Senate Banking Hearing on Monetary Policy with Fed Chair Yellen
Senate Banking Committee
“The Semiannual Monetary Policy Report to the Congress”
Thursday, July 16, 2015
Key Topics & Takeaways
- SIFI Threshold: Fed Chair Yellen stated that she would be open to a “modest increase” of the threshold for systemic designation, but said it would be crucial that the Fed retain discretion to put more requirements on firms even if they do not reach the new threshold.
- Living Wills: Sen. Warren (D-Mass.) asked if the Fed would deem living wills from the current round of submissions to be non-credible if banks have failed to fix each problem identified from last year’s submissions. Yellen replied that “we are certainly prepared to make those determinations” and that the Fed will work with the FDIC to see if firms’ responses to the directions given them have been satisfactory.
- Shadow Banking: Yellen noted that the Federal Reserve was “well aware” that as it put regulations in place, there would be a tendency for activities to migrate beyond the regulatory perimeter. She agreed that regulators must be vigilant to monitor risks, and assured that the Federal Reserve has “hugely ramped up” its attention to the shadow banking system through both the FSOC and the FSB.
Witness
- Janet Yellen, Chair, Federal Reserve Board of Governors
Opening Statements
In his opening statement, Chairman Richard Shelby (R-Ala.) said the Federal Reserve plays a crucial role in overseeing the economy and “managing money and monitoring the health of the financial sector”. He said the Fed’s transparency, which has improved in recent years, is still a concern and does not match other central banks’ standards.
Shelby expressed similar transparency concerns in the Fed’s regulatory responsibilities, specifically regarding the assessments of living wills and stress testing. He stated the lack of feedback and standards leave banks “unfairly susceptible” to falling short.
In his opening statement, Ranking Member Sherrod Brown (D-Ohio) stated the fifth anniversary of the Dodd-Frank Act is a reminder of the costs of the crisis, its massive economic losses and the psychological distress, and how far the country has come in recovering. He credited the law for the economic recovery and noted that taxpayers are now less likely to pay for future bailouts. He noted criticisms of the reform harming the economy, and of its regulations hurting financial stability, but asserted that “Wall Street reform did not ruin the economy – Wall Street gambling did.”
Testimony
In her testimony, Federal Reserve Chair Janet Yellen noted that the Fed has two mandates: 1) to reach full employment; and 2) to maintain a targeted inflation rate of two percent. She pointed to progress towards full employment, but also the lagging inflation rate. Yellen stressed that monetary policy will be tightened at the Fed’s discretion, if the economy continues to stabilize as anticipated.
Yellen agreed, in response to recent criticisms of the Fed being opaque, that there is value in transparency, but warned that short-term political pressure could limit the ability of policymakers to make wise decisions.
Questions and Answers
Federal Reserve Statutory Dividends
Shelby noted that some in Congress have raised concerns over a proposal to reduce the statutory dividend paid to Federal Reserve member banks on the shares that they hold in their respective reserve banks to help pay for a new transportation bill. He asked Yellen if she is concerned about such a proposal. Yellen said she is familiar with the proposal, and that she would be concerned that reducing the dividend could have unintended consequences on banks’ willingness to be part of the Federal Reserve System.
Liquidity
Shelby said the issue of liquidity in fixed income markets has become a daily topic in the news, and asked if Yellen believes that federal regulations have been a significant factor. Yellen answered that the Federal Reserve is studying liquidity very careful and that it has “certainly heard market concerns on this topic.” She said a number of factors may be impacting liquidity, including: 1) changes in market structure; 2) capital requirements and other regulatory changes; 3) changes in firms’ risk management practices; 4) algorithmic trading; and 5) increased reporting requirements. She added that liquidity risk has moved away from highly-leveraged institutions, and that this may be a safer situation.
Systemic Risk and SIFI Threshold
Shelby asked if banks should be encouraged to reduce systemic risk “everywhere they can.” Yellen replied that the Federal Reserve is “certainly trying to put in place incentives to reduce systemic footprints” through higher capital requirements, capital surcharges, and other regulations to diminish risk.
