Russia. Moore said that she wants to see this recovery touch America’s poor and working class, but blames Congress, not the Fed for this shortcoming. She commented that Congress should not worry itself into enacting counterproductive policies and stop derailing itself with extreme policies, as the U.S. has a bright future and will get through the current period of frustration with ease because of regulators like Yellen.
Testimony
Janet Yellen, Chair, Board of Governors of the Federal Reserve System
In her testimony, Yellen highlighted progress made towards the Federal Reserve’s objective of maximum employment, with 14 million jobs created since early 2010 and the unemployment rate having fallen more than 5 percentage points from its peak. Additionally, she said jobless rates have declined for all major demographic groups, yet she still highlighted the concern that unemployment rates for minorities remain higher than for the nation overall.
In her discussion of inflation, Yellen said that although the inflation rate is short of the Committee’s two percent objective, the price index for personal expenditures increased one percent over the 12 months ending in April, up notably from its pace of last year. She noted that the Committee expects inflation to rise to two percent over the medium term. She then discussed how the Committee is closely monitoring global economic and financial developments, such as the U.K. referendum to exit the European Union, and watching the slowing growth in China, to look at their implications for domestic economic activity, labor markets, and inflation.
Turning to monetary policy, Yellen noted that the Federal Open Market Committee (FOMC) has maintained the target range for the federal funds rate at ¼ to ½ a percent and has kept the Federal Reserve’s holdings of longer-term securities at an elevated level. She stressed that proceeding with caution will allow the United States to support economic growth while assessing whether growth is returning to a moderate pace. Yellen said the FOMC anticipates that economic conditions will evolve in a manner that will warrant “only gradual increases” in the federal funds rate, and that the federal funds rate is likely to remain below “levels that are expected to prevail in the longer run” for a while.
Question & Answer
Brexit
Waters addressed her concerns about Brexit and the potential for significant economic repercussions, and questioned whether Yellen was aware of any formula that takes into account the uncertainty associated with a member country dropping out of the EU. Yellen commented that current mechanical rules do not account for that scenario; however, the rules do account for the rate of inflation and GDP. Yellen added that because of the low interest rates and a sluggish U.S. economy, it is important to look holistically at the risks of Brexit and incorporate risk management strategies, and expressed her uncertainties regarding the specific consequences of Brexit.
Rep. Brad Sherman (D-Calif.) questioned how much of an emergency Brexit is and whether Yellen had planned emergency meetings. Yellen replied that the Federal Reserve will be monitoring the outcome of the vote and any possible repercussions, but that no emergency meetings have been planned.
Stress Tests
Huizenga and Rep. Scott Garrett (R-N.J.) asked if the Fed has conducted a stress test on its own balance sheet, to which Yellen replied that they have done so and publicly reported the outcome due to public interest, but added that the Fed’s balance sheet is “very different” from a commercial bank, and its liabilities are not runnable.
Moore asked what the right amount of banking capital would be if there was simply leverage without other liquidity protections. Yellen stressed that it “would be a bad idea” as it would encourage banks to take on risk by loading their balance sheets with riskier assets, adding that stress testing is necessary.
Rep. Frank Guinta (R-N.H.) raised his concerns regarding increasing transparency of the stress tests and questioned whether Yellen would support legislation requiring the Fed to issue regulations subject to public notice and comment, which would describe in detail the scenarios the Fed would rely on while conducting stress tests. Yellen stated that she would not support such legislation, and that when conducting a stress test, it is important that the scenarios are up-to-date and that the tests reflect and assess current and relevant risks. She cautioned that there would be a delay if such regulations were subject to public notice and comment processes, and added that this delay would cause the stress test to become outdated.
Rep. Lynn Westmoreland (R-Ga.) stressed that the designation of banks and nonbanks as systemically important financial institutions (SIFIs) is creating the notion that large banks are “too big to fail” (TBTF), and that there must be a more distinct classification between banks and their size. Yellen agreed and explained that she wants to tailor regulations so they are appropriate to the institutions’ risks, and that the Fed is likely to make changes to the stress testing regime that would reduce the burden on small banks.
