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Senate Banking Committee Hears Testimony on Threats to Financial Stability

Steven.Lofchie@friedfrank.com's picture
Commentary by Steven Lofchie

At a hearing before the Senate Committee on Banking, Housing and Urban Affairs, Treasury Secretary Janet L. Yellen testified on the Financial Stability Oversight Council's 2021 Annual Report to Congress (see related coverage).

Ms. Yellen identified vulnerabilities in nonbank financial institutions, noting that the liquidity mismatch caused by the pandemic and the use of leverage by some nonbank financial institutions may expose nonbank institutions to risks similar to those of traditional banks. In connection with this, FSOC re-established its Hedge Fund Working Group with the aim of (i) developing a risk-monitoring system and (ii) offering options to mitigate risks the group identifies.

Additionally, FSOC took steps to improve its ability to collect data, evaluate expanded central clearing, and enhance transparency and oversight over alternative trading systems. FSOC also established a Climate-related Financial Risk Committee and Climate-related Financial Risk Advisory Committee to provide analysis on climate risk and coordinate interagency efforts. Ms. Yellen stated that FSOC is committed to continuing to identify potential emerging threats to financial stability.

Committee Chair Senator Sherrod Brown (D-OH) commended FSOC and its leadership for "turn[ing] the page" from a "Wall Street-first mentality." However, Senator Brown expressed concern over past taxpayer bailouts of the "biggest banks" and urged FSOC to monitor both traditional banks and nonbank financial institutions to ensure a crisis similar to the 2008 financial meltdown does not happen again.

Ranking Member Patrick J. Toomey (R-PA) expressed concern that FSOC has become too politicized, and that this is interfering with FSOC's ability to properly fulfill its obligations. Most notably, Senator Toomey disagreed with FSOC's prioritization of climate-related risk and a "needless" imposition of bank-like regulations on nonbank financial institutions. Senator Toomey also urged FSOC to retain an activities-based approach to oversight established under the previous administration. He remarked that despite publishing an agenda that included discussions on digital assets, cybersecurity and enhancing the resilience of the U.S. Treasury market, FSOC has made little to no progress on those issues due to the fact that it is too focused on "political issues."

Commentary

FSOC seems a wholly failed organization. The justification for the organization was to provide an independent big-picture view of risk. As it is composed of members of a single political party, FSOC just parrots back the Administration's view under a different organizational stamp that provides the barest illusion of impartiality.

It would be better to simply disband the organization and instead publish a summary of the global views of all the major investment banks and economic research organizations. That would provide a disparate set of opinions from organizations that have an economic, rather than political, interest in making reasonable predictions.

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