Sen. Mike Rounds (R-S.D.) asked if Yellen supports giving firms designated as systemically important financial institutions (SIFIs) a specific roadmap for de-designation. Yellen agreed that firms should have the ability to be de-designated, and explained that the Financial Stability Oversight Council (FSOC) reviews its designations each year and gives firms very detailed information during the process, adding that they “understand well” what led to the designation. She stated that it is not appropriate for the FSOC to “micromanage” the way firms do their business, and that there is no single appropriate off-ramp for de-designation but said firms would have opportunities to work with the regulators to change their SIFI status.
Sen. Elizabeth Warren (D-Mass.) pointed out that the Dodd-Frank Act instructs the Federal Reserve to impose tougher standards on banks with over $50 billion in assets. She was critical of proposals to raise the threshold to $500 billion, as she said Republicans in the Committee sought to do, and urged that Congress “play it safe” by keeping the threshold as it is and letting the Federal Reserve tailor its rules for institutions of different sizes.
Sen. Mike Crapo (R-Idaho) commented that witnesses in past hearings have suggested changes to the $50 billion threshold, and that designations should not be based solely on size. He asked if Yellen agreed there would be benefits to changing the threshold and focusing on substantive evaluations of true risk. Yellen replied that she would be open to a “modest increase” to the threshold because for some of the institutions just above the threshold, it appears that the extra regulatory costs exceed benefits to financial stability. She added that if there are changes to the threshold, it would be crucial that the Fed retain discretion to put more requirements on firms even if they do not reach the threshold.
Crapo summarized Yellen’s comments as a declaration that banks with different risk profiles should subject to different regulatory standards, and that the Federal Reserve should have the ability to evaluate banks’ risk profiles to regulate them appropriately. He stated that the financial system would benefit from allowing regulation to focus on risk rather than institutions’ sizes.
Shelby stated that his regulatory relief bill does not raise the threshold from $50 billion to $500 billion as Democrats had stated. He explained that it keeps the current threshold for institutions to be “considered for enhanced prudential regulation” and gives the regulators discretion, while banks over $500 billion would receive no such discretion.
Brown responded that while Shelby is correct, the bill would increase the difficulty of FSOC designation and that this would threaten the safety and soundness of the financial system.
Monetary Policy
Brown asked about the risks of tightening monetary policy too soon, explaining that he continues to be concerned that the recovery has not taken hold for all Americans. Yellen said there are risks from tightening too soon, and that the Federal Reserve does not want to threaten the recovery. However she said waiting too long could lead to “overshooting” the Fed’s inflation target that would then require a short tightening of monetary policy that could be disruptive.
Sen. Bob Corker (R-Tenn.) expressed concern that the Federal Reserve has become very affected by market swings, and that these movements have become drivers of monetary policy. Yellen responded that she would “push back against the notion that we are unduly affected by ups and downs of the stock market.” She explained that the Fed is focused on the fundamental economic statistics regarding inflation and the labor market, but that broader financial conditions are also relevant to forecasting the economy.
Corker said he has been concerned by possible regulatory capture taking place that has led to the Fed not applying enough pressure on financial institutions to deliver adequate living wills. Yellen insisted that the Fed has worked closely with the Federal Deposit Insurance Corporation (FDIC) to give institutions clear expectations for the current round of submissions, and that preliminary readings “suggest they have made progress.” She added that if the Fed sees shortcomings, then it is prepared to use its authority to determine that the submissions do not meet Dodd-Frank requirements.
Warren noted that the Federal Reserve and FDIC are supposed to determine whether living will submissions are credible or not, and that those institutions with non-credible submissions can be ordered to simplify their structures or to sell off assets. She asked if the Fed would deem living wills from the current round of submissions to be non-credible if banks have failed to fix each problem identified from last year’s submissions. Yellen replied that “we are certainly prepared to make those determinations” and that the Fed will work with the FDIC to see if firms’ responses to the directions given them have been satisfactory.
Warren stressed that two of the fixes included developing rational and less-complex legal structures and developing a holding company structure that supports rapid resolvability. She pointed out that the largest banks have thousands of subsidiaries that could prevent a rapid resolution. Yellen answered that complexity cannot be determined based solely on the number of legal entities, and that not all entities are equal or present impediments to resolution.
