Transcripts For CSPAN3 Federal Reserve Chair Janet Yellen Te

The committee will come to order. Without objection, the chair is authorized to declare a recess in the committee at any time. This hearing is entitled semiannual testimony on the Federal Reserve supervision and regulation of Financial System. I now recognize myself for three minutes to give an opening statement. As we all know the dodd frank act vastly increased the powers of the fed way beyond has traditional Monetary Policy responsibilities. The act has made the fed omnipotent but cannot make it omniscient. No act can. Through the exercise of socalled heightened prudential standards the fed can control the largest Financial Institutions in our economy. Former fed governor kevin warsh recently wrote Central Bank Power is permissible in a democracy only when its scope limited, its track record strong and accountable assured. None of that do we observe today. Where his feds omnipotents has taken us . The big banks are bigger, Economic Growth lags and theres scant evidence our economy is more stable. Two new fed expanded authorities granted under dodd frank are controversial and problematic. Secrecy surrounding the stress test make it almost impossible to measure the fed Regulatory Oversight or integrity of the test findings. As a columbia professor says, its hard to believe the current structure are stress test could occur in a country like the United States which prizes the rule of law, protection of Property Rights and adherence to due process. Dodd franks living wills grant the fdic and fed unbridled and on reviewable discretion under a standardless process that relies entirely upon the personal discretion of washington regulators. The fed stands at the center of dodd franks codification of too big to fail. It occupies the board rooms of the largest Financial Institutions in our nation and decides how they can deploy their capital sending a clear signal that washington will bail them out if they get in trouble. Despite claims by the fed is tailors regulations to fit the size of Financial Institutions, we know small banks are suffering disproportionately under washingtons thumb. As we lose on average one Community Financial institution per day, consumers lose options to help them achieve financial independence, Small Businesses news opportunities to grow jobs, and the big banks just keep getting bigger. There is a better way. Former fed chair Alan Greenspan said lawmakers and regulators give an elevated Capital Buffers need to be far less concerned about the quality of the banks loans and portfolios since any losses would be absorbed by shareholders not taxpayers. This would enage the dodd frank act to be shelved, ending its potential to distort the market. A current fdic vice chair has said u. S. Banks engaged in core banking activities and operating with reasonable levels of capital should not incur the same Regulatory Burden as those that do not. Former fdic share sheila bair has also expressed support for higher capital levels in place of Regulatory Risk weighting. Feed the doesnt know whats risky. The fdic doesnt know whats risky. Didnt we learn anything from the crisicrisis, unquote. Its. Endorsed by renowned exists nati nationwide including three nobel prize winners. Financial choice act fosters Economic Growth for all, Bank Bailouts for none and ensures the fed is accountable and remained focused on good mlt Monetary Policy. The chair now recognizes the Ranking Member for five minutes. Thank you for holding this hearing and thank you chair yellen for making yourself available to testify today. Just a few weeks ago we passed the ninth anniversary of the Lehman Brothers failure leading up to 2008. Much of the risk in our Banking System went entirely unchecked by regulators. Failure to quickly address fraud and mismanagement resulted in the loss of more than 8 million jobs as unemployment topped 10 . Millions of families lost their homes, and entire industries were on the brink of collapse. Congress responded to this devastation by passing the most comprehensive overhaul of our Financial System since the Great Depression. The dodd frank wall street reform and Consumer Protection act. The dodd frank act greatly increased the feds responsibility and authority for safeguarding the Financial System but also set minimum standards to ensure that regulators didnt lose sight of emerging risk again. The dodd frank act has required regulators to increase capital and liquidity standards, reduce interconnection in the Financial Markets and more closely scrutinize large Financial Firms Risk Management. However, theres much work left to be done. As we have seen from the enormous failure of a Risk Management at wells fargo, its important to remind the committee and the public why these reforms were necessary in the first place. Fraudulent Retail Banking practices may not in and of themselves pose Systemic Risk but they surely indicate mismanagement that could be catastrophic and riskier and more complex divisions of a Bank Holding Company. Supervisors and Law Enforcement must continue to hold both institutions and individuals accountable. Chair yellen, i know you will keep that in mind over the next several weeks as you review living wills from the five banks that failed their submissions in april and that includes wells fargo. Chair yellen, i am eager to hear about the feds progress in implementing wall street reform and how the boards supervision practices have evolved over the last several years, specifically, i am interested in hear more about how the fed is using the flexibility embedded in dodd frank to tailor regulations appropriate to the sizes and risk of different types of banks. Todd frank also provided the fed in consultation with the Financial Stability Oversight Council with new responsibility to regulate the activities of systemically risky nonbanks, entities such as the Insurance Company aig whose near failure imposed dire systemic consequences on our economy just eight years ago. Since the passage of dodd frank, congress has given the Federal Reserve Additional Authority in setting capital standards for Insurance Firms subject to enhance supervision. Look forward to hearing about the boards progress on regulating insurers. Yet just a few weeks ago, in this committee, the republicans pushed a bill that would severely undermine efforts by the fed to regulate the Financial System. The chairmans misguided legislation would repeal the Financial Stability Oversight Councils ability to designate nonbanks for enhanced supervision by the fed creating a huge swath of unmonitored risk in our Financial System. The legislation would also replace carefully considered limits on banking activities with nothing but an insufficient 10 equity cushion encouraging the reckless and risky behavior that nearly destroyed our economy in 2008. Moreover, as we in congress consider another funding resolution, we must be mindful of continued attempts to defund regulators work implementing dodd frank. For the first time, Economic Data indicates that the middle class is benefiting from the recovery. Failure to heed the lessons of the past will put that progress in jeopardy. Thank you, mr. Chairman, and i yield back the balance of my time. Chair now recognizes the gentleman from texas, the