[Senate Hearing 113-125]
[From the U.S. Government Publishing Office]
S. Hrg. 113-125
NOMINATION OF JANET L. YELLEN
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
ON
NOMINATION OF JANET L. YELLEN, OF CALIFORNIA, TO BE CHAIRMAN OF THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
__________
NOVEMBER 14, 2013
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon MARK KIRK, Illinois
KAY HAGAN, North Carolina JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota
Charles Yi, Staff Director
Gregg Richard, Republican Staff Director
Laura Swanson, Deputy Staff Director
Krishna Patel, FDIC Detailee
Brian Filipowich, Professional Staff Member
Greg Dean, Republican Chief Counsel
Mike Lee, Republican Professional Staff Member
Dawn Ratliff, Chief Clerk
Kelly Wismer, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, NOVEMBER 14, 2013
Page
Opening statement of Chairman Johnson............................ 1
Opening statements, comments, or prepared statements of:
Senator Crapo................................................ 2
NOMINEE
Janet L. Yellen, of California, to be Chairman of the Board of
Governors of the Federal Reserve System........................ 4
Prepared statement........................................... 37
Biographical sketch of nominee............................... 39
Responses to written questions of:
Senator Crapo............................................ 52
Senator Brown............................................ 57
Senator Hagan............................................ 58
Senator Warren........................................... 60
Senator Vitter........................................... 63
Senator Johanns.......................................... 67
Senator Kirk............................................. 71
Senator Moran............................................ 81
Senator Coburn........................................... 84
NOMINATION OF JANET L. YELLEN,
OF CALIFORNIA, TO BE CHAIRMAN OF THE BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM
----------
THURSDAY, NOVEMBER 14, 2013
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:01 a.m., in room SD-106, Dirksen
Senate Office Building, Hon. Tim Johnson, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN TIM JOHNSON
Chairman Johnson. I call this hearing to order.
Today we consider the nomination of the Honorable Janet
Yellen to be Chair of the Board of Governors of the Federal
Reserve System for a term of 4 years.
Dr. Yellen is an extraordinary candidate to lead the
Federal Reserve. She currently serves as a Member and Vice
Chair of the Board of Governors; she previously served as a
Member of the Board of Governors in the 1990s; she was the
Chair of President Clinton's Council of Economic Advisers; and
she served 6 years as the President of the San Francisco Fed.
In addition, Dr. Yellen has an impressive academic record.
She is a professor at Berkeley's Haas School of Business and
was previously a professor at Harvard University, as well as a
faculty member at the London School of Economics. Dr. Yellen
graduated summa cum laude from Brown University and received
her Ph.D. in economics from Yale.
Dr. Yellen's nomination is especially timely as our Nation
struggles with high unemployment in the wake of the Great
Recession. She has devoted a large portion of her professional
and academic career to studying the labor market, unemployment,
monetary policy, and the economy.
Dr. Yellen also has a strong track record in evaluating
trends in the economy; her economic analysis has been spot-on.
The New York Times recently noted that she was ``the first Fed
official, in 2005, to describe the rise in housing prices as a
bubble that might damage the economy. She was also the first,
in 2008, to say that the economy had fallen into a recession.''
These forecasts were not an anomaly. The Wall Street
Journal recently analyzed 700 predictions made between 2009 and
2012 in speeches and congressional testimony by 14 Federal
Reserve policy makers and found Dr. Yellen was the most
accurate. Such accurate economic judgment would be a tremendous
quality of a Fed Chair.
Dr. Yellen has proven through her extensive and impressive
record in public service and academia that she is most
qualified to be the next Chair of the Federal Reserve. We need
her expertise at the helm of the Fed as our Nation continues to
recover from the Great Recession, completes Wall Street reform
rulemakings, and continues to enhance the stability of our
financial sector.
I am excited to cast my vote to confirm her as the first
woman to serve as Chair of the Federal Reserve, and when we
vote on the nomination, I urge my colleagues to do the same.
I now turn to Ranking Member Crapo for his opening
statement.
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. Thank you, Mr. Chairman, for holding today's
hearing on the nomination of Dr. Yellen to be the next Chair of
the Federal Reserve Board. Today's hearing is an opportunity
not only to examine Governor Yellen's qualifications but also
her views on the role and direction of the Federal Reserve.
In recent years the Fed has engaged in unprecedented
policies, including purchasing trillions of dollars in
Treasuries and mortgage-backed securities. Current Fed
purchases total up to $85 billion a month. As a result, the
next Fed Chair will inherit a balance sheet that currently
stands at approximately $3.8 trillion, four times higher than
before the financial crisis.
As I think everyone knows, I have been a long-time critic
of the Fed's quantitative easing purchases. Now that a
reduction in asset purchases finally seems to be on the
horizon, I am concerned that markets have become overly reliant
on them. That is why it is essential to know how Dr. Yellen, if
confirmed, would manage the process of normalizing our monetary
policy. The Fed has indicated that it will hold short-term
interest rates low for an extended period. In a speech in
April, Governor Yellen stated, ``The policy rate should, under
present conditions, be held lower for longer.'' But how long is
too long?
