HFSC Yellen Hearing on the International Financial System

House Financial Service Committee

The Annual Testimony of the Secretary of the Treasury on the State of the International

Financial System

Wednesday, April 6, 2022

Topline

• The hearing focused on energy, Russia’s war in Ukraine, China, digital assets, and international institutions.
• Foster asked about President Biden’s EO on digital assets, and Lucas highlighted the SEC’s rulemaking agenda and short comment periods.

Witnesses

• The Honorable Janet L. Yellen, Secretary of the Treasury

Opening Statements
Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters discussed efforts to address Russian aggression and her recent letter to U.S. financial institutions regarding Russia, saying she looks forward to their responses. She also highlighted her Nowhere to Hide Oligarchs’ Assets Act.

Ranking Member Patrick McHenry (R-N.C.)

In his opening statement, McHenry said China is taking notes on the U.S. response to Russia and that China must feel the pinch of its no-limit partnership with Russia. He then criticized the Biden Administration’s response to Russia and accused the Treasury Department of dodging public hearings.

Rep. Jim Himes (D-Conn.)

In his opening statement, Himes described atrocities by Russian troops and said the U.S. must do all it can to help Ukraine win this war.

Rep. Andy Barr (R-Ky.)

In his opening statement, Barr recommended energy sanctions on Russia.

Testimony
Janet L. Yellen, Secretary of the Treasury

In her testimony, Yellen said Treasury has asked the World Bank to continue working closely with COVAX and international partners to improve vaccine readiness and support increased vaccine delivery in developing countries and that the importance of the international financial institutions (IFI) is even more paramount given Russia’s brutal and unprovoked invasion of Ukraine. She added that Treasury is also working collectively with U.S. partners to block Russia from accessing benefits from IFIs, which are stepping in to provide critical budget financing to help respond to the economic costs of war. She also said the IFIs will play a critical role in food security, energy security, and debt sustainability. She then said the recent record replenishment of the World Bank’s concessional window—the International Development Association—will help deliver critical financing to the world’s poorest and most vulnerable to address impacts of the war. She concluded by explaining the Biden Administration’s request for Congressional authorization to provide financing to bolster two critical International Monetary Fund (IMF) lending facilities that will support vulnerable countries through these exceptional global shocks, including the Poverty Reduction and Growth Trust, the IMF’s existing concessional facility, and the new IMF Resilience and Sustainability Trust to provide targeted financing alongside IMF programs to support countries’ effort to strengthen energy security and pandemic preparedness.

Question & Answer

Energy

McHenry asked why Treasury is providing sanctions licensing for bank transactions related to Russian energy. Yellen said many European partners are heavily dependent on Russia for energy, the U.S. is trying to help them transition away form that dependence, but in the meantime, Treasury issued the license to ensure a continued flow of Russian energy to those countries. Rep. Bill Posey (R-Fla.) asked if the U.S. should reconsider the rush to eliminate the use of fossil fuels. Yellen said we need to transition from fossil fuels to combat climate change and that the President has proposed using petroleum reserves to deal with the short-term energy crisis. Rep. Emanuel Cleaver (D-Mo.) asked what Treasury can do to push the U.S. toward energy sustainability. Yellen explained the importance of the transition from fossil fuels, touted the Administration’s efforts on energy sustainability, and encouraged Congress to act. Barr asked Yellen if she agrees with the approach of the No Energy Revenues for Russian Hostilities Act. Yellen said something along the lines of that bill is a constructive suggestion and that the approach is worth exploring.

China

McHenry asked about Treasury’s sanctions strategy against China. Yellen would not comment on specifics but cited sanctions regarding forced labor and provocations with Hong Kong. She added that the U.S. has threatened and imposed serious consequences against China and that it should not be doubted that Treasury will do so in the future. Rep. Ann Wagner (R-Mo.) asked which parts of China’s financial system pose the most international risk. Yellen said there is severe risk in the property sector. Rep. Blaine Luetkemeyer (R-Mo.) asked if Treasury is working with the Administration to come up with pro-active deterrence against China to prevent invasion of Taiwan. Yellen said preliminary sanctions do not deter but that the Administration is preparing tools and strategies. Reps. Alex Mooney (R-W.V.) and Anthony Gonzalez (R-Ohio) asked about countries preferring Chinese loans over financing from multilateral development banks. Yellen said many developing countries prefer multilateral loans to Chinese loans, but they want access to all available funding and use both. She added that multilateral banks need to be adequately financed. Mooney asked if Yellen is concerned that China’s global lending undermines efforts to combat Chinese aggression. Yellen said Chinese lending can be predatory and that the U.S. should extend its lending to diminish China’s influence in this space.