Orderly Liquidation Authority
Moore asked how the orderly liquidation authority (OLA) will work. Yellen explained that the OLA will be used by the Federal Deposit Insurance Corporation (FDIC) as a “backstop” should it be impossible to resolve the firm under the bankruptcy code. She continued that the OLA is “very important” for the FDIC and if a bank were to fail without it, she is uncertain what the consequences would be.
GSIBs
Rep. Randy Neugebauer (R-Texas) asked the global systemically important bank (GSIB) surcharge was designed to reduce a GSIB’s probability of default, to which Yellen replied that she thinks it does. She continued that a GSIB’s failure would have systemic repercussions and result in a cost to the economy even if it was able to be resolved.
Rep. Robert Pittenger (R-N.C.) noted that the Fed has said it will add the GSIB surcharge as a component to the Comprehensive Capital Analysis and Review (CCAR) and noted his concern regarding whether the Fed has considered any actual benefit to adding the component, referring to it as “regulatory redundancy.” Yellen explained that it is important firms go on to serve the credit needs of the country and continue to lend during “very adverse” circumstances, and that the addition of an extra component is appropriate. She continued that the Fed is conducting a five-year review of the stress test and CCAR and will make additional changes that could be partially offsetting regarding capital levels.
Community Banks
Rep. Jim Himes (D-Conn.) questioned whether the Fed is doing everything it can for small banks, and asked specifically what it is doing to relieve small banks from regulatory burdens. Yellen explained that an increasing number of small banks are exempt from bank holding company rules and commented that the Federal Reserve is looking to reduce regulatory burdens, and is contemplating a simplified capital rule for well-capitalized banks.
Westmoreland expressed his concern over the burdensome regulations on small banks and questioned whether the Fed and other financial regulators should prioritize decreasing the number of regulations pertaining to small banks. In response, Yellen explained that it is a priority to reduce regulatory burdens for small banks, and commented that the Fed is looking carefully at a simplified capital regime.
Rep. Roger Williams (R-Texas) asked whether it is more difficult for a small institution to comply with the new regulations than a larger institution. Yellen acknowledged that the burden is higher for smaller institutions, and assured Williams that the Fed attempts to tailor regulations to be less burdensome and with fewer applicable rules for smaller banks. She then emphasized that the Fed continues to look for ways to simplify regulatory and capital regimes for smaller institutions.
Impact of Regulations
Neugebauer asked if the Fed is considering the impacts of regulations prior to implementation like the EU does. Yellen answered that the Fed has looked at the impact of such rules on society as a whole.
Rep. Blaine Leutkemeyer (R-Mo.) asked if Yellen has studied the impact of Dodd Frank on job creation, capital formation, and economic growth. Yellen replied that comprehensive analysis has not been undertaken, and that Congress has set out a roadmap for regulators.
Leutkemeyer then asked how the Fed can make specific regulations if it does not have the appropriate tools to study it. Yellen responded that the Fed does an internal study in order to minimize the burden of its rules and asks for public comments on alternative ideas that could achieve the same goal and reduce burden.
Rep. Sean Duffy (R-Wis.) asked whether the 81,000 pages of new government regulations over the last year are a headwind for economic growth. Yellen expressed that it is hard to quantify the extent to which regulations are headwinds, but that typically businesses cite regulations as a factor impacting decision making.
Rep. Steve Stivers (R-Ohio) discussed the European Commission’s call for evidence to review how their financial regulations are working and consider re-calibrating their rules to support liquidity and the financial markets, economic growth and lending. He asked if the Fed has similar plans since U.S. regulations are “so far out of whack” with the rest of the international community. Yellen replied that U.S. banking regulations are not out of line with international standards, as they work with other countries to ensure a level playing field and raise standards in tandem.
Rep. Keith Rothfus (R-Pa.) asked whether Yellen is aware of the concerns regarding the supplemental leverage ratio rule and asked if the Fed is studying the impact of the rule. Yellen replied that she is aware of the concerns and that she would look into the issue. However, she explained that no study was underway.