The extended period of low rates is hurting individuals
living on fixed-income investments and defined benefit pension
funds. The International Monetary Fund cautioned that the
actions taken by central banks are associated with financial
risks that are likely to increase the longer the policies are
maintained.
How would the Fed ensure that these risks are avoided under
Dr. Yellen's chairmanship? In addition to unprecedented
monetary policy, the next Fed Chair will finalize several key
financial regulatory reform rules. These rules must balance the
financial stability with the inherent need for markets to take
on and accurately price risk. They must be done without putting
the U.S. markets at an undue competitive disadvantage or
harming consumers with unintended consequences.
The Chair of the Federal Reserve must understand how
different rules interact with each other, what impact they have
on the affected entities and the economy at large. Just as some
worried that we did not have another regulations on the books
to prevent the economic crisis, some of us worry now that the
post-crisis response will result in a regulatory regime that
stifles growth and job creation.
The Chair of the Federal Reserve must know and understand
the need for that balance and how to carefully manage competing
demands without harming the economy. The U.S. banking system
and capital markets must remain the preferred destination for
investors throughout the world.
During previous hearings, I have asked Chairman Bernanke
what parts of Dodd-Frank could be revisited on a bipartisan
basis. The Chairman identified the end user and swaps push-out
provisions as well as the need for regulatory relief on small
banks. Chairman Bernanke also commented in July that
legislation is needed to allow the Fed flexibility to deal with
the Collins amendment and tailor appropriate capital
requirements for insurance companies.
I look forward to hearing Dr. Yellen's views on what Dodd-
Frank fixes Congress ought to consider and how she intends to
achieve an appropriate balance between the prudential
regulation and economic growth, if confirmed.
In addition to the previously mentioned issues, the makeup
of the Board itself will change in the near future. Governor
Sarah Bloom Raskin has been nominated to a position at
Treasury, and Governor Elizabeth Duke resigned in August. If
Governor Yellen is confirmed as Chair, the Fed will need a new
Vice Chair. Moreover, Dodd-Frank created a Vice Chair of
Supervision, which has not yet been officially filled. These
appointments will shape the direction of the Federal Reserve
policymaking for years to come.
I look forward to working with the Chairman to see these
positions are filled in a way that provides the proper balance
and expertise at the Fed.
Thank you, Mr. Chairman.
Chairman Johnson. Thank you, Senator Crapo.
Senator Crapo and I have agreed that, to allow for
sufficient time for questions, we are limiting opening
statements to the Chair and Ranking Member. All Senators are
welcome to submit an opening statement for the record.
We will now swear in Dr. Yellen. Please rise and raise your
right hand. Do you swear or affirm that the testimony that you
are about to give is the truth, the whole truth, and nothing
but the truth, so help you God?
Ms. Yellen. I do.
Chairman Johnson. Do you agree to appear and testify before
any duly constituted committee of the Senate?
Ms. Yellen. I do.
Chairman Johnson. Please be seated.
Please be assured that your written statement will be part
of the record. I invite you to introduce your family and
friends in attendance before beginning your statement.
Dr. Yellen, please proceed with your testimony.
STATEMENT OF JANET L. YELLEN, OF CALIFORNIA, TO BE CHAIRMAN OF
THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Ms. Yellen. Thank you. I would like to introduce my
husband, George Akerlof; and my sister-in-law, Allison Brooks;
and my friend and a former San Francisco Fed Director, Karla
Chambers, who are here with me today.
Chairman Johnson, Senator Crapo, and Members of the
Committee, thank you for this opportunity to appear before you
today. It has been a privilege for me to serve the Federal
Reserve at different times and in different roles over the past
36 years and an honor to be nominated by the President to lead
the Fed as Chair of the Board of Governors.
I approach this task with a clear understanding that the
Congress has entrusted the Federal Reserve with great
responsibilities. Its decisions affect the well-being of every
American and the strength and prosperity of our Nation. That
prosperity depends most, of course, on the productiveness and
enterprise of the American people, but the Federal Reserve
plays a role too, promoting conditions that foster maximum
employment, low and stable inflation, and a safe and sound
financial system.
The past 6 years have been challenging for our Nation and
difficult for many Americans. We endured the worst financial
crisis and deepest recession since the Great Depression. The
effects were severe, but they could have been far worse.
Working together, Government leaders confronted these
challenges and successfully contained the crisis. Under the
wise and skilled leadership of Chairman Bernanke, the Fed
helped stabilize the financial system, arrest the steep fall in
the economy, and restart growth.
Today the economy is significantly stronger and continues
to improve. The private sector has created 7.8 million jobs
since the post-crisis low for employment in 2010. Housing,
which was at the center of the crisis, seems to have turned a
corner. Construction, home prices, and sales are up
significantly. The auto industry has made an impressive
comeback, with domestic production and sales back to near their
pre-crisis levels.
We have made good progress, but we have further to go to
regain the ground lost in the crisis and the recession.
