Senator Warren Urges FSOC to Address Interest Rate Risks
Commentary by Steven Lofchie
Senator Elizabeth Warren (D-MA) asked Treasury Secretary Janet L. Yellen, in her role as Chair of the Financial Stability Oversight Council ("FSOC"), to address risks to U.S. financial stability caused by the Federal Reserve Board's ("FRB") "rapid increase" in interest rates.
Senator Warren focused on (i) risks to banks from declines in the value of the bonds they hold, (ii) losses in the value of commercial real estate, and (iii) losses in the leveraged loan market to default. Senator Warren asked FSOC to "carefully assess these risks and work swiftly to mitigate them." She asked that FSOC provide information by September 30, 2023, on:
- actions, if any, taken by FSOC to monitor the risks associated with the FRB's interest rate increases;
- FSOC's assessment of the risks created by interest rate increases; and
- the challenge for regulators in mitigating these risks.
Commentary
FSOC is an organization created by Dodd-Frank with the supposed purpose of monitoring risks to the financial system. There are few organizations that are wrong (or perhaps it would be fairer to say, "not right") as much as FSOC. As mentioned previously, this may result in good part from the make-up of the organization. While it is composed of representatives of many agencies, all of these representatives are from a single party. Thus it would seem to focus on (or create?) systemic risks that reflect the policy aims of that party (climate, digital assets) and ignore risk that may challenge those aims (energy shortage, inflation). Whatever the causes of FSOC's failures, it would seem very possible that those failures can not be rectified by different individuals; rather they are inherent in the structure of it s one-party membership.
Senator Warren's concerns on inflation (see also, her website) appear to focus on private companies raising prices, as if the federal government is a bystander to the issue. It is predictable that the Senator does not consider that government policies may have created the problem, but only that banks have failed to protect themselves against it. The likely solution, given her perspective, can only be more regulation more strictly enforced. (As Abraham Maslow didn't exactly say, "To the government, every problem looks like a gap in regulation.")