Rothfus noted that in the past, Yellen indicated that the funding rule and the liquidity coverage ratio rule should only apply to those institutions that are internationally active. With that in mind, Rothfus asked why certain banks should be considered internationally active if they do not participate in or have limited foreign activities. Yellen replied that she did not have enough details and would get back to him.
Corporate Tax Rate
Duffy criticized that the U.S. corporate tax rate is 15 percent higher than the Organisation for Economic Co-operation and Development (OECD) average of just over 21 percent, and asked if there is a correlation between additional capital and less regulation. Yellen noted that there could be a constructive change to the corporate tax system, and that for community banks there is a correlation between more capital and less regulation, but not for SIFIs.
EU Delay on Margin Requirements
Rep. Bill Foster (D-Ill.) noted the report that the EU will be delaying its margin requirements for uncleared derivatives trades until 2017 and asked if Yellen is willing to engage with the EU regarding the U.S. rules going live in September of this year. Yellen replied that she has “worked hard to put these regulations in place” and that it is important to implement them, adding that the EU delay “will be very short.”
Rep. Frank Lucas (R-Okla.) stressed the need for a level playing field for U.S. companies and applauded the Fed for its efforts in this space. He continued that as global standards are developed, there needs to be consistency in the rules and effective dates, noting his concern about the impact of the margin requirements on uncleared swaps rules will have on U.S. companies. Yellen replied that the Fed has worked hard to prepare to implement the margin requirements rules and that firms “are ready to put them into effect.” She continued that while the EU delay “is going to be short,” the Fed will continue to monitor the situation, and that she agrees about the importance of a level playing field.
Lucas added that it may be in the U.S. economy’s best interest to coordinate effective dates with the Europeans, and that if they will not go live in 2016, “maybe we shouldn’t either.” Yellen replied that the Fed needs to consider what impact the EU’s delay will have on the economy and will “work closely with the Europeans.”
Interest Rates
Rep. Ed Royce (R-Calif.) asked if the Fed has the capacity to defy the global pattern of zero or negative interest rates if it is the global reality, to which Yellen replied that the Fed does.
Rep. Mick Mulvaney (R-S.C.) asked if the Fed is going into negative interest rates, to which Yellen replied that they are not. He then asked what weight is placed on other countries negative or approaching zero when making such decisions. Yellen explained that other countries are important when it comes to decision making and that they take them into account when setting U.S. policies.
Rep. Nydia Velazquez (D-N.Y.) asked whether there is any indication that the last interest rate increase impacted credit availability for small businesses. Yellen replied that the Federal Reserve increased rates by 25 basis points and that she was not aware of any significant repercussions that the rate hike had for the cost of consumer credit. Moreover, she noted her expectations that rates are increasing gradually. Yellen continued that, in order to achieve price stability, the Federal Reserve is cautious about raising rates and only does so when the economy is preforming well and the job market is strong.
Diversity and Inclusion
Rep. Terri Sewell (D-Ala.) commented on how the Fed is comprised of mostly Caucasian males and asked whether Yellen believes that the leadership at the Federal Reserve Bank is fulfilling its mandate to represent the public. Yellen responded that she would like to see greater diversity and hopes to make progress in that area in the coming years. Moreover, she pointed out that the procedure for appointing presidents for the Federal Reserve Banks is set out in the Federal Reserve Act and that the Board has to approve the appointments of presidents.
Cybersecurity
Rep. Carolyn Maloney (D-N.Y.) talked about the cyber breaches involving SWIFT in which hackers stole foreign banks’ credentials and initiated fraudulent bank transfers, and asked if Yellen is concerned that these attacks could undermine confidence in the international payments system. Maloney also asked what impact these hackers could have on the U.S. banking system and what the Fed has done in response to the attacks. Yellen responded that that the New York Fed systems were not compromised and that they are looking at current processes, best practices, and the possibility of enhanced monitoring for certain kinds of transactions.