Unemployment is down from a peak of 10 percent, but at 7.3
percent in October, it is still too high, reflecting a labor
market and economy performing far short of their potential. At
the same time, inflation is running below the Federal Reserve's
goal of 2 percent and is expected to continue to do so for some
time.
For these reasons, the Federal Reserve is using its
monetary policy tools to promote a more robust recovery. A
strong recovery will ultimately enable the Fed to reduce its
monetary accommodation and its reliance on unconventional
policy tools such as asset purchases. I believe that supporting
the recovery today is the surest path to returning to a more
normal approach to monetary policy.
In the past two decades, and especially under Chairman
Bernanke, the Federal Reserve has provided more and clearer
information about its goals. Like the Chairman, I strongly
believe that monetary policy is most effective when the public
understands what the Fed is trying to do and how it plans to do
it. At the request of Chairman Bernanke, I led the effort to
adopt a statement of the Federal Open Market Committee's
longer-run objectives, including a 2-percent goal for
inflation. I believe this statement has sent a clear and
powerful message about the FOMC's commitment to its goals and
has helped anchor the public's expectations that inflation will
remain low and stable in the future. In this and many other
ways, the Federal Reserve has become a more open and
transparent institution. I have strongly supported this
commitment to openness and transparency, and I will continue to
do so if I am confirmed and serve as Chair.
The crisis revealed weaknesses in our financial system. I
believe that financial institutions, the Federal Reserve, and
our fellow regulators have made considerable progress in
addressing those weaknesses. Banks are stronger today,
regulatory gaps are being closed, and the financial system is
more stable and more resilient. Safeguarding the United States
in a global financial system requires higher standards both
here and abroad, so the Federal Reserve and other regulators
have worked with our counterparts around the globe to secure
improved capital requirements and other reforms
internationally. Today, banks hold more and higher-quality
capital and liquid assets that leave them much better prepared
to withstand financial turmoil. Large banks are now subject to
annual ``stress tests'' designed to ensure that they will have
enough capital to continue the vital role they play in the
economy, even under highly adverse circumstances.
We have made progress in promoting a strong and stable
financial system, but here, too, important work lies ahead. I
am committed to using the Fed's supervisory and regulatory role
to reduce the threat of another financial crisis. I believe
that capital and liquidity rules and strong supervision are
important tools for addressing the problem of financial
institutions that are regarded as ``too big to fail.'' In
writing new rules, however, the Fed should continue to limit
the regulatory burden for community banks and smaller
institutions, taking into account their distinct role and
contributions. Overall, the Federal Reserve has sharpened its
focus on financial stability and is taking that goal into
consideration when carrying out its responsibilities for
monetary policy. I support these developments and pledge, if
confirmed, to continue them.
Our country has come a long way since the dark days of the
financial crisis, but we have farther to go. I believe the
Federal Reserve has made significant progress toward its goals
but has more work to do.
Thank you for the opportunity to appear before you today. I
would be happy to respond to your questions.
Chairman Johnson. Thank you for your testimony.
Will the clerk please put 5 minutes on the clock for each
Member?
Dr. Yellen, you know, as I do, that unemployment is not
just numbers but real men and women who are ready to work if
given the chance. As Chair, how will you lead the Fed to
continue reducing unemployment aggressively and improve the
prospects of young Americans and others who are unemployed?
Ms. Yellen. Thank you, Senator. I would be strongly
committed to working with the FOMC to continue promoting a
robust economic recovery. As you noted, unemployment remains
high. A disproportionate share of that unemployment takes the
form of long spells of unemployment. Around 36 percent of all
those unemployed have been unemployed for more than 6 months.
This is a virtually unprecedented situation, and we know that
those long spells of unemployment are particularly painful for
households, impose great hardship and costs on those without
work, on the marriages of those who suffer these long
unemployment spells, on their families. So I consider it
imperative that we do what we can to promote a very strong
recovery.
We are doing that by continuing our asset purchase program
which we put in place with the goal of assuring a substantial
improvement in the outlook for the labor market. We are taking
account of the costs and efficacy of that program as we go
along. At this point I believe the benefits exceed the costs.
As that program gradually winds down, we have indicated that we
expect to maintain a highly accommodative monetary policy for
some time to come thereafter, and the message that we want to
send is that we will do what is in our power to assure a robust
recovery in the context of price stability.
Chairman Johnson. What are the dangers of tapering asset
purchases too early? If confirmed, how should the FOMC move
forward on an exit strategy?
Ms. Yellen. Senator, I think there are dangers, frankly, on
both sides of ending the program or ending accommodation too
early. There are also dangers that we have to keep in mind with
continuing the program too long or more generally keeping
monetary policy accommodation in place too long. So the
objective here is to assure a strong and robust recovery so
that we get back to full employment and that we do so while
keeping inflation under control. It is important not to remove
support, especially when the recovery is fragile and the tools
available to monetary policy should the economy falter are
limited, given that short-term interest rates are at zero. I
believe it could be costly to withdraw accommodation or to fail
to provide adequate accommodation.
