12/5/2019 - Promoting Financial Stability? Reviewing the Administration’s ... - (EventID=110287)

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Thursday, December 5, 2019 (10:00 AM) -- Hearing: "Promoting Financial Stability? Reviewing the Administration’s Deregulatory Approach to Financial Stability" Connect with the House Financial Services Committee Get the latest news: https://financialservices.house.gov/ Follow us on Facebook: https://www.facebook.com/FinancialDems/ Follow us on Twitter: https://twitter.com/FSCDems ---------------------------------------------- This will be a one-panel hearing with a single witness: • The Honorable Steven Mnuchin, Secretary, U.S. Department of the Treasury, and Chairperson, Financial Stability Oversight Council (FSOC) Overview Pursuant to Section 112(a)(2)(N) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), Congress mandates the Financial Stability Oversight Council (FSOC) to submit an annual report to Congress on various issues, including its activities; significant financial market and regulatory developments; and potential emerging threats to the financial stability of the United States. Pursuant to Section 112(c) of Dodd-Frank, the Chairperson of the FSOC is required to testify before the Committee to discuss FSOC’s annual report. Background The Dodd–Frank Act established FSOC to, among other things, “identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace.” The FSOC is composed of ten voting members – including the Secretary of the Treasury who serves as FSOC’s Chairperson – and five nonvoting members. The Office of Financial Research (OFR) was established to conduct independent research and support FSOC’s work. While FSOC is empowered to designate nonbank financial companies for enhanced oversight by the Federal Reserve or designate financial market utilities (FMUs) as systemically important, FSOC can generally only recommend—but not compel— member agencies to undertake regulatory changes. Following the 2007-2009 financial crisis, Congress created the FSOC and OFR to address an observed failure of the regulatory structure to consider the interconnectedness of the system, to coordinate among agencies on financial crisis planning, and to quantify and map systemwide risks. However, under the Trump Administration, FSOC and its member agencies have been criticized for being more focused on implementing financial deregulatory proposals than on mitigating systemic risks. A summary of FSOC’s 2018 annual report and recent activities are described below. Potential Threats to Financial Stability According to FSOC’s 2018 Annual Report, “Overall, risks to U.S. financial stability remain moderate, though they have evolved since the last annual report.... At the same time, financial stability risks outside the U.S. appear to have increased.” The report identified six “potential emerging threats and vulnerabilities” to financial stability: • Cybersecurity—the vulnerability of financial markets or institutions to cyberattacks; • Ongoing structural vulnerabilities—the systemic importance of central counterparties and large, complex, interconnected financial institutions, LIBOR transition, concentration risk in tri-party repo and risk opacity in bilateral repo, run risk in money market funds and cash management vehicles, financial innovation, and data gaps; • Developments related to prolonged credit expansion—the potential reversal of elevated debt levels and asset values; • Changes in financial market structure—reduced asset market liquidity provided by market makers, potential for high frequency trading to cause equity market volatility episodes, and risks associated with evolving Treasury market structure; • Vulnerabilities related to asset management—liquidity and redemption risk, use of derivatives; and • Global developments—Brexit, longer-term structural vulnerabilities in the euro area, Chinese economic slowdown, and emerging markets with large current account deficits, such as Argentina and Turkey. Leveraged Lending. One potential threat to financial stability relates to leveraged lending. Leveraged loans are loans made to businesses that are highly indebted by some measure, such as having a high ratio of debt to earnings or have a below investment grade credit rating. Most leveraged loans are syndicated, meaning that a group of bank or nonbank lenders, such as private equity funds, collectively fund a single borrower, in contrast to a traditional loan held by a single bank. Investors wishing to hold leveraged loans can do so either by investing directly in individual leveraged loans or investing in collateralized loan obligations (CLOs), which are securities backed by cash flows from pools of leveraged loans.... Hearing page: https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=404856