Senate Banking Monetary Policy Hearing with Janet Yellen
Senate Banking Committee
“The Semiannual Monetary Report to Congress”
Thursday, February 11, 2016
Key Topics & Takeaways
- Living Wills: Ranking Member Brown (D-Ohio) asked if Yellen is still committed to making formal determinations on the credibility of living will submissions this year. Yellen answered that the Federal Reserve (Fed) and Federal Deposit Insurance Corporation (FDIC) are actively engaged and far along in the evaluation process, and that determinations would be made in the “not too distant future.” She added that they are still committed to finding plans that fail to meet specifications as non-credible.
- Tailoring of Stress Tests: Sen. Crapo (R-Idaho) asked for specific examples in which stress tests or capital planning arrangements are tailored to particular firms. Yellen replied that the Fed is considering ways to make stress tests less burdensome for banks closer to the $50 billion threshold, but that it may also make them stricter for the largest banks. She said this would be “tailoring it appropriately at both ends of the spectrum.”
- Cost-Benefit Analysis: Ranking Member Brown criticized calls for cost-benefit analysis, calling it the “best way to weaken Dodd-Frank” and the “dream of Wall Street.” He insisted that it would undercut the Fed’s rulemaking efforts because it is always harder to quantify the benefits of financial stability than the costs of regulation.
- Municipal Securities as HQLA: Chairman Shelby (R-Ala.) asked if Yellen supports H.R. 2209, which would require the Fed to consider municipal securities as Level 2A assets for its Liquidity Coverage Ratio (LCR) rule. Yellen said she would not support the legislation because municipal bonds are not as liquid as the instruments currently classified as Level 2A. Yellen said the legislation would interfere with the Fed’s supervisory judgments.
Witness
- Janet Yellen, Chair, Federal Reserve Board of Governors
Opening Statements
In his opening statement, Chairman Richard Shelby (R-Ala.) said the Federal Reserve should help Congress and the people understand how the Federal Open Markets Committee (FOMC) makes it monetary policy decisions. He noted that many economists have disputed the idea that adhering to a clear rule for establishing monetary policy would reduce the Fed’s independence, and he recalled a provision of the Financial Regulatory Improvement Act that would have required the Federal Reserve to disclose a monetary policy rule. He called this “reasonable accountability” and hoped that Congress could reach agreement on the bill this year.
Shelby further commented that accountability is even more important with the Federal Reserve having been given increased regulatory authority under the Dodd-Frank Act over new sectors, such as insurance companies and non-bank financial institutions. He also noted that the Fed has issued new regulations recently that stem from the Basel Committee on Banking Supervision, including the Liquidity Coverage Ratio (LCR) and Total Loss Absorbing Capacity (TLAC). He stated that the rules are set by an international body acting as a de facto U.S. regulator, and questioned whether the Federal Reserve is tailoring them properly for the U.S. financial system in order to avoid putting Americans firms at a competitive disadvantage.
Ranking Member Sherrod Brown (D-Ohio), in his opening statement, lauded economic progress since the crisis but also noted that challenges remain with flat wages and millions still look for work. He also opined that many in Congress and on Wall Street are suffering from “collective amnesia,” having forgotten the adverse impacts of the financial crisis. He said some Republicans, rather than working to bolster safeguards, want to “unleash the forces that almost destroyed the economy in the first place.” Rather than conducting oversight hearings to see through the implementation of Dodd-Frank reforms, he continued, the Senate Banking Committee is instead trying to weaken laws for banks and non-banks.
Brown called on the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) to make public determinations of whether individual firms have submitted credible living wills, and he called on regulators to finish rules for compensation incentives on Wall Street that encouraged the behavior that led to the crisis.
Testimony
In her testimony, Chair Janet Yellen of the Federal Reserve Board of Governors highlighted progress made towards the Federal Reserve’s objective of maximum employment, with 13 million jobs created since early 2010 and the unemployment rate having fallen to 4.9 percent. She added, however, that other factors suggest that some slack in the labor market remains.
