reasury Secretary Yellen testifies before the House Financial Services Committee — 2/6/24

reasury Secretary Yellen testifies before the House Financial Services Committee — 2/6/24

Financial Stability Oversight Council (FSOC) Annual Report

  • Rep. McHenry criticized the FSOC for failing to identify and respond to emerging risks and accused the Biden administration of politicizing it.
  • Rep. Waters praised the FSOC's efforts to strengthen capital requirements and defended it against Wall Street's criticism.
  • Rep. Barr criticized the FSOC for operating as an unaccountable roving regulator.
  • Rep. Foster highlighted the importance of the FSOC as a forum for sharing information and welcomed steps taken to address AI-related risks.
  • Secretary Yellen testified before the House Financial Services Committee on the FSOC's annual report.
  • The FSOC monitors a wide range of risks to the financial system, including those from commercial and residential real estate, geopolitical conflicts, and technological developments.
  • The FSOC has not yet designated any firms as non-banks but has issued revised guidance and an analytic framework to make the designation process more transparent.
  • The FSOC believes that federal law changes are needed to regulate the spot market for digital assets and stablecoins.
  • The FSOC's annual report recommends finalizing bank capital rules to strengthen capital requirements for the largest banks.

Basel 3 Endgame Proposal

  • Mega banks oppose the bank capital proposal, claiming it will limit their ability to lend to communities of color.
  • Research shows that better-capitalized banks actually lend more to consumers in both good times and bad.
  • The strong banking system that resulted from implementing strong capital, liquidity, and risk management rules during the post-crisis reforms helped meet the credit needs of businesses and households during the pandemic.
  • The failure of Silicon Valley Bank highlighted the importance of adequate capital to prevent bank runs and maintain financial stability.
  • Secretary Yellen supports ensuring credit availability is not significantly diminished but does not explicitly state her position on the Basel endgame proposal.
  • The Basel 3 endgame proposal would de facto repeal regulatory tailoring, subjecting category three and four regional banks to one-size-fits-all standards that currently apply to global systemically important banks (G-SIBs), eliminate the use of internal risk models, and transition the industry and regulators toward a standardized framework.
  • This proposal would reduce business model diversity and push financial intermediation and lending outside of the bank regulatory perimeter, making the banking industry smaller and more concentrated.
  • A less diverse banking system with forced consolidation and fewer diverse business models could undermine financial stability.

Climate-Related Financial Risk

  • Climate-related financial risk is an emerging and rising threat to the United States' financial stability, with low-income and minority households facing greater climate risk.
  • The FSOC issued guidance on the designation of non-banks as systemically important, emphasizing engagement with the company and its current financial regulator.
  • The Biden administration is committed to promoting diversity in hiring and programs to address disparities in financial services for low-income and marginalized communities.
  • The Treasury is investigating concerns about financial institutions searching Americans' legal transactions for political or religious purchases.
  • The FSOC's 2023 annual report stated that the US banking system remains resilient overall, but there are risks that could be handled better.
  • The Federal Insurance Office (FIO) is recommended to collect six years of granular data on climate-related financial risks from property and casualty insurers.

Artificial Intelligence (AI) in Financial Services

  • The FSOC is concerned about the potential financial stability risks posed by the use of artificial intelligence (AI) in the financial sector.
  • Some of the risks associated with AI include explainability, cyber, and customer risks.
  • The FSOC is working with the financial sector to address these risks and ensure that AI is used in a compliant way with existing financial regulations and laws.
  • Artificial intelligence (AI) is identified as an area of concern for the financial system, particularly with regards to generative AI and deep fake impersonations, which pose risks of fraud and financial loss.

Strengthening Cybersecurity for the Financial Sector Act

  • The Strengthening Cybersecurity for the Financial Sector Act, introduced in January 2023, aims to give the NCUA and Federal Housing Finance Authority the authority to oversee third-party vendors employed by entities under their purview.
  • The NCUA and FHFA's authority to oversee third-party service providers expired, leaving a gap that poses risks to consumers and the financial system.

State and Local Tax (SALT) Deduction

  • Secretary Yellen agrees that the SALT deduction has had a disproportionate impact on different states, including New Jersey, and is committed to finding a fair solution.
  • The IRS is preparing for potential changes to the SALT deduction if the proposed legislation is enacted.

US-China Relations

  • Secretary Yellen does not have a position on whether the US should impose sanctions on China due to its ties to Iran, as that is a matter for the State Department and interagency.
  • Treasury is actively cracking down on

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