May 11, 2022

ICYMI: At Hearing, Warren Calls out Trump Administration for Weakening Oversight of Giant Nonbank Financial Institutions

Secretary Yellen Agrees with Senator Warren that FSOC Needs to be Strengthened

Video of Hearing (YouTube)

Washington, D.C. – In case you missed it, at a hearing of the Senate Banking, Housing, and Urban Affairs Committees, U.S. Senator Elizabeth Warren (D-Mass.) called out the Trump administration’s actions to weaken the Financial Stability Oversight Council (FSOC)’s oversight powers by undermining its ability to designate nonbanks – including giant asset managers, mortgage companies, hedge funds, private equity firms, and investment companies – as systemically important financial institutions, and urged Secretary of the Treasury Janet Yellen to restore FSOC’s authorities. 

Senator Warren and Secretary Yellen agreed that FSOC’s oversight abilities need to be strengthened again. 

Transcript: The Financial Stability Oversight Council Annual Report to Congress
U.S. Senate Committee on Banking, Housing, and Urban Affairs 
Wednesday, May 10, 2022

Senator Elizabeth Warren: Thank you, Mr. Chairman. 

In the crash of 2008, we saw how financial institutions that were not banks could be big enough and risky enough to bring down our whole economy. It was the collapse of a few non-banks, the investment companies Lehman Brothers and Bear Stearns, the insurance giant AIG, that triggered the crisis and caused millions of families to lose their jobs, their homes, and their retirement savings. 

Now in response, Congress created FSOC to prevent such a crash from ever happening again. And one of the most powerful tools we gave to FSOC was the ability to designate nonbank firms as "systemically important financial institutions" or SIFIs and subject them to the same oversight as the big, too-big-to-fail banks. Today, these nonbank firms include asset managers that oversee trillions of dollars in assets, exceeding the GDPs of just about every nation on earth, mortgage companies that originate 60% of home loans in the United States, and hedge funds, private equity firms, and investment companies that operate in the shadows of financial, of the financial system. 

Those companies control huge amounts of the US and the worldwide economy, which means their mismanagement or failure could threaten the entire economic system. Even so, in 2019, the Trump administration, under the Trump administration, FSOC issued revised guidance that significantly weakens the Council’s ability to conduct this oversight. But don't take my word for it – Secretary Yellen, you, along with Fed Chair Ben Bernanke and former Treasury Secretaries Tim Geithner and Jack Lew wrote a letter in 2019 opposing the revised guidance. 

You stated that the changes would "neuter the designation authority" and "amount to a substantial weakening of the post-crisis reforms." You also say that the 2019 guidance would "make it impossible to prevent the buildup of risk in financial institutions whose failure would threaten the stability of the system as a whole." That sounds pretty serious. Do you still agree with that, Secretary Yellen? 

Secretary of the Treasury, Janet Yellen: Yes I do. 

Senator Warren: Good. Under the Trump administration, regulators chipped away at the rules bit by bit, leaving our financial system and American families less safe. Restoring FSOC's ability to prevent giant corporations from taking our economy down again is a critical step to building those defenses back up. So Secretary Yellen, you have already joined others to say how dangerous you think it is that the 2019 SIFI guidance change was and now you have the power to do something about it. Will you reverse the risky 2019 guidance this year?

Secretary Yellen: We're looking at this very carefully and examining what our options are. We'll be discussing this with other members of the Council. So, I continue to hold the same set of views. 

But I do want to say, designation is not the only tool that was given to FSOC to address financial stability risks in the non-bank financial sector. Activity-based regulations are also relevant. And so there are two kinds of tools. 

Sometimes designation is clearly the right tool when there is an institution who, whose failure could threaten financial stability, it's the right tool. But sometimes, and I would give you money market funds as an example, there is a practice that occurs throughout the financial sector, many firms are involved in it. 

The risk comes from the activities or the structures that many firms have that risk. In situations of that sort, an activity-based approach may be relevant. And I want to say that FSOC has been very focused ever since the day I became Treasury Secretary on risks in the non-bank financial sector. 

Senator Warren: And–

Secretary Yellen: We have focused on money market funds. We have focused on open-end mutual funds where there can be run risks and hedge funds. And in activity-based analysis or potential regulations in all of these cases from the SEC or further data-gathering, I think that's the right approach there–

Senator Warren: I just–

Secretary Yellen: – as opposed to designation.

Senator Warren: I appreciate that, Secretary Yellen, but we're going to run out of time here. I just want to remind you, though, I will quote Yellen-to-Yellen on this. The letter you co-led said "activity-based approaches cannot address risks that are tied to the funding, leverage, and combination of activities within a corporation." It also says, "Congress created the FSOC with both, both, designation authority and the authority to review and make recommendations regarding activities. Congress did not intend for one authority to be used as a prerequisite for the other." My only point here is that with that 2019 designation that you wrote this letter against, it has altered that balance and I want to see that balance come back into play.

Secretary Yellen: I agree with that. I think both tools should be available and one should not be a prerequisite to another in my view.

Senator Warren: Good.

Secretary Yellen: But we need both tools and hope to look very carefully at what the designation.

Senator Warren: I want to see both as well. Stronger rules to protect our economy. 

Secretary Yellen: I would agree.