On the other hand, it will be important for us also, as the
recovery proceeds, to make sure that we do withdraw
accommodation when the time is appointed. My colleagues and I
are committed to our longer-run inflation goal of 2 percent,
and we will need to ensure that, as the recovery takes hold and
progresses, we also exit or bring monetary policy back to
normal in a timely fashion.
I believe we have the tools necessary to do so. We have
been very careful to make sure that we have the tools available
at our disposal and we also have the will and commitment, and I
look forward to leading, when the time is appropriate, the
normalization of monetary policy.
Chairman Johnson. Thank you.
Senator Crapo.
Senator Crapo. Thank you, Mr. Chairman, and I would like to
follow up on the Chairman's question with you, Ms. Yellen, with
regard to quantitative easing. You have indicated that you feel
that as long as the economy remains--well, I do not want to put
words in your mouth. But as the economy remains fragile, that
we need to continue the accommodation from the Federal Reserve.
According to the July quarterly survey of the primary
dealers by the New York Fed, the Fed's balance sheet will reach
almost 24 percent of GDP in the first quarter of 2014. And I am
concerned about the size of the Fed's balance sheet and its
impact on the economy and the unintended consequences of these
accommodations.
It seems to me that there is a disconnect between what the
Fed intended to accomplish and the results. A PIMCO executive
recently stated that the $4 trillion in quantitative easing may
have contributed as little as one-quarter of 1 percent to GDP
growth. And even the Fed's own economists estimates that the
QE2 added only about 0.13 percent to real GDP growth in 2010.
And another expert has indicated that Fed policies contribute
to bubble-like markets.
How do you respond to the concerns that quantitative easing
has limited impact on economic growth and is, in fact, creating
very serious risks in our financial markets?
Ms. Yellen. A number of different studies have been done
attempting to assess what the contribution of our asset
purchases have been, and, of course, this is something we can
only estimate and cannot know with certainty. But my personal
assessment would be, based on all of that work, that these
purchases have made a meaningful contribution to economic
growth and to improving the outlook.
Certainly long-term interest rates. The purpose of these
purchases was to push down longer-term interest rates. We have
seen interest rates fall very substantially. Lower interest
rates, lower mortgage rates particularly, I think have been a
positive factor in generating the recovery of the housing
sector. House prices, after having fallen very substantially,
are moving up, and that is helping substantially many
households, including the large fraction of American households
who found themselves underwater on their mortgages. It is
improving their household finances.
We have seen a very meaningful recovery in automobile
sales, spurred in part by low interest rates.
Senator Crapo. But how long can we artificially hold or
operate monetary policy in what I consider to be such extreme
levels of the quantitative easing?
Ms. Yellen. Senator, when we initiated this program, the
unemployment rate was 8.1 percent, and the committee was
somewhat pessimistic about its expectations for what we would
see in the labor market over the ensuing year. In fact, the
committee expected little or no meaningful progress in bringing
down unemployment. And when we began this program, we indicated
that our goal was to see a substantial improvement in the
outlook for the labor market.
So the progress of this program, it is not on a set course.
It is data dependent, but we have seen improvement in the labor
market.
Senator Crapo. But can it just continue indefinitely? I
mean, if the labor market does not improve to the point that
you reach your target, how long can this continue? Do you agree
that there has to be some point at which we return to normal
monetary policy?
Ms. Yellen. I would agree that this program cannot continue
forever, that there are costs and risks associated with the
program. We are monitoring those very carefully. You noted
potential risks to financial stability, and those are risks
that we take very seriously.
The committee is focused on a variety of risks and
recognizes that the longer this program continues, the more we
will need to worry about those risks. So I do not see the
program as continuing indefinitely.
Senator Crapo. Do you have any estimate right now as to
when there may be a beginning of the tapering?
Ms. Yellen. Well, we at each meeting are attempting to
assess whether we have seen meaningful progress in the labor
market, and what the committee is looking for is signs that we
will have growth that is strong enough to promote continued
progress. As the FOMC indicated in its most recent statement,
we do see strength in the private sector of the economy, and we
are expecting continued progress going forward. So while there
is no set time that we will decide to reduce the pace of our
purchases, at each meeting we are attempting to assess whether
or not the outlook is meeting the criterion that we have set
out to begin to reduce the pace of purchases.
Senator Crapo. My time has expired. Thank you.
Chairman Johnson. Senator Menendez.
Senator Menendez. Well, thank you, Mr. Chairman. Thank you,
Dr. Yellen. I appreciated our visit together.
Let me ask you, as the Federal Reserve has engaged in
measures to strengthen our economy, some critics have argued
that any growth that results might somehow be artificial--I
know we have heard that here--or that low interest rates and
cheaper credit might lead to financial instability or asset
bubbles if investors make riskier investments in order to
``reach for the yield.''
In the current environment, though, my question is: Isn't
weak demand the greater concern? I look at consumers pulling
back on their spending because of high debt burdens, underwater
mortgages from the financial crisis, businesses holding off on
investing because of weak consumer demand. Doesn't that change
the relative costs, benefits, and risks of different monetary
policy actions?
