Hybrid Hearing - The Annual Report of the Financial Stability Oversight Council (EventID=114746)

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Connect with the House Financial Services Committee Get the latest news: https://democrats-financialservices.house.gov/ Follow us on Facebook: https://www.facebook.com/HouseFinancialCmte Follow us on Twitter: https://twitter.com/FSCDems ___________________________________ On Thursday, May 12, 2022, at 10:00 a.m. (ET) full Committee Chairwoman Waters and Ranking Member McHenry will host a hybrid hearing entitled, “The Annual Report of the Financial Stability Oversight Council." ___________________________________ Witness for this one-panel hearing will be: • The Honorable Janet Yellen, 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 the efforts, activities, objectives, and plans of FSOC and discuss and answer questions concerning FSOC’s annual report. The Dodd-Frank Act established FSOC in the aftermath of the 2008 financial crisis to carry out three primary purposes, which are: “(A) to 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; (B) to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the event of failure; and (C) to respond to emerging threats to the stability of the United States financial system.” The FSOC comprises 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 systemically important financial market utilities (SIFMUs), FSOC can generally only recommend—but not compel— member agencies to undertake regulatory changes. A summary of FSOC’s 2021 annual report and recent activities are described below. Potential Threats to Financial Stability According to FSOC’s 2021 annual report, “Regulatory reforms after the 2008 financial crisis strengthened the ability of the financial system to withstand a shock or an economic downturn. However, risks to U.S. financial stability today are elevated compared to before the pandemic… At the onset of the pandemic, the financial crisis in March 2020 has also made some vulnerabilities more salient.” The report identified the following areas of risks and vulnerabilities to financial stability: Climate-related financial risk. In May 2021, President Biden issued Executive Order 14030, directing the Treasury Secretary to engage with FSOC members on climate-related financial risks and report on the FSOC’s activities. In October 2021, the FSOC issued a detailed report on climate-related financial risk, which found that “Climate change is an emerging threat to the financial stability of the United States.” The report described “physical risks” as economic and financial losses stemming from “harm to people and property arising from acute, climate-related disaster events such as hurricanes, wildfires, floods, and heatwaves as well as longer-term chronic phenomena such as higher average temperatures, changes in precipitation patterns, sea-level rise, and ocean acidification.” The report also described “transition risks,” or “stresses to certain institutions or sectors arising from the shifts in policy, consumer and business sentiment, or technologies associated with the changes necessary to limit climate change.” At its December 2021 meeting, the FSOC voted to establish a Climate-related Financial Risk Committee within the FSOC. Corporate credit. FSOC noted that the average leverage of non-financial corporations is high relative to historical norms, particularly for the airline, hospitality and leisure, and restaurant sectors. FSOC recommended that member agencies monitor non-financial business leverage, asset valuations, and the financial sector’s ability to manage severe simultaneous losses. Short-term wholesale funding markets. FSOC highlighted how money... Hearing page: https://democrats-financialservices.house.gov/events/eventsingle.aspx?EventID=409377