Yellen noted that financial conditions have recently become “less supportive of growth,” with declines in broad measures of equity prices, higher borrowing rates for risky borrowers, and appreciation of the dollar. Despite this, she said the Federal Open Market Committee (FOMC) expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years. Foreign economic developments, Yellen continued, are posing risks to U.S. economic growth. She specifically discussed the sharp slowdown in Chinese economic growth, uncertainty about China’s exchange rate policy, low commodity prices, and volatility in global financial markets.
Inflation continues to run below the FOMC’s 2 percent objective, Yellen said, with much of the low average pace traced to steep declines in oil prices and other imported goods. However, she expects that as oil and import prices stop falling and the labor market strengthens further, inflation will rise to 2 percent over the medium term.
Turning to monetary policy, Yellen noted that the FOMC chose to raise its target range for the federal funds rate in December with the belief that a modest reduction in policy accommodation economy activity would continue to expand. Had the FOMC delayed normalization for too long, she warned, it may have then had to tighten abruptly in the future to keep the economy from “overheating.” Yellen said the FOMC anticipates that economic conditions will evolve in a manner that will warrant “only gradual increases” in the federal funds rate.
Questions and Answers
Rule-Based Monetary Policy
Shelby asked if the FOMC uses the Phillips Rule in its deliberations to predict inflation. Yellen answered that the theory behind the Phillips Rule fits reasonably in predicting inflation, and that the elements it involves are all considered by the FOMC, but there are also other factors that make a difference.
Sen. Bob Corker (R-Tenn.) asked if there any other rules or guidelines, beyond the goals of 2 percent inflation and maximum inflation, that guide monetary policy. Yellen said it is important to distinguish between a systematic approach, as used by the FOMC and all other major central banks, and a mechanical, mathematical rule that she opposes. She stressed that the FOMC has articulated in a clear statement what it objectives are and that its projections are published.
Corker suggested that the Fed could have an off-the-record meeting with the Committee to lay out its systematic approach and compare it to a having a rule-based approach.
Banking System and Too Big to Fail
Shelby asked Yellen about her thoughts on the strength of the banking system. Yellen said the steps taken since the crisis have had substantial payoffs in the form of a “more resilient, stronger, better-capitalized, and more liquid” banking system. She also pointed to stress testing as another way regulators have sought to ensure that banks can continue to support the credit needs of the economy even in times of stress.
Brown asked if an aggressive and thorough living will process will end the question of too-big-to-fail (TBTF). Yellen replied that it “certainly helps” and highlighted other measures, such as TLAC and Orderly Liquidation Authority under Title II of Dodd-Frank. She said it is premature to say TBTF has been solved, but that “very substantial strides” have been made.
Brown noted that Yellen stated last year that the Fed and FDIC have provided clear feedback to firms on their living wills are would be prepared to make determinations that their resolution plans are non-credible. He asked if Yellen is still committed to making formal determinations on plans’ credibility this year. Yellen answered that the Fed and FDIC are actively engaged and far along in the evaluation process, and that determinations would be made in the “not too distant future.” She added that they are still committed to finding plans that fail to meet specifications as non-credible.
Sen. Elizabeth Warren (D-Mass.) pointed out that if the Fed and FDIC both find plans to be non-credible, they can impose higher capital standards, strengthen leverage ratios, or even break up the big banks by forcing them to sell of assets. However, she lamented that in August 2014 the FDIC identified several problems with the living wills of the 11 largest banks and determined them to be non-credible, while the Federal Reserve refused to make that determination even while agreeing with the problems. She questioned why the Fed refused to join the FDIC in its determination so that it could use its statutory authority to push firms in the right direction.
Yellen explained that the Fed and FDIC had set out guidance pertaining to the living will process and expected to have to go through several rounds of submissions. She assured that the Fed has worked closely with the FDIC to give more detailed guidance for the latest round, and that they have made clear that if submissions do not satisfactorily address the shortcomings identified from the previous round then they are prepared to make a joint determination of non-credibility.