Ms. Yellen. Well, Senator, I completely agree that weak
demand for the goods and services that this economy is capable
of producing is a major drag holding back the economy. And, of
course, the purpose of our policies, all of them, is to bring
down interest rates in order to spur spending in interest-
sensitive sectors, and if we are capable of doing that, that
will help to stimulate a favorable dynamic in which jobs are
created, incomes rise, and more spending takes place, which
will create more jobs throughout the economy. So I agree with
your diagnosis, and our programs are intended to remedy the
situation of weak demand.
On the other hand, it is very important for us to monitor
financial risks that could be developing as a consequence of
the program or of low interest rates more generally or even
more broadly of developing financial risks in the economy. No
one wants to live through another financial crisis, and the
Federal Reserve is devoting substantial resources and time and
effort at monitoring those risks.
At this stage I do not see risks of financial stability.
Although there is limited evidence of reach for yield, we do
not see a broad buildup in leverage or the development of risks
that I think at this stage poses a risk to financial stability.
Senator Menendez. Well, let me ask you--I appreciate that.
Some commentators have suggested that, in addition to managing
inflation and promoting full employment, the Fed should also
monitor an attempt to fight asset bubbles. Do you think it is a
feasible job and something that the Fed should be doing? And if
so, how would you go about it?
Ms. Yellen. Well, Senator, I think it is important for the
Fed, hard as it is, to attempt to detect asset bubbles when
they are forming. We devote a good deal of time and attention
to monitoring asset prices in different sectors, whether it is
house prices or equity prices or farmland prices, to try to see
if there is evidence of price misalignments that are
developing.
By and large, I would say that I do not see evidence at
this point in major sectors of asset price misalignments, at
least of the level that would threaten financial stability. But
if we were to detect such misalignments or other threats to
financial stability, as a first line of defense, we have a
variety of supervisory tools, micro and macro prudential, that
we can use to attempt to limit the behavior that is giving rise
to those asset price misalignments.
I would not rule out using monetary policy as a tool to
address asset price misalignments, but because it is a blunt
tool and because Congress has asked us to use those tools to
achieve the goals of maximum employment and price stability,
which are very important goals in their own right, I would like
to see monetary policy first and foremost directed toward
achieving those goals Congress has given us and to use other
tools in the first instance to try to address potential
financial stability threats. But an environment of low interest
rates can induce risky behavior, and I would not rule out
monetary policy conceivably having to play a role.
Senator Menendez. Thank you.
Thank you, Mr. Chairman.
Chairman Johnson. Senator Shelby.
Senator Shelby. Thank you. Welcome, Governor.
Would you describe the portfolio of the Federal Reserve as
unprecedented, the size of it today?
Ms. Yellen. Yes, Senator.
Senator Shelby. You are an economist, and you have been on
the Fed, and you were also the Chairman of the Economic
Advisers of President Clinton. Looking back in history, recent
history, the last 30, 40, 50 years, have you noticed any
portfolio of the Fed approaching what it is today?
Ms. Yellen. Not of the Federal Reserve, but----
Senator Shelby. That is what I mean.
Ms. Yellen. But other central banks----
Senator Shelby. I am asking about the Federal Reserve of
the United States of America.
Ms. Yellen. No, I have not, Senator.
Senator Shelby. OK. Would you describe what you are doing
here by--you call it ``quantitative easing,'' a term that has
been made up, I guess. We all make up terms. But is that a
stimulus toward the economy, a tool--you used the word, the
term ``monetary tool.'' Is that what you would call it?--to
help augment, to stimulate the economy?
Ms. Yellen. It is a tool that is intended to push down
longer-term interest rates----
Senator Shelby. Yes, ma'am. I understand that.
Ms. Yellen. ----and to stimulate demand and spending in the
economy, yes.
Senator Shelby. Is this, in the area of economics,
something that Keynes and Tobin and others have espoused over
the years at times when you have got high unemployment, to use
a monetary tool to stimulate the economy?
Ms. Yellen. Well, Tobin and Friedman and others have----
Senator Shelby. What about Keynes, too?
Ms. Yellen. I do not know that Keynes actually thought
about this.
Senator Shelby. OK.
Ms. Yellen. But a number of economists have written about
something called the portfolio balance effect that is basically
about supply and demand, that by buying up a class of assets,
it may be possible to push up their prices and push down their
yields and thereby affect financial conditions in the economy.
Senator Shelby. You know, it was said several years ago
that China was buying our bonds--in other words, we were
totally dependent on China to buy our paper, finance our
deficits, and so forth. But isn't it true that the Federal
Reserve in the last--since you had quantitative easing, is
basically the buyer of our bonds, our paper?
Ms. Yellen. Well, Senator, we are purchasing----
Senator Shelby. For the most part.
Ms. Yellen. We are purchasing a substantial, at this point,
quantity of both Treasury and mortgage-backed, agency mortgage-
backed securities. But we are certainly not doing so for the
sake of helping the Government finance the deficit. We are
doing so to achieve the goals that Congress has assigned to the
Federal Reserve in circumstances where we have run out of scope
for conducting additional normal monetary policy. Once our
overnight interest rate target has hit zero, we really have to
rely on alternative techniques, and we are certainly not the
only central bank that has recognized this and undertaken
similar programs.