chairman of our Financial Institutions subcommittee, for two minutes. Thank you, mr. Chairman. Todays hearing is fundamental to understanding developments in the prudential supervision and regulation of our Financial Institutions. The role of vice chair of supervisions serves as the stas torly designated official to oversee supervision. In 2010, paul volcker, champion of the volcker rheum noted the reaction of this might turn out to be one of the most important things in here, meaning the dodd frank. It focuses the responsibility on one person. Yet president obama has failed to nominate anyone to fill this important position. A position that sets prudential regulatory responsibility and sets the United States in International Banking forums like the Financial Stability board. I remain concerned that governor dan tirillo continues to exercise these authorities outside the construct and mandated oversight of congress. I hope to understand the regulatory actions taken by the Federal Reserve. For example, how does the posture on reducing Bank Leverage interact with its recent recommendations to repeal the Merchant Banking authority. What type of risk is the fed trying to mitigate in capital proposal for commodities activity . Similarly, what wourld the impact be in a physical commodity activity decreases or stops. And finally, does the Federal Reserve recognize the exposure reducing characteristics of segregated margin and does it plan to reevaluate its position in the leverage ratio rule given recent Basil Committee discussions. Its incumbent upon her to do so in the president ial inaction. With that, mr. Chairman, this is my last time to be in this committee with chair yellen. Ill thank the chair for making herself available to us. And thanks again for her service in her capacity. With that, i yield back. Gentleman yields back. Today we welcome the testimony of the honorable janet yellen. Chair yellen has previously testified before our committee on a number of occasions. I believe she needs no further introduction. Without objection, chair yellen, your written statement will be made part of the record. You are recognized for five minutes to give an oral presentation of your testimony. Thank you. Thank you. Chairman hensarling, Ranking Member waters and other members of the committee, i appreciate the opportunity to testify this morning on the Federal Reserves regulation and supervision of responsible institutions. One of the Federal Reserves fundamental goals is to make sure that our regulatory and Supervisory Program is tailored to the risk the different Financial Institutions pose to the system as a whole. As we saw in 2007 and 2008, the failure of systemically important Financial Institutions can destabilize the Financial System and undermine the real economy. The largest, most complicated firms must, therefore, be subject to prudential standards that are more stringent than the standards that apply to other firms. Small and mediumsized banking organizations whose failure would generally pose much less risk to the system should be subject to standards that are materially less stringent. The Federal Reserve has made substantial progress in building a regulatory and Supervisory Program that is consistent with these principles. We have implemented key standards designed to limit the Financial Stability risks posed by the largest, most complex banking firms. We continue to work on some remaining standards and to assess the adequacy of this package of measures. With respect to small and medium sized banks, we must build on the steps we have already taken to ensure that they do not face undue Regulatory Burdens. Looking forward, we must continue to monitor for the emergence of new risks, since the lesson from the crisis is that Financial Stability threats change over time. The Federal Reserves postcrisis efforts to strengthen its regulation and supervision of large banks focused on promoting the safety and soundness of these firms. And on limiting the adverse effects that their distress or failure could have on the Financial System in the broader economy. Weve aimed to increase the resiliency of the largest banking organizations by establishing a broad set of enhanced prudential standards, including capital liquidity requirements for large domestic and foreign banking organizations. And weve aimed to make large Financial Institutions more resolvable through, for example, the living wills process and our proposed longterm debt requirements. The introduction of capital stress testing for large banking organizations has been one of our signature regulatory and supervisory innovations since the financial crisis. As events during the financial crisis demonstrated, Capital Buffers that seem adequate in a benign environment may turn out to be far less than adequate during periods of stress. For this reason, the Federal Reserve conducts supervisory stress tests each year on banking organizations with 50 billion or more in total assets to determine whether they have sufficient capital to continue operations through periods of economic stress and market turbulence. And whether the Capital Planning frameworks are adequate to their risk profiles. The expectation embodied in our stress Testing Program that large banking organizations should maintain sufficient Capital Buffers to withstand a period of significant stress promotes the resilience of those firms and of the Financial System more generally. While our stress Testing Program has been successful since it was first introduced in 2009, the crisis reinforced the need for regulators and supervisors to continually revisit the effectiveness of their tools and adjust as needed over time. As my written testimony indicates in more detail and as my colleague discussed in his speech earlier this week, we are now considering making several changes to our stress testing methodology and process. A leading idea thats emerged from a substantive review of our comprehensive capital Analysis Review or ccar program is to integrate ccar with our regulatory capital framework, thus effectively included surcharges in the stress test. We are also considering making certain changes to the stress test assumptions used in ccar. In addition, were considering exempting from the qualitative portions of ccar any Bank Holding Company that has less than 250 billion in total assets and that does not have Significant International or nonbank activity. As well as reducing the amount of data these firms are required to submit for stress testing purposes. On this and other changes to ccar that were considering, we will, of course, Seek Public Input before moving to adopt them. I know that Community Banks play a vital role in many ever your districts. Among the lessons of my years of experience at the Federal Reserve, have reinforced that when it comes to Bank Regulation and supervision, one size does not fit all. To effectively promote safety and soundness and to ensure that institutions comply with applicable Consumer Protection laws, without creating undue Regulatory Burden, rules and supervisory approaches should be tailored to different types of institutions such as Community Banks. The Federal Reserve has already done a considerable amount to reduce Regulatory Burden on Community Banking organizations. But were