Warren asked if Yellen would commit to working with the FDIC to issue a joint declaration on each submission. Yellen repeated that the Fed and FDIC are working closely, and that they will try to write joint letters again to identify shortcomings and further steps. However, because each member of the Federal Reserve Board of Governors and FDIC Board must arrive at their own individual judgments, she said she could not guarantee identical conclusions.
Warren then asked if Yellen would at least commit that the Fed, if it comes to a different conclusion on credibility, would then issue a written public statement explaining why it reached a different conclusion. Yellen said she expects to release the letters that will go to the firms themselves, which she hopes will be written jointly with the FDIC.
Sen. Mike Crapo (R-Idaho) expressed hope that Congress would make some progress in addressing the $50 billion threshold for designation of systemically important financial institutions (SIFIs), but also noted that Yellen has said the Fed has the authority to tailor its rules. He asked for specific examples of tailoring, such as relief on stress testing and capital planning. Yellen replied that the Fed is considering ways to make stress tests less burdensome for banks closer to the $50 billion threshold, but that it may also make them stricter for the largest banks. She said this would be “tailoring it appropriately at both ends of the spectrum.”
Asked whether this tailoring would be announced soon, Yellen said it would be this year, but that it would not take effect until the 2017 stress testing cycle.
Sen. Dean Heller (R-Nev.) asked Yellen whether she believes banks are overregulated or underregulated. Yellen said she recognizes the regulatory burden is a significant issue for many institutions, and that the Fed is working to ease the burden for small banks. However, she said it is critical that larger institutions hold more capital and are held to higher standards.
Liquidity
Crapo asked if Yellen is concerned that liquidity in bond markets may be less available in stressed conditions, and whether she agrees that all factors should be considered, including reaction. Yellen answered that the normal metrics have not changed much, but that experience suggests liquidity may disappear when it is most needed and the Fed is looking at all factors involved. She said this includes the impact of regulation, but also the emergence of high-frequency trading, changing business models, and changes in disclosure in corporate bond markets.
FSOC
Crapo asked whether it would be helpful for the Financial Stability Oversight Council (FSOC) to provide actionable guidance on how to be de-designated as a systemically important financial institution (SIFI). He suggested that the financial system would be more stable if firms knew what they had to do and had an incentive to be less systemically risky. Yellen said designation was not meant to be permanent, and that firms understand exactly why they were designated in the first place and what actions need to be taken to de-risk. However, she added that the FSOC needs to be careful not to micromanage firms and tell them exactly what their business plans should be.
Sen. Jon Tester (D-Mont.) asked Yellen to clarify her statement that firms know why they were designated and how they can be de-designated, commenting that this is “new information” to him and asking if this information is given as the designation process goes on or afterwards. Yellen said designation is a three-stage process, with firms having “a great deal of interaction” with the FSOC and ample opportunity to explain their business models.
Sen. Mike Rounds (R-S.D.) spoke of the importance of conducting a cost-benefit analysis when writing rules, and asked whether the Fed is working on any such analysis in the context of insurance capital standards stemming from Fed rulemakings or international agreements. Yellen said the Fed is carefully considering what capital standards should be imposed, and there will be notices and comment periods to consider the regulatory burden. However, she would not commit to a cost-benefit analysis.
Sen. Heidi Heitkamp (D-N.D.) discussed the importance of cost-benefit analysis, saying a third party analysis of independent agencies would be a form of “legitimate oversight” by Congress. She invited input or suggestions from Yellen and insisted that the question of cost-benefit analysis will not go away.