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House Financial Services Committee
“Monetary Policy and the State of the Economy”
Wednesday, June 22, 2016
Key Topics & Takeaways
- SIFI Designation: Rep. Westmoreland (R-Ga.) stressed that the designation of banks and nonbanks as systemically important financial institutions (SIFIs) is creating the notion that large banks are “too big to fail” (TBTF), and that there must be a more distinct classification between banks and their size. Yellen agreed and explained that she wants to tailor regulations so they are appropriate to institutions’ risks, and that the Fed is likely to make changes to the stress testing regime that would reduce the burden on small banks.
- Orderly Liquidation Authority: Rep. Moore (D-Wis.) asked how the orderly liquidation authority (OLA) will work. Yellen explained that the OLA will be used by the Federal Deposit Insurance Corporation (FDIC) as a “backstop” should it be impossible to resolve the firm under the bankruptcy code. She continued that the OLA is “very important” for the FDIC and if a bank were to fail without it, she is uncertain what the consequences would be.
- EU Delay on Margin Requirements: Members of Congress on both sides of the aisle questioned the report of the EU’s delay on margin requirements for uncleared derivatives, stressing that the U.S. should also delay its effective date due to the un-level playing field it will create globally. Yellen agreed that there should be a level playing field but stressed that the Fed has worked hard to implement the rules; however, she noted that the Fed will be monitoring the impact of the delay on the U.S. economy and will “work closely with the Europeans.”
Speakers
- Janet Yellen, Chair, Board of Governors of the Federal Reserve System
Opening Statements
In his opening statement, Chairman Jeb Hensarling (R-Texas) expressed his disappointment in the economy’s slow recovery from the financial crisis He criticized President Obama for being the only President in U.S. history who has failed to deliver three percent economic growth during his presidency, and claimed the President was on track for overseeing the worst period of economic growth in U.S. history. He expressed his disappointment in the Fed’s complicity with “Obamanomics,” and claimed there is a revolving door between the Department of the Treasury, the Federal Reserve (Fed) and the Obama Administration.
Hensarling further argued there is a better way forward, as he suggested reforming the Fed to better comport with its mandate and highlighted the Republicans’ introduction of the Financial CHOICE Act. He argued that the Fed’s data-dependent monetary policy compromises transparency, as he stated the policy says nothing about what data the agency is using and how the data matters. He then suggested a policy to reestablish Fed independence with a data-dependent framework, and warned that if nothing changes, the central bank will soon become the “central planner.”
Ranking Member Maxine Waters (D-N.Y.) praised Yellen and the Federal Reserve, saying that the Fed clearly cares about American families and has made progress on their behalf, and that the work of the Fed has a profound impact on the day-to-day lives of millions of Americans. She also praised the Obama Administration for overseeing the longest ever streak of private sector job growth, rising job prices, and overall gains in household wealth.
Waters stated that Congress, not the Fed, must take responsibility for many of the disparities in the U.S. economies, and that too many years of fiscal austerity have “robbed the economy of its full potential.” She highlighted the culmination of Republican efforts to kill Dodd-Frank to argue how the Republicans want to undermine financial reform. Waters cited the upcoming UK referendum as a reminder as why the United States must preserve the Fed’s independence in monetary policy, asserting that “foolish” proposals that seek to put U.S. monetary policy on autopilot must be rejected.
Rep. Bill Huizenga (R-Mich.) criticized the Fed for going beyond its authority by setting interest rates on reserves higher than the general level of short term interest rates. He stated the Fed’s balance sheet, which, at $4.5 trillion is 25 percent of U.S. gross domestic product (GDP), is far too large and has no sign of shrinking. He argued the Fed’s plan mimics monetary policy, leaving experts unsure of what data will inform its decision making, and stated that the Fed’s monetary policy is far outside its bounds and shows no sign of return, threatening dependence.
