Warren to Yellen at Hearing: How Will You Evaluate and Manage Risks Posed by BlackRock and Other Financial Giants?
Washington, DC - In a Senate Banking, Housing, and Urban Affairs Committee hearing today, United States Senator Elizabeth Warren (D-Mass.) called for companies such as BlackRock, the world's largest asset management firm, to be designated as a Systemically Important Financial Institution (SIFI). Senator Warren highlighted risks associated with the nonbank sector and how Treasury Secretary Janet Yellen can work to address these risks in her capacity as chair of the Financial Stability Oversight Council (FSOC).
Following the 2008 financial crash triggered by the failure of two investment companies, Bear Stearns and Lehman Brothers, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which established FSOC to identify and mitigate risks throughout the financial system. FSOC has the power to designate nonbank firms as SIFIs and subject them to the same enhanced oversight by the Federal Reserve as the too big to fail banks.
BlackRock is the world's largest asset management firm, overseeing nearly $9 trillion in assets - more than double where it was ten years ago. It also holds a stake in just about every company listed on the S&P 500. BlackRock also runs a technology platform that currently houses at least 10% of all the stocks and bonds around the world.
Transcript: Banking and Housing Committee Hearing on Quarterly CARES
U.S. Senate Committee on Banking, Housing and Urban Affairs
Wednesday March 24, 2021
Senator Warren: Thank you, Mr. Chairman.
So, after the 2008 financial crisis, Congress passed the Dodd-Frank Act to put more cops on the beat and prevent Wall Street from wrecking our economy again. One of the protections that Dodd-Frank put in place was to automatically create a special designation for the "too big to fail" banks - at the time, those with assets of $50 billion or more - so they received stronger oversight by the Federal Reserve.
Chair Powell, why did Congress think it was a good idea to put stronger oversight in place for banks above a certain size?
Chair Powell: I think it was a wise decision just it was particularly for the very largest institutions it was clear at the time that we needed to raise expectations across a very broad range of measures including particularly capital liquidity risk management.
Senator Warren: Okay, and we needed better supervision to do that? I take it.
Chair Powell: I would agree.
Senator Warren: But it isn't just banks that pose a risk to the economy. In 2008, two investment companies, Bear Stearns and Lehman Brothers, failed, triggering the 2008 crash. So when Congress passed Dodd-Frank, they created the Financial Stability Oversight Council, or FSOC, and gave it the power to designate nonbank firms as too big to fail, or, in the terms of the statute to designate them as "systemically important," which means they get the same stronger oversight as the too big to fail banks. Is that right Chair Powell?
Chair Powell: Yes it is.
Senator Warren: Okay, so let's look at an example of how that's working today. BlackRock is the world's largest asset management firm, overseeing nearly $9 trillion dollars in assets - that's more than double where it was ten years ago. It also holds a stake in just about every company listed on the S&P 500. To put that in perspective, BlackRock manages more assets than the entire GDP of Japan, or Germany, or Great Britain, or any other nation in the world except the United States and China. And it's not just size. BlackRock also runs a technology platform that currently houses at least 10% of all the stocks and bonds around the world.
So, Secretary Yellen, just hypothetically, if a $9 trillion investment company failed, would that likely have a significant impact on our economy?
Secretary Yellen: Well, Senator Warren, I believe it's important to look very carefully at the risk posed by asset management industry including BlackRock and other firms. And the FSOC began to do that I believe in 2016 and 2017, but the risk it focused on were ones having to do with open-end mutual funds that can experience massive withdrawals and be forced to sell off assets that could create fire sales
Senator Warren: Right
Secretary Yellen: That is actually a risk that we saw materialize last spring in March and I think that with respect to asset management, rather than focus on designation of companies, I think it's important to focus on an activity like that and to consider what the appropriate restrictions are, it's not obvious to me that designation is the correct tool to address
Senator Warren: Now wait just a minute - designation is what gives the Fed its increased oversight power, is that correct? Is that correct?
Secretary Yellen: Yes
Senator Warren: And is BlackRock currently designated so that it receives that increased oversight?
Secretary Yellen: It isn't designated but I think it's important to understand
Senator Warren: So that means it is not receiving the increased oversight from the Fed. So my question is, are you currently looking at designation for companies like BlackRock, 9 trillion dollar companies like this?
Secretary Yellen: Well as I said, FSOC has looked at this issue in the past.
Senator Warren: I understand we've done it in the past. I'm not asking about what the last Secretary of the Treasury did, you are the head of the FSOC now,
Senator Warren: And the question I'm asking is whether or not FSOC is considering and looking at designation for these large financial institutions?
Secretary Yellen: Well, I think it's appropriate to designate institutions whose failure would pose a material risk to U.S. financial stability.
Senator Warren: Good. And that's why I'm starting my question with, does potentially a 9 trillion dollar investment company pose some risk to the American economy if it should fail?
Secretary Yellen: Well one needs to analyze what the risk is. An asset management company is very different from a bank.
Senator Warren: So how do you analyze what the risk is if you're not actually doing the investigation through FSOC?
Secretary Yellen: Well, FSOC has undertaken such work in the past. And as I said, when it looked at asset managers it issued a report outlining what it saw as some of the most significant risks from those industries.
Senator Warren: So I appreciate that they've done this in the past, are you continuing that investigation now?
Secretary Yellen: Well, I'm just beginning a work program with FSOC and certainly risk from asset management
Senator Warren: Alright
Secretary Yellen: Will be on the list.
Senator Warren: I understand that when the stock market is going up it is easy to ignore risks that can be building up in the system. That was the mindset of the regulators that led up to the 2008 crash and that is how taxpayers ended up on the hook for a $700 billion dollar bailout of the giant banks. When the party is going strong, it is the job of the regulators to take away the punchbowl. My view on this is that Congress gave you the tools to monitor these companies for risk, and it is important to use them.
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