Brown criticized calls for cost-benefit analysis, calling it the “best way to weaken Dodd-Frank” and the “dream of Wall Street.” He insisted that it would undercut the Federal Reserve’s rulemaking efforts because it is always harder to quantify the benefits of financial stability than the costs of regulation. Yellen agreed that cost-benefit analysis could cause significant delays to regulation while also resulting in unwarranted litigation. She insisted that regulator are only acting to implement rules that Congress has already judged to be worthwhile and stated that the benefits of reducing the chance of crisis overwhelms the cost of regulation.
Brown asked who would want to have the regulatory process take longer, noting that even without cost-benefit analysis the agenda from the Dodd-Frank Act has already taken over five years. Yellen replied that she knows the banking industry is concerned with regulations and their costs.
Central Counterparties
Sen. Jack Reed (D-R.I.) noted that Dodd-Frank required derivatives to be cleared, but commented that this also creates questions of systemic risk. He asked Yellen to comment on the FSOC’s attention to central counterparties (CCPs). Yellen agreed that the creation of CCPs can be a source of risk, and assured that the FSOC wants to make sure they are sufficiently supervised and operate at high standards. She added that it is a high priority both for the FSOC and globally to ensure comprehensive and strong supervision.
Brown noted that some in Congress have proposed repealing the Fed’s power to pay interest on excess reserves (IOER), and opined that this is an attack by those opposed to the actions the Fed undertook to overcome the crisis. Yellen defended IOER as “the most critical tool we have” to adjust the level of short-term interest rates, and explained that without it the Fed would have to contemplate shrinking its balance sheet rapidly, which could have an adverse impact on the economy and diminish returns to the Treasury.
Municipal Securities as High Quality Liquid Assets
Shelby asked if Yellen supports H.R. 2209, which would require the Fed to consider municipal securities as Level 2A assets for its LCR rule. Yellen said she would not support the legislation because municipal bonds are not as liquid as the instruments currently classified as Level 2A. She added that the Federal Reserve has tried to recognize that some municipal bonds are sufficiently liquid to be included in limited amounts at Level 2B assets. Yellen said the legislation would interfere with the Federal Reserve’s supervisory judgments.
For more information on this hearing, please click here.
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Senate Banking Committee
“The Semiannual Monetary Report to Congress”
Thursday, February 11, 2016
Key Topics & Takeaways
- Living Wills: Ranking Member Brown (D-Ohio) asked if Yellen is still committed to making formal determinations on the credibility of living will submissions this year. Yellen answered that the Federal Reserve (Fed) and Federal Deposit Insurance Corporation (FDIC) are actively engaged and far along in the evaluation process, and that determinations would be made in the “not too distant future.” She added that they are still committed to finding plans that fail to meet specifications as non-credible.
- Tailoring of Stress Tests: Sen. Crapo (R-Idaho) asked for specific examples in which stress tests or capital planning arrangements are tailored to particular firms. Yellen replied that the Fed is considering ways to make stress tests less burdensome for banks closer to the $50 billion threshold, but that it may also make them stricter for the largest banks. She said this would be “tailoring it appropriately at both ends of the spectrum.”
- Cost-Benefit Analysis: Ranking Member Brown criticized calls for cost-benefit analysis, calling it the “best way to weaken Dodd-Frank” and the “dream of Wall Street.” He insisted that it would undercut the Fed’s rulemaking efforts because it is always harder to quantify the benefits of financial stability than the costs of regulation.
- Municipal Securities as HQLA: Chairman Shelby (R-Ala.) asked if Yellen supports H.R. 2209, which would require the Fed to consider municipal securities as Level 2A assets for its Liquidity Coverage Ratio (LCR) rule. Yellen said she would not support the legislation because municipal bonds are not as liquid as the instruments currently classified as Level 2A. Yellen said the legislation would interfere with the Fed’s supervisory judgments.