Senator Shelby. Now, you have alluded to other central
banks, but, of course, you look around the world, and I do not
know of any central bank that I think we should follow myself,
and a lot of economists do not. We should set the example here
in the United States, and the Fed has historically.
I will run out of time in a minute. Unemployment, you
mentioned unemployment, stated unemployment is, what, 7.2 or
7.3 percent?
Ms. Yellen. 7.3 percent.
Senator Shelby. What is the real unemployment, that is,
people that have given up looking for a job, working part-time,
frustrated by the whole system? Is it around 13, 14 percent?
Ms. Yellen. Well, Senator, you are absolutely right that
broader measures of unemployment are much higher. Part-time
employment among people who would prefer full-time jobs or more
work are at unprecedented levels, and we have seen a
significant decline in labor force participation. Part of it
reflects an aging workforce. But some of it may be a reflection
of very weak labor market conditions where people who have been
unemployed for a long time feel frustrated about their job
prospects.
Senator Shelby. Could you quickly mention your views on
Basel III, how important Basel III is, how important it is for
our banks to make the standards of capital and liquidity, and
also the other banks in Europe? How important is that?
Ms. Yellen. Senator, it is extremely important for our
banks to have more capital, higher-quality capital. Basel III
putting those rules into effect has been an important step, and
there are further steps that we will be taking with other
regulators down the line to make sure that the most
systemically important institutions, those whose failure could
create financial distress, will be asked to hold more capital
and meet higher standards of liquidity and prudential
supervision to make sure that they are more resilient.
Senator Shelby. What have you learned since you were
President of the San Francisco Bank? You were there during the
housing bubble and the debacle. As a regulator, I hope that you
and others have learned a lot, not just the Federal Reserve but
others, that you cannot let a bubble continue to grow.
Ms. Yellen. Senator, I think that in the aftermath of the
crisis, all of us have spent a great deal of time attempting to
draw the appropriate lessons. There have been many of them. The
Federal Reserve is very focused on a broad financial stability
mandate, both in terms of our monitoring of the economy,
attempting to understand the threats that exist broadly in the
financial system, and to improve our supervision especially of
the largest institutions to make sure that we are identifying
those threats that can be risks to the economy.
Senator Shelby. Thank you.
Thank you, Mr. Chairman.
Chairman Johnson. Senator Brown.
Senator Brown. Thank you, Mr. Chairman. Welcome, Ms.
Yellen.
When Chairman Bernanke came before this Committee 3\1/2\
years ago, he noted that the two sectors that typically pull us
out of recession are housing and manufacturing--the Fed's
monetary policy through large-scale purchases of mortgage-
backed securities clearly aimed at stimulating and promoting
housing. You have spoken compellingly about the real economy. I
hope that that means a real emphasis on manufacturing,
particularly because of its impact rippling through the entire
economy.
But one of my concerns is that the Fed's monetary policy
does not do enough to serve all Americans. Last year, a
journalist described the execution of monetary policy as a sort
of trickle-down economics; it boosts the price of assets like
stocks and bonds and homes and can enrich the wealthy and Wall
Street. But it is not clear to me and, more importantly, it is
not clear to the many Americans who have not seen a raise in a
number of years that this policy increases wages and incomes
for workers on Main Street.
During your time as Chair, tell us how you will ensure that
the Fed's monetary policy directly benefits families on Main
Street in places like Cleveland and Mansfield, Ohio?
Ms. Yellen. Well, Senator, the objective of our policy is
to broadly benefit all Americans, especially those who were
seeing harm come to them and their families from high
unemployment in a recovery that has taken a long time and been,
frankly, disappointing.
It is true that in the first instance the policies that the
Fed conducts when we implement monetary policy drive down
interest rates, affect asset prices, and you used the term
``trickle down.'' We tend to affect interest-sensitive
spending--automobiles, housing--but the ripple effects go
through the economy and bring benefits to, I would say, all
Americans, both those who are unemployed and find it easier to
get jobs as the recovery is stronger, and also to those who
have jobs. You mentioned that wage growth has been weak or
nonexistent in real terms over the last several years. As the
economy recovers, my hope and expectation is that would change,
and if we can generate a more robust recovery in the context of
price stability, that all Americans will see more meaningful
increases in their well-being.
Senator Brown. Thank you. I in my role on this committee
spend a lot of time talking to bankers, to community bankers,
to the regionals like bankers at Key and Huntington and PNC and
Fifth Third and some of the largest six or seven or eight
banks, which--and I hear a concern from so many of these
bankers across the board that too big to fail still has not
been solved. In March, Chairman Bernanke said too big to fail
is not solved and gone, it is still here. Last Friday, you, I
am sure, saw the comments of the President of the New York Fed,
Bill Dudley, not exactly a populist firebrand. He said that
there are deep-seated cultural and ethical failures at many
large financial institutions. ``They have an apparent lack of
respect for law, regulation, and the public trust.'' He said
our current regulatory efforts may not solve these problems.