International Regulation
Rounds asked if Yellen agrees that it is important for the U.S. to set its own insurance capital and other regulatory standards before agreeing to anything internationally. Yellen answered that the Fed is working on U.S. standards, and assured that nothing applies to American firms before going through a formal U.S. rulemaking process. She defended American regulators’ involvement with the Financial Stability Board (FSB) and other international bodies, saying it is appropriate for U.S. regualtors to take part so that “we end up with a competitive playing field.”
Sen. Tim Scott (R-S.C.) expressed concern that U.S. regulators are failing to lead international regulatory discussions, noting that the FSOC designated domestic insurers shortly after the FSB, “suggesting that the FSOC is happy to follow the FSB lead.” He said European regulators have different concerns from their U.S. counterparts, and insisted on using domestic regulatory approaches rather than importing foreign regulation.
Yellen said it is important for the U.S. to have its voice heard in international processes, and denied that American regulators have been “sitting back.”
Sen. Joe Donnelly (D-Ind.) said he voted for the Dodd-Frank Act because he wanted to see safety and stability, but that he now sees a growing shadow banking system that brings with it other concerns. Yellen noted that the Federal Reserve was “well aware” that as it put regulation in place, there would be a tendency for activities to migrate beyond the regulatory perimeter. She agreed that regulators must be vigilant to monitor risks, and assured that the Federal Reserve has “hugely ramped up” its attention to the shadow banking system through both the FSOC and the FSB.
Cybersecurity
Sen. Jack Reed (D-R.I.) asked about the Federal Reserve’s cybersecurity practices and about its activities to ensure that regulated institutions are adequately protected. Yellen explained that the Fed is “highly focused” on cybersecurity and that it has a robust system in place that includes routine self-evaluations of vulnerabilities.
Regarding the monitoring of cybersecurity at regulated institutions, Yellen stated that the Fed has supervisors trained in IT security who examine institutions, and that it works jointly with the other financial regulators to address cyber threats.
Conversion of Long Term Debt
Sen. Mark Warner (D-Va.) said rules are still needed on the long-term debt to make sure it is convertible and thus able to help in a resolution process. He asked if the regulation would be released by the end of the year. Yellen said she could not give a specific date, but assured Warner that it is a very high priority and the Fed would finish the rule “as soon as we can.”
For more information on this event, please click here.
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Senate Banking Committee
“The Semiannual Monetary Policy Report to the Congress”
Thursday, July 16, 2015
Key Topics & Takeaways
- SIFI Threshold: Fed Chair Yellen stated that she would be open to a “modest increase” of the threshold for systemic designation, but said it would be crucial that the Fed retain discretion to put more requirements on firms even if they do not reach the new threshold.
- Living Wills: Sen. Warren (D-Mass.) asked if the Fed would deem living wills from the current round of submissions to be non-credible if banks have failed to fix each problem identified from last year’s submissions. Yellen replied that “we are certainly prepared to make those determinations” and that the Fed will work with the FDIC to see if firms’ responses to the directions given them have been satisfactory.
- Shadow Banking: Yellen noted that the Federal Reserve was “well aware” that as it put regulations in place, there would be a tendency for activities to migrate beyond the regulatory perimeter. She agreed that regulators must be vigilant to monitor risks, and assured that the Federal Reserve has “hugely ramped up” its attention to the shadow banking system through both the FSOC and the FSB.
Witness
- Janet Yellen, Chair, Federal Reserve Board of Governors
Opening Statements
In his opening statement, Chairman Richard Shelby (R-Ala.) said the Federal Reserve plays a crucial role in overseeing the economy and “managing money and monitoring the health of the financial sector”. He said the Fed’s transparency, which has improved in recent years, is still a concern and does not match other central banks’ standards.
Shelby expressed similar transparency concerns in the Fed’s regulatory responsibilities, specifically regarding the assessments of living wills and stress testing. He stated the lack of feedback and standards leave banks “unfairly susceptible” to falling short.
In his opening statement, Ranking Member Sherrod Brown (D-Ohio) stated the fifth anniversary of the Dodd-Frank Act is a reminder of the costs of the crisis, its massive economic losses and the psychological distress, and how far the country has come in recovering. He credited the law for the economic recovery and noted that taxpayers are now less likely to pay for future bailouts. He noted criticisms of the reform harming the economy, and of its regulations hurting financial stability, but asserted that “Wall Street reform did not ruin the economy – Wall Street gambling did.”