Rep. Gwen Moore (D-Wis.) applauded Yellen and the Obama Administration for their forceful reaction to the financial crisis and smart reforms. She argued that since these reforms, the U.S. has become the envy of the world compared to Europe, China and Russia. Moore said that she wants to see this recovery touch America’s poor and working class, but blames Congress, not the Fed for this shortcoming. She commented that Congress should not worry itself into enacting counterproductive policies and stop derailing itself with extreme policies, as the U.S. has a bright future and will get through the current period of frustration with ease because of regulators like Yellen.
Testimony
Janet Yellen, Chair, Board of Governors of the Federal Reserve System
In her testimony, Yellen highlighted progress made towards the Federal Reserve’s objective of maximum employment, with 14 million jobs created since early 2010 and the unemployment rate having fallen more than 5 percentage points from its peak. Additionally, she said jobless rates have declined for all major demographic groups, yet she still highlighted the concern that unemployment rates for minorities remain higher than for the nation overall.
In her discussion of inflation, Yellen said that although the inflation rate is short of the Committee’s two percent objective, the price index for personal expenditures increased one percent over the 12 months ending in April, up notably from its pace of last year. She noted that the Committee expects inflation to rise to two percent over the medium term. She then discussed how the Committee is closely monitoring global economic and financial developments, such as the U.K. referendum to exit the European Union, and watching the slowing growth in China, to look at their implications for domestic economic activity, labor markets, and inflation.
Turning to monetary policy, Yellen noted that the Federal Open Market Committee (FOMC) has maintained the target range for the federal funds rate at ¼ to ½ a percent and has kept the Federal Reserve’s holdings of longer-term securities at an elevated level. She stressed that proceeding with caution will allow the United States to support economic growth while assessing whether growth is returning to a moderate pace. Yellen said the FOMC anticipates that economic conditions will evolve in a manner that will warrant “only gradual increases” in the federal funds rate, and that the federal funds rate is likely to remain below “levels that are expected to prevail in the longer run” for a while.
Question & Answer
Brexit
Waters addressed her concerns about Brexit and the potential for significant economic repercussions, and questioned whether Yellen was aware of any formula that takes into account the uncertainty associated with a member country dropping out of the EU. Yellen commented that current mechanical rules do not account for that scenario; however, the rules do account for the rate of inflation and GDP. Yellen added that because of the low interest rates and a sluggish U.S. economy, it is important to look holistically at the risks of Brexit and incorporate risk management strategies, and expressed her uncertainties regarding the specific consequences of Brexit.
Rep. Brad Sherman (D-Calif.) questioned how much of an emergency Brexit is and whether Yellen had planned emergency meetings. Yellen replied that the Federal Reserve will be monitoring the outcome of the vote and any possible repercussions, but that no emergency meetings have been planned.
Stress Tests
Huizenga and Rep. Scott Garrett (R-N.J.) asked if the Fed has conducted a stress test on its own balance sheet, to which Yellen replied that they have done so and publicly reported the outcome due to public interest, but added that the Fed’s balance sheet is “very different” from a commercial bank, and its liabilities are not runnable.
Moore asked what the right amount of banking capital would be if there was simply leverage without other liquidity protections. Yellen stressed that it “would be a bad idea” as it would encourage banks to take on risk by loading their balance sheets with riskier assets, adding that stress testing is necessary.
Rep. Frank Guinta (R-N.H.) raised his concerns regarding increasing transparency of the stress tests and questioned whether Yellen would support legislation requiring the Fed to issue regulations subject to public notice and comment, which would describe in detail the scenarios the Fed would rely on while conducting stress tests. Yellen stated that she would not support such legislation, and that when conducting a stress test, it is important that the scenarios are up-to-date and that the tests reflect and assess current and relevant risks. She cautioned that there would be a delay if such regulations were subject to public notice and comment processes, and added that this delay would cause the stress test to become outdated.
Rep. Lynn Westmoreland (R-Ga.) stressed that the designation of banks and nonbanks as systemically important financial institutions (SIFIs) is creating the notion that large banks are “too big to fail” (TBTF), and that there must be a more distinct classification between banks and their size. Yellen agreed and explained that she wants to tailor regulations so they are appropriate to the institutions’ risks, and that the Fed is likely to make changes to the stress testing regime that would reduce the burden on small banks.