His view is reinforced by the fact that DOJ currently has eight
separate investigations open against the largest U.S. banks
alone.
Do you agree with what I assume you are hearing from
bankers, too, and from others and do you agree with Chairman
Bernanke and Mr. Dudley that a system where too-big-to-fail
institutions have, in Dudley's words, ``an apparent lack of
respect for law, regulation, or the public trust,'' do you
agree we have not solved the problem? And what do you do as Fed
Chair to address too big to fail?
Ms. Yellen. Senator, I would agree that addressing too big
to fail has to be among the most important goals of the post-
crisis period. That must be the goal that we try to achieve.
Too big to fail is damaging. It creates moral hazard. It
corrodes market discipline. It creates a threat to financial
stability, and it does unfairly, in my view, advantage large
banking firms over small ones.
My assessment would be that we are making progress, that
Dodd-Frank put into place an agenda that, as we complete it,
should make a very meaningful difference in terms of too big to
fail. We have raised capital standards. We will raise capital
standards further for the largest institutions that pose the
greatest risk by proposing so-called SIFI capital surcharges.
We have on the drawing boards the possibility of requiring that
the largest banking organizations hold additional unsecured
debt at the holding company level to make sure that they are
capable of resolution.
Right now the FDIC has the capacity and the legal authority
to resolve, possibly using orderly liquidation authority, a
systemically important firm that finds itself in trouble, and
they have designed an architecture that I think is very
promising in terms of being able to accomplish that.
So we are working with foreign regulators to improve the
odds of a successful resolution and continuing to put in place
higher prudential standards, capital and liquidity
requirements. We have put out a proposal for a supplementary
leverage requirement for the largest banks. So I think that
this agenda will make a meaningful difference, and we are
hoping to complete this in the months ahead.
Senator Brown. You said you look for something
potentially--something maybe to do further. How will you assess
the regs put out, the higher capital standards by the Fed, the
OCC, and FDIC? How will you assess as they go into effect if
you need higher capital requirements, not just--I mean,
certainly the surcharges, but how will you assess the
effectiveness of those?
Ms. Yellen. There are, as you know, studies that attempt to
estimate what the too-big-to-fail subsidy is in the market, and
while there are a lot of question marks around those studies,
we can look to see what is happening there.
Senator Brown. Do you believe there is a subsidy, as----
Chairman Johnson. Would the Senator wrap it up?
Senator Brown. I apologize. OK. That was the last question.
Do you believe there is a subsidy, as Bloomberg and so many
others have pointed out, of tens of billions of dollars a year
for the largest banks?
Ms. Yellen. I think there are different methodologies that
are used in different studies, and it is hard to be definitive.
But, yes, I would say most studies point to some subsidy that
may reflect too big to fail, although other factors also may
account for part of the reason that larger firms tend to face
lower borrowing costs.
Senator Brown. Thank you. I am sorry, Mr. Chairman.
Chairman Johnson. Senator Vitter.
Senator Vitter. Thank you, Mr. Chairman. Thank you, Dr.
Yellen.
I want to pick up where my colleague left off because, as
you know, I share his and many others' concerns about too big
to fail being alive and well.
As both of you noted, there are many studies that document,
even try to measure too big to fail and the market subsidy or
advantage that the megabanks have. Another is coming out today.
GAO is releasing its first study that Senator Brown and I asked
for and again confirms this in general. It focuses on the huge
discount that the Federal Reserve offered the megabanks during
the financial crisis and the huge market advantage that they
got. And, specifically, this GAO report coming out today said--
it recommended ``the Federal Reserve Board finalize policies
and procedures related to its emergency lending authority and
establish internal timelines for developing those procedures to
ensure timely compliance with Dodd-Frank Act requirements.''
What that means, really, is Dodd-Frank gives you the
ability to wind down that emergency lending authority. The
Board has not acted on that or even established, as far as I
know, internal timelines to do that.
So one obvious question related to this study coming out
today: Will you do that as Chairman? And when will you do it?
Ms. Yellen. Senator, I think that that guidance is in the
works, and we will try to get it out soon.
Senator Vitter. Do you have a general timeframe in mind?
Ms. Yellen. I am not certain just what the timeframe is,
but I will try to make sure that that happens.
Senator Vitter. OK. If I could just ask you to supplement
the record following the hearing with more specifics about the
Fed's plan to act on Dodd-Frank with regard to that.
Ms. Yellen. Yes.
Senator Vitter. Thank you.
You also mentioned increased leverage ratios for the
biggest banks. I agree that the action you supported in July in
terms of supplementary leverage ratio for larger banks was very
positive. I do not agree that it is enough, and I think even
when you consider the SIFI surcharge and other things, more
needs to be done.
Would you support going further in terms of leverage ratios
for the largest banks or not?
Ms. Yellen. I think we will have a very meaningful
improvement in capital standards by going the approach that
Dodd-Frank has recommended, which is higher risk-based capital
standards. There will be a SIFI surcharge. We are contemplating
a countercyclical capital surcharge that would add to that. We
are contemplating additional ways of dealing with problems of
reliance on short-term wholesale funding that could take the
form of a capital charge that is related to reliance on that
kind of funding, or it could take the role of margin
requirements.