Testimony
In her testimony, Federal Reserve Chair Janet Yellen noted that the Fed has two mandates: 1) to reach full employment; and 2) to maintain a targeted inflation rate of two percent. She pointed to progress towards full employment, but also the lagging inflation rate. Yellen stressed that monetary policy will be tightened at the Fed’s discretion, if the economy continues to stabilize as anticipated.
Yellen agreed, in response to recent criticisms of the Fed being opaque, that there is value in transparency, but warned that short-term political pressure could limit the ability of policymakers to make wise decisions.
Questions and Answers
Federal Reserve Statutory Dividends
Shelby noted that some in Congress have raised concerns over a proposal to reduce the statutory dividend paid to Federal Reserve member banks on the shares that they hold in their respective reserve banks to help pay for a new transportation bill. He asked Yellen if she is concerned about such a proposal. Yellen said she is familiar with the proposal, and that she would be concerned that reducing the dividend could have unintended consequences on banks’ willingness to be part of the Federal Reserve System.
Liquidity
Shelby said the issue of liquidity in fixed income markets has become a daily topic in the news, and asked if Yellen believes that federal regulations have been a significant factor. Yellen answered that the Federal Reserve is studying liquidity very careful and that it has “certainly heard market concerns on this topic.” She said a number of factors may be impacting liquidity, including: 1) changes in market structure; 2) capital requirements and other regulatory changes; 3) changes in firms’ risk management practices; 4) algorithmic trading; and 5) increased reporting requirements. She added that liquidity risk has moved away from highly-leveraged institutions, and that this may be a safer situation.
Systemic Risk and SIFI Threshold
Shelby asked if banks should be encouraged to reduce systemic risk “everywhere they can.” Yellen replied that the Federal Reserve is “certainly trying to put in place incentives to reduce systemic footprints” through higher capital requirements, capital surcharges, and other regulations to diminish risk.
Sen. Mike Rounds (R-S.D.) asked if Yellen supports giving firms designated as systemically important financial institutions (SIFIs) a specific roadmap for de-designation. Yellen agreed that firms should have the ability to be de-designated, and explained that the Financial Stability Oversight Council (FSOC) reviews its designations each year and gives firms very detailed information during the process, adding that they “understand well” what led to the designation. She stated that it is not appropriate for the FSOC to “micromanage” the way firms do their business, and that there is no single appropriate off-ramp for de-designation but said firms would have opportunities to work with the regulators to change their SIFI status.
Sen. Elizabeth Warren (D-Mass.) pointed out that the Dodd-Frank Act instructs the Federal Reserve to impose tougher standards on banks with over $50 billion in assets. She was critical of proposals to raise the threshold to $500 billion, as she said Republicans in the Committee sought to do, and urged that Congress “play it safe” by keeping the threshold as it is and letting the Federal Reserve tailor its rules for institutions of different sizes.
Sen. Mike Crapo (R-Idaho) commented that witnesses in past hearings have suggested changes to the $50 billion threshold, and that designations should not be based solely on size. He asked if Yellen agreed there would be benefits to changing the threshold and focusing on substantive evaluations of true risk. Yellen replied that she would be open to a “modest increase” to the threshold because for some of the institutions just above the threshold, it appears that the extra regulatory costs exceed benefits to financial stability. She added that if there are changes to the threshold, it would be crucial that the Fed retain discretion to put more requirements on firms even if they do not reach the threshold.
Crapo summarized Yellen’s comments as a declaration that banks with different risk profiles should subject to different regulatory standards, and that the Federal Reserve should have the ability to evaluate banks’ risk profiles to regulate them appropriately. He stated that the financial system would benefit from allowing regulation to focus on risk rather than institutions’ sizes.
Shelby stated that his regulatory relief bill does not raise the threshold from $50 billion to $500 billion as Democrats had stated. He explained that it keeps the current threshold for institutions to be “considered for enhanced prudential regulation” and gives the regulators discretion, while banks over $500 billion would receive no such discretion.
Brown responded that while Shelby is correct, the bill would increase the difficulty of FSOC designation and that this would threaten the safety and soundness of the financial system.