Orderly Liquidation Authority
Moore asked how the orderly liquidation authority (OLA) will work. Yellen explained that the OLA will be used by the Federal Deposit Insurance Corporation (FDIC) as a “backstop” should it be impossible to resolve the firm under the bankruptcy code. She continued that the OLA is “very important” for the FDIC and if a bank were to fail without it, she is uncertain what the consequences would be.
GSIBs
Rep. Randy Neugebauer (R-Texas) asked the global systemically important bank (GSIB) surcharge was designed to reduce a GSIB’s probability of default, to which Yellen replied that she thinks it does. She continued that a GSIB’s failure would have systemic repercussions and result in a cost to the economy even if it was able to be resolved.
Rep. Robert Pittenger (R-N.C.) noted that the Fed has said it will add the GSIB surcharge as a component to the Comprehensive Capital Analysis and Review (CCAR) and noted his concern regarding whether the Fed has considered any actual benefit to adding the component, referring to it as “regulatory redundancy.” Yellen explained that it is important firms go on to serve the credit needs of the country and continue to lend during “very adverse” circumstances, and that the addition of an extra component is appropriate. She continued that the Fed is conducting a five-year review of the stress test and CCAR and will make additional changes that could be partially offsetting regarding capital levels.
Community Banks
Rep. Jim Himes (D-Conn.) questioned whether the Fed is doing everything it can for small banks, and asked specifically what it is doing to relieve small banks from regulatory burdens. Yellen explained that an increasing number of small banks are exempt from bank holding company rules and commented that the Federal Reserve is looking to reduce regulatory burdens, and is contemplating a simplified capital rule for well-capitalized banks.
Westmoreland expressed his concern over the burdensome regulations on small banks and questioned whether the Fed and other financial regulators should prioritize decreasing the number of regulations pertaining to small banks. In response, Yellen explained that it is a priority to reduce regulatory burdens for small banks, and commented that the Fed is looking carefully at a simplified capital regime.
Rep. Roger Williams (R-Texas) asked whether it is more difficult for a small institution to comply with the new regulations than a larger institution. Yellen acknowledged that the burden is higher for smaller institutions, and assured Williams that the Fed attempts to tailor regulations to be less burdensome and with fewer applicable rules for smaller banks. She then emphasized that the Fed continues to look for ways to simplify regulatory and capital regimes for smaller institutions.
Impact of Regulations
Neugebauer asked if the Fed is considering the impacts of regulations prior to implementation like the EU does. Yellen answered that the Fed has looked at the impact of such rules on society as a whole.
Rep. Blaine Leutkemeyer (R-Mo.) asked if Yellen has studied the impact of Dodd Frank on job creation, capital formation, and economic growth. Yellen replied that comprehensive analysis has not been undertaken, and that Congress has set out a roadmap for regulators.
Leutkemeyer then asked how the Fed can make specific regulations if it does not have the appropriate tools to study it. Yellen responded that the Fed does an internal study in order to minimize the burden of its rules and asks for public comments on alternative ideas that could achieve the same goal and reduce burden.
Rep. Sean Duffy (R-Wis.) asked whether the 81,000 pages of new government regulations over the last year are a headwind for economic growth. Yellen expressed that it is hard to quantify the extent to which regulations are headwinds, but that typically businesses cite regulations as a factor impacting decision making.
Rep. Steve Stivers (R-Ohio) discussed the European Commission’s call for evidence to review how their financial regulations are working and consider re-calibrating their rules to support liquidity and the financial markets, economic growth and lending. He asked if the Fed has similar plans since U.S. regulations are “so far out of whack” with the rest of the international community. Yellen replied that U.S. banking regulations are not out of line with international standards, as they work with other countries to ensure a level playing field and raise standards in tandem.
Rep. Keith Rothfus (R-Pa.) asked whether Yellen is aware of the concerns regarding the supplemental leverage ratio rule and asked if the Fed is studying the impact of the rule. Yellen replied that she is aware of the concerns and that she would look into the issue. However, she explained that no study was underway.