Witness
- Janet Yellen, Chair, Federal Reserve Board of Governors
Opening Statements
In his opening statement, Chairman Richard Shelby (R-Ala.) said the Federal Reserve should help Congress and the people understand how the Federal Open Markets Committee (FOMC) makes it monetary policy decisions. He noted that many economists have disputed the idea that adhering to a clear rule for establishing monetary policy would reduce the Fed’s independence, and he recalled a provision of the Financial Regulatory Improvement Act that would have required the Federal Reserve to disclose a monetary policy rule. He called this “reasonable accountability” and hoped that Congress could reach agreement on the bill this year.
Shelby further commented that accountability is even more important with the Federal Reserve having been given increased regulatory authority under the Dodd-Frank Act over new sectors, such as insurance companies and non-bank financial institutions. He also noted that the Fed has issued new regulations recently that stem from the Basel Committee on Banking Supervision, including the Liquidity Coverage Ratio (LCR) and Total Loss Absorbing Capacity (TLAC). He stated that the rules are set by an international body acting as a de facto U.S. regulator, and questioned whether the Federal Reserve is tailoring them properly for the U.S. financial system in order to avoid putting Americans firms at a competitive disadvantage.
Ranking Member Sherrod Brown (D-Ohio), in his opening statement, lauded economic progress since the crisis but also noted that challenges remain with flat wages and millions still look for work. He also opined that many in Congress and on Wall Street are suffering from “collective amnesia,” having forgotten the adverse impacts of the financial crisis. He said some Republicans, rather than working to bolster safeguards, want to “unleash the forces that almost destroyed the economy in the first place.” Rather than conducting oversight hearings to see through the implementation of Dodd-Frank reforms, he continued, the Senate Banking Committee is instead trying to weaken laws for banks and non-banks.
Brown called on the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) to make public determinations of whether individual firms have submitted credible living wills, and he called on regulators to finish rules for compensation incentives on Wall Street that encouraged the behavior that led to the crisis.
Testimony
In her testimony, Chair Janet Yellen of the Federal Reserve Board of Governors highlighted progress made towards the Federal Reserve’s objective of maximum employment, with 13 million jobs created since early 2010 and the unemployment rate having fallen to 4.9 percent. She added, however, that other factors suggest that some slack in the labor market remains.
Yellen noted that financial conditions have recently become “less supportive of growth,” with declines in broad measures of equity prices, higher borrowing rates for risky borrowers, and appreciation of the dollar. Despite this, she said the Federal Open Market Committee (FOMC) expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years. Foreign economic developments, Yellen continued, are posing risks to U.S. economic growth. She specifically discussed the sharp slowdown in Chinese economic growth, uncertainty about China’s exchange rate policy, low commodity prices, and volatility in global financial markets.
Inflation continues to run below the FOMC’s 2 percent objective, Yellen said, with much of the low average pace traced to steep declines in oil prices and other imported goods. However, she expects that as oil and import prices stop falling and the labor market strengthens further, inflation will rise to 2 percent over the medium term.
Turning to monetary policy, Yellen noted that the FOMC chose to raise its target range for the federal funds rate in December with the belief that a modest reduction in policy accommodation economy activity would continue to expand. Had the FOMC delayed normalization for too long, she warned, it may have then had to tighten abruptly in the future to keep the economy from “overheating.” Yellen said the FOMC anticipates that economic conditions will evolve in a manner that will warrant “only gradual increases” in the federal funds rate.
Questions and Answers
Rule-Based Monetary Policy
Shelby asked if the FOMC uses the Phillips Rule in its deliberations to predict inflation. Yellen answered that the theory behind the Phillips Rule fits reasonably in predicting inflation, and that the elements it involves are all considered by the FOMC, but there are also other factors that make a difference.
Sen. Bob Corker (R-Tenn.) asked if there any other rules or guidelines, beyond the goals of 2 percent inflation and maximum inflation, that guide monetary policy. Yellen said it is important to distinguish between a systematic approach, as used by the FOMC and all other major central banks, and a mechanical, mathematical rule that she opposes. She stressed that the FOMC has articulated in a clear statement what it objectives are and that its projections are published.