Monetary Policy
Brown asked about the risks of tightening monetary policy too soon, explaining that he continues to be concerned that the recovery has not taken hold for all Americans. Yellen said there are risks from tightening too soon, and that the Federal Reserve does not want to threaten the recovery. However she said waiting too long could lead to “overshooting” the Fed’s inflation target that would then require a short tightening of monetary policy that could be disruptive.
Sen. Bob Corker (R-Tenn.) expressed concern that the Federal Reserve has become very affected by market swings, and that these movements have become drivers of monetary policy. Yellen responded that she would “push back against the notion that we are unduly affected by ups and downs of the stock market.” She explained that the Fed is focused on the fundamental economic statistics regarding inflation and the labor market, but that broader financial conditions are also relevant to forecasting the economy.
Corker said he has been concerned by possible regulatory capture taking place that has led to the Fed not applying enough pressure on financial institutions to deliver adequate living wills. Yellen insisted that the Fed has worked closely with the Federal Deposit Insurance Corporation (FDIC) to give institutions clear expectations for the current round of submissions, and that preliminary readings “suggest they have made progress.” She added that if the Fed sees shortcomings, then it is prepared to use its authority to determine that the submissions do not meet Dodd-Frank requirements.
Warren noted that the Federal Reserve and FDIC are supposed to determine whether living will submissions are credible or not, and that those institutions with non-credible submissions can be ordered to simplify their structures or to sell off assets. She asked if the Fed would deem living wills from the current round of submissions to be non-credible if banks have failed to fix each problem identified from last year’s submissions. Yellen replied that “we are certainly prepared to make those determinations” and that the Fed will work with the FDIC to see if firms’ responses to the directions given them have been satisfactory.
Warren stressed that two of the fixes included developing rational and less-complex legal structures and developing a holding company structure that supports rapid resolvability. She pointed out that the largest banks have thousands of subsidiaries that could prevent a rapid resolution. Yellen answered that complexity cannot be determined based solely on the number of legal entities, and that not all entities are equal or present impediments to resolution.
International Regulation
Rounds asked if Yellen agrees that it is important for the U.S. to set its own insurance capital and other regulatory standards before agreeing to anything internationally. Yellen answered that the Fed is working on U.S. standards, and assured that nothing applies to American firms before going through a formal U.S. rulemaking process. She defended American regulators’ involvement with the Financial Stability Board (FSB) and other international bodies, saying it is appropriate for U.S. regualtors to take part so that “we end up with a competitive playing field.”
Sen. Tim Scott (R-S.C.) expressed concern that U.S. regulators are failing to lead international regulatory discussions, noting that the FSOC designated domestic insurers shortly after the FSB, “suggesting that the FSOC is happy to follow the FSB lead.” He said European regulators have different concerns from their U.S. counterparts, and insisted on using domestic regulatory approaches rather than importing foreign regulation.
Yellen said it is important for the U.S. to have its voice heard in international processes, and denied that American regulators have been “sitting back.”
Sen. Joe Donnelly (D-Ind.) said he voted for the Dodd-Frank Act because he wanted to see safety and stability, but that he now sees a growing shadow banking system that brings with it other concerns. Yellen noted that the Federal Reserve was “well aware” that as it put regulation in place, there would be a tendency for activities to migrate beyond the regulatory perimeter. She agreed that regulators must be vigilant to monitor risks, and assured that the Federal Reserve has “hugely ramped up” its attention to the shadow banking system through both the FSOC and the FSB.
Cybersecurity
Sen. Jack Reed (D-R.I.) asked about the Federal Reserve’s cybersecurity practices and about its activities to ensure that regulated institutions are adequately protected. Yellen explained that the Fed is “highly focused” on cybersecurity and that it has a robust system in place that includes routine self-evaluations of vulnerabilities.
Regarding the monitoring of cybersecurity at regulated institutions, Yellen stated that the Fed has supervisors trained in IT security who examine institutions, and that it works jointly with the other financial regulators to address cyber threats.
Conversion of Long Term Debt
Sen. Mark Warner (D-Va.) said rules are still needed on the long-term debt to make sure it is convertible and thus able to help in a resolution process. He asked if the regulation would be released by the end of the year. Yellen said she could not give a specific date, but assured Warner that it is a very high priority and the Fed would finish the rule “as soon as we can.”
For more information on this event, please click here.