Rothfus noted that in the past, Yellen indicated that the funding rule and the liquidity coverage ratio rule should only apply to those institutions that are internationally active. With that in mind, Rothfus asked why certain banks should be considered internationally active if they do not participate in or have limited foreign activities. Yellen replied that she did not have enough details and would get back to him.
Corporate Tax Rate
Duffy criticized that the U.S. corporate tax rate is 15 percent higher than the Organisation for Economic Co-operation and Development (OECD) average of just over 21 percent, and asked if there is a correlation between additional capital and less regulation. Yellen noted that there could be a constructive change to the corporate tax system, and that for community banks there is a correlation between more capital and less regulation, but not for SIFIs.
EU Delay on Margin Requirements
Rep. Bill Foster (D-Ill.) noted the report that the EU will be delaying its margin requirements for uncleared derivatives trades until 2017 and asked if Yellen is willing to engage with the EU regarding the U.S. rules going live in September of this year. Yellen replied that she has “worked hard to put these regulations in place” and that it is important to implement them, adding that the EU delay “will be very short.”
Rep. Frank Lucas (R-Okla.) stressed the need for a level playing field for U.S. companies and applauded the Fed for its efforts in this space. He continued that as global standards are developed, there needs to be consistency in the rules and effective dates, noting his concern about the impact of the margin requirements on uncleared swaps rules will have on U.S. companies. Yellen replied that the Fed has worked hard to prepare to implement the margin requirements rules and that firms “are ready to put them into effect.” She continued that while the EU delay “is going to be short,” the Fed will continue to monitor the situation, and that she agrees about the importance of a level playing field.
Lucas added that it may be in the U.S. economy’s best interest to coordinate effective dates with the Europeans, and that if they will not go live in 2016, “maybe we shouldn’t either.” Yellen replied that the Fed needs to consider what impact the EU’s delay will have on the economy and will “work closely with the Europeans.”
Interest Rates
Rep. Ed Royce (R-Calif.) asked if the Fed has the capacity to defy the global pattern of zero or negative interest rates if it is the global reality, to which Yellen replied that the Fed does.
Rep. Mick Mulvaney (R-S.C.) asked if the Fed is going into negative interest rates, to which Yellen replied that they are not. He then asked what weight is placed on other countries negative or approaching zero when making such decisions. Yellen explained that other countries are important when it comes to decision making and that they take them into account when setting U.S. policies.
Rep. Nydia Velazquez (D-N.Y.) asked whether there is any indication that the last interest rate increase impacted credit availability for small businesses. Yellen replied that the Federal Reserve increased rates by 25 basis points and that she was not aware of any significant repercussions that the rate hike had for the cost of consumer credit. Moreover, she noted her expectations that rates are increasing gradually. Yellen continued that, in order to achieve price stability, the Federal Reserve is cautious about raising rates and only does so when the economy is preforming well and the job market is strong.
Diversity and Inclusion
Rep. Terri Sewell (D-Ala.) commented on how the Fed is comprised of mostly Caucasian males and asked whether Yellen believes that the leadership at the Federal Reserve Bank is fulfilling its mandate to represent the public. Yellen responded that she would like to see greater diversity and hopes to make progress in that area in the coming years. Moreover, she pointed out that the procedure for appointing presidents for the Federal Reserve Banks is set out in the Federal Reserve Act and that the Board has to approve the appointments of presidents.
Cybersecurity
Rep. Carolyn Maloney (D-N.Y.) talked about the cyber breaches involving SWIFT in which hackers stole foreign banks’ credentials and initiated fraudulent bank transfers, and asked if Yellen is concerned that these attacks could undermine confidence in the international payments system. Maloney also asked what impact these hackers could have on the U.S. banking system and what the Fed has done in response to the attacks. Yellen responded that that the New York Fed systems were not compromised and that they are looking at current processes, best practices, and the possibility of enhanced monitoring for certain kinds of transactions.
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