Digital Currency

Reps. Nydia Velazquez (D-N.Y.), Josh Gottheimer (D-N.J.), and Gonzalez asked how Treasury is working to prevent Russian oligarchs from using digital assets to sidestep sanctions. Yellen said Treasury is monitoring attempts to use digital assets to evade sanctions, tracking the assets of oligarchs and other sanctioned individuals, and working with partners on this in the Russian Elites, Proxies and Oligarchs (REPO) task force, and FinCEN issued an alert to financial institutions to help them recognize suspicious transactions in this regard. She added that it is difficult to use crypto to evade sanctions. Rep. Bill Foster (D-Ill.) asked about the Executive Order on digital assets and Treasury’s participation. Yellen said Treasury plays an important role in assessing the future of money, which includes the role of digital assets and how we can create an environment in which responsible innovation can flourish with adequate protections for consumers and investors and consideration for financial stability concerns and the risk of illicit finance, that we need a regulatory framework that we do not have at that point, and that Treasury wants to make recommendations as to how we can safely do this and look at the pros and cons of a central bank digital currency. Rep. Warren Davidson (R-Ohio) asked if it would be fitting for Treasury to enter into a rulemaking or make statements about digital assets in light of the President’s Executive Order. Yellen said she is giving a speech tomorrow to describe the Executive Order and the approach that Treasury is taking but that Treasury has not come out with recommendations with the exception of those on stablecoins.

International Institutions

Wagner highlighted her Isolate Russian Government Officials Act and asked about Russia’s involvement with groups within Treasury’s jurisdiction. Yellen said the U.S. will not participate in certain G20 meetings if Russia remains in the group, that Russia’s participation in the Financial Stability Board (FSB) should be minimal, and that the U.S. will denounce Russia’s participation in international fora. Rep. Joyce Beatty (D-Ohio) asked how financing by the IFIs will aid refugees and how the U.S. can ensure distribution of funds. Yellen said Treasury will be in discussions with IFIs to fashion programs to distribute aid along with the European Union (EU). Barr asked what types of materials and briefings Yellen was given as Federal Reserve Chair and as Financial Stability Oversight Council (FSOC) Chair with respect to what is committed to in international standard setting bodies and what types of materials the Committee can get to ensure that advocacy is in line with the policy goals of Congress. Yellen said Treasury can provide materials and briefings and that there is no regulatory enforcement in those agencies, which are fora for desirable regulation.

Sanctions

Rep. David Scott (D-Ga.) asked why Treasury issued a special license exempting a certain oligarch from sanctions. Yellen said she could not give details on a specific individual. Rep. Frank Lucas (R-Okla.) asked Yellen to speak to the urgency with which the EU expects to intensify Russian sanctions. Yellen said the U.S. is working with the EU to impose sanctions and that this morning, the U.S. announced additional Sberbank sanctions and cited a new Biden Executive Order on sanctions.

Banks and Capital Markets

Lucas highlighted the volume and significance of Securities and Exchange Commission (SEC) proposed rulemakings and short comment periods and asked Yellen to speak to the importance of market liquidity during times of massive economic uncertainty. Yellen said having liquid markets is important to businesses and consumers and to hedge transactions. Rep. Ed Perlmutter (D-Colo.) asked about the SAFE Banking Act. Yellen agreed with Perlmutter’s concerns addressed by the bill and that Treasury supports the bill and Congressional action.

Illicit Finance

Rep. Brad Sherman (D-Calif.) asked for a timeframe on FinCEN’s beneficial ownership database. Yellen said Treasury is working as rapidly as possible to establish the database and that Treasury is considering a rule to address potential gaps in anti-money laundering and combating financing of terrorism (AML/CFT) coverage for investment advisors. Rep. French Hill (R-Ark.) asked if FinCEN should be able to expand its geographic targeting. Yellen said she was not sure. Rep. Barry Loudermilk (R-Ga.) asked about Treasury’s plan to work with small businesses on FinCEN requirements. Yellen said she could not tell Loudermilk in detail what Treasury’s plan is but could provide a briefing.

Tax

Posey asked how taxing unrealized capital gains will impact the size of the investment and allocation of capital among alternative investments. Yellen said tax policy and interest rates influence capital, the cost of capital should be an important factor in investment spending, but expected future output is more important. Rep. Roger Williams (R-Texas) asked about the global tax proposal. Yellen said she has been engaged with Congress on this and that it does not harm the competitiveness of American businesses.

Inflation

Posey asked about deficit spending and inflation. Yellen said the Federal Reserve is charged with controlling inflation and that she agrees with the need to control inflation. Reps. Bill Huizenga (R-Mich.) and Juan Vargas (D-Calif.) asked about transitory inflation. Yellen said transitory inflation is related to the ongoing pandemic and will abate when the pandemic ends.

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