Corker suggested that the Fed could have an off-the-record meeting with the Committee to lay out its systematic approach and compare it to a having a rule-based approach.
Banking System and Too Big to Fail
Shelby asked Yellen about her thoughts on the strength of the banking system. Yellen said the steps taken since the crisis have had substantial payoffs in the form of a “more resilient, stronger, better-capitalized, and more liquid” banking system. She also pointed to stress testing as another way regulators have sought to ensure that banks can continue to support the credit needs of the economy even in times of stress.
Brown asked if an aggressive and thorough living will process will end the question of too-big-to-fail (TBTF). Yellen replied that it “certainly helps” and highlighted other measures, such as TLAC and Orderly Liquidation Authority under Title II of Dodd-Frank. She said it is premature to say TBTF has been solved, but that “very substantial strides” have been made.
Brown noted that Yellen stated last year that the Fed and FDIC have provided clear feedback to firms on their living wills are would be prepared to make determinations that their resolution plans are non-credible. He asked if Yellen is still committed to making formal determinations on plans’ credibility this year. Yellen answered that the Fed and FDIC are actively engaged and far along in the evaluation process, and that determinations would be made in the “not too distant future.” She added that they are still committed to finding plans that fail to meet specifications as non-credible.
Sen. Elizabeth Warren (D-Mass.) pointed out that if the Fed and FDIC both find plans to be non-credible, they can impose higher capital standards, strengthen leverage ratios, or even break up the big banks by forcing them to sell of assets. However, she lamented that in August 2014 the FDIC identified several problems with the living wills of the 11 largest banks and determined them to be non-credible, while the Federal Reserve refused to make that determination even while agreeing with the problems. She questioned why the Fed refused to join the FDIC in its determination so that it could use its statutory authority to push firms in the right direction.
Yellen explained that the Fed and FDIC had set out guidance pertaining to the living will process and expected to have to go through several rounds of submissions. She assured that the Fed has worked closely with the FDIC to give more detailed guidance for the latest round, and that they have made clear that if submissions do not satisfactorily address the shortcomings identified from the previous round then they are prepared to make a joint determination of non-credibility.
Warren asked if Yellen would commit to working with the FDIC to issue a joint declaration on each submission. Yellen repeated that the Fed and FDIC are working closely, and that they will try to write joint letters again to identify shortcomings and further steps. However, because each member of the Federal Reserve Board of Governors and FDIC Board must arrive at their own individual judgments, she said she could not guarantee identical conclusions.
Warren then asked if Yellen would at least commit that the Fed, if it comes to a different conclusion on credibility, would then issue a written public statement explaining why it reached a different conclusion. Yellen said she expects to release the letters that will go to the firms themselves, which she hopes will be written jointly with the FDIC.
Sen. Mike Crapo (R-Idaho) expressed hope that Congress would make some progress in addressing the $50 billion threshold for designation of systemically important financial institutions (SIFIs), but also noted that Yellen has said the Fed has the authority to tailor its rules. He asked for specific examples of tailoring, such as relief on stress testing and capital planning. Yellen replied that the Fed is considering ways to make stress tests less burdensome for banks closer to the $50 billion threshold, but that it may also make them stricter for the largest banks. She said this would be “tailoring it appropriately at both ends of the spectrum.”
Asked whether this tailoring would be announced soon, Yellen said it would be this year, but that it would not take effect until the 2017 stress testing cycle.
Sen. Dean Heller (R-Nev.) asked Yellen whether she believes banks are overregulated or underregulated. Yellen said she recognizes the regulatory burden is a significant issue for many institutions, and that the Fed is working to ease the burden for small banks. However, she said it is critical that larger institutions hold more capital and are held to higher standards.
Liquidity
Crapo asked if Yellen is concerned that liquidity in bond markets may be less available in stressed conditions, and whether she agrees that all factors should be considered, including reaction. Yellen answered that the normal metrics have not changed much, but that experience suggests liquidity may disappear when it is most needed and the Fed is looking at all factors involved. She said this includes the impact of regulation, but also the emergence of high-frequency trading, changing business models, and changes in disclosure in corporate bond markets.
FSOC
Crapo asked whether it would be helpful for the Financial Stability Oversight Council (FSOC) to provide actionable guidance on how to be de-designated as a systemically important financial institution (SIFI). He suggested that the financial system would be more stable if firms knew what they had to do and had an incentive to be less systemically risky. Yellen said designation was not meant to be permanent, and that firms understand exactly why they were designated in the first place and what actions need to be taken to de-risk. However, she added that the FSOC needs to be careful not to micromanage firms and tell them exactly what their business plans should be.
Sen. Jon Tester (D-Mont.) asked Yellen to clarify her statement that firms know why they were designated and how they can be de-designated, commenting that this is “new information” to him and asking if this information is given as the designation process goes on or afterwards. Yellen said designation is a three-stage process, with firms having “a great deal of interaction” with the FSOC and ample opportunity to explain their business models.
Sen. Mike Rounds (R-S.D.) spoke of the importance of conducting a cost-benefit analysis when writing rules, and asked whether the Fed is working on any such analysis in the context of insurance capital standards stemming from Fed rulemakings or international agreements. Yellen said the Fed is carefully considering what capital standards should be imposed, and there will be notices and comment periods to consider the regulatory burden. However, she would not commit to a cost-benefit analysis.
Sen. Heidi Heitkamp (D-N.D.) discussed the importance of cost-benefit analysis, saying a third party analysis of independent agencies would be a form of “legitimate oversight” by Congress. She invited input or suggestions from Yellen and insisted that the question of cost-benefit analysis will not go away.
Brown criticized calls for cost-benefit analysis, calling it the “best way to weaken Dodd-Frank” and the “dream of Wall Street.” He insisted that it would undercut the Federal Reserve’s rulemaking efforts because it is always harder to quantify the benefits of financial stability than the costs of regulation. Yellen agreed that cost-benefit analysis could cause significant delays to regulation while also resulting in unwarranted litigation. She insisted that regulator are only acting to implement rules that Congress has already judged to be worthwhile and stated that the benefits of reducing the chance of crisis overwhelms the cost of regulation.
Brown asked who would want to have the regulatory process take longer, noting that even without cost-benefit analysis the agenda from the Dodd-Frank Act has already taken over five years. Yellen replied that she knows the banking industry is concerned with regulations and their costs.
Central Counterparties
Sen. Jack Reed (D-R.I.) noted that Dodd-Frank required derivatives to be cleared, but commented that this also creates questions of systemic risk. He asked Yellen to comment on the FSOC’s attention to central counterparties (CCPs). Yellen agreed that the creation of CCPs can be a source of risk, and assured that the FSOC wants to make sure they are sufficiently supervised and operate at high standards. She added that it is a high priority both for the FSOC and globally to ensure comprehensive and strong supervision.
Brown noted that some in Congress have proposed repealing the Fed’s power to pay interest on excess reserves (IOER), and opined that this is an attack by those opposed to the actions the Fed undertook to overcome the crisis. Yellen defended IOER as “the most critical tool we have” to adjust the level of short-term interest rates, and explained that without it the Fed would have to contemplate shrinking its balance sheet rapidly, which could have an adverse impact on the economy and diminish returns to the Treasury.
Municipal Securities as High Quality Liquid Assets
Shelby asked if Yellen supports H.R. 2209, which would require the Fed to consider municipal securities as Level 2A assets for its LCR rule. Yellen said she would not support the legislation because municipal bonds are not as liquid as the instruments currently classified as Level 2A. She added that the Federal Reserve has tried to recognize that some municipal bonds are sufficiently liquid to be included in limited amounts at Level 2B assets. Yellen said the legislation would interfere with the Federal Reserve’s supervisory judgments.
For more information on this hearing, please click here.