I think a belt-and-suspenders kind of approach in which we
have a leverage requirement that serves as a backup because
there are potential issues with risk-based capital
requirements. Remember that we also have stress tests which are
yet another approach to assessing whether or not the largest
systemically important institutions have the wherewithal to be
able to lend, and----
Senator Vitter. I do not mean to cut you off, but if I can
follow up before my time is up, I understand those other
categories, including the SIFI surcharge. But considering all
those, including the SIFI surcharge, I personally, and others,
think you should go further with the supplementary leverage
ratio. Would you support that as we speak today or not?
Ms. Yellen. I would want to see where we are when we have
implemented all of the Dodd-Frank requirements that we need to
put in place.
Senator Vitter. OK. A final question. You have said in the
past, ``Like Chairman Bernanke, I strongly believe that
monetary policy is most effective when the public understands
what the Fed is trying to do and how it plans to do it.''
A lot of us would agree with that, and many of us think the
best way to get there is through true openness and transparency
at the Fed, not just a better sort of managed PR campaign but
real openness and transparency.
Would you publicly support S.209? I am sure you are
familiar with that. And if not, what specific changes to that
would be required to earn your public support?
Ms. Yellen. I strongly, as I have indicated, support
transparency and openness on the part of the Fed, and I think
with respect to monetary policy, in terms of the range of
information and the timeliness of that information, we are one
of the most transparent central banks in the world. What I
would not support is a requirement that would diminish the
independence of the Federal Reserve in implementing and
deciding on implementing in monetary policy.
For 50 years Congress has recognized that there should be
an exception to GAO ability to audit the Fed to avoid any
political interference in monetary policy. I believe it is
critically important to the economic performance of this
country--and we have seen this around the world--that allowing
a central bank to be independent in formulating monetary policy
is critical to assuring markets and the public that we will
achieve price stability. And I would be very concerned about
legislation that would subject the Federal Reserve to short-
term political pressures that could interfere with that
independence.
Senator Vitter. Thank you, Mr. Chairman.
Chairman Johnson. Senator Tester.
Senator Tester. Yes, thank you, Mr. Chairman. I want to
thank you for being here, Vice Chair Yellen.
At the end of October, the Federal Reserve formally applied
for application in the--International Association of Insurance
Supervisors for membership. The United States already has
membership on that through the Federal Insurance Office created
by Dodd-Frank. Can you tell me why the Fed should have its own
membership on that board and, furthermore, why there should be
a focus on that when domestic oversight challenges seem to be a
much higher priority?
Ms. Yellen. Well, my understanding, Senator, is that now
that the Federal Reserve has been charged with supervising some
of the largest insurance companies that have been designated by
FSOC as systemic, that we want to be in a position to work with
regulators in other countries, as we have in the case of
banking rules, to make sure that we have internationally
compatible----
Senator Tester. And the FIO----
Ms. Yellen. ----appropriate standards.
Senator Tester. Excuse me, but the FIO cannot fill that
need for you?
Ms. Yellen. I am not certain. I think we felt it would be
beneficial to participate in that group.
Senator Tester. OK. In our conversations about ensuring
capital standards are appropriately tailored to insurers, I
raised concern in this same vein with the FSOC, who I have
encouraged to develop industry-specific guidance and metrics
for systemically important financial institutions.
Do you agree that the FSOC has and should exercise its
authority to develop industry-specific guidance and metrics
rather than forcing insurers or asset managing firms, for
example, into a bank-centric regulatory model?
Ms. Yellen. Senator, I do believe that one size fits all
should not be the model for regulation and that we need to
develop appropriate models for regulation and supervision of
different kinds of institutions. Insurance certainly has some
very unique features that make them very different from banks,
and we are taking the time to try to study what the best way is
to craft regulations that would be appropriate for those
organizations.
Senator Tester. So what I am hearing you saying is that a
bank-centric regulatory model would not work for insurance
companies in this country?
Ms. Yellen. Well, there certainly are critical differences
in terms of their business models that we want to understand
and respond to.
Senator Tester. OK. I want to express a serious
disappointment with a recent decision by FSOC not to release
for public comment a study produced by the Office of Financial
Research regarding the asset management industry. While the
Council has publicly indicated that it would release any
metrics or guidance on this industry for public comment, it has
declined to release this study, which will presumably provide
formal basis for future consideration.
If you are confirmed as Chairman of the Fed and a member of
the FSOC, will you ensure that the Council lives up to its
commitment of transparency? And will the Fed support efforts to
make any potential evaluation metrics and studies on which they
may based available for public comment?
Ms. Yellen. Senator, I have not participated in FSOC, but
if I do so, I will try to take those concerns seriously.
Senator Tester. If you are confirmed, you will be
participating in FSOC.
Ms. Yellen. I will.
Senator Tester. And the question is about transparency, and
it is the transparency of metrics that are going to be used
that people need to have the ability to comment on before they
are applied. And I guess my question to you is: Will you be
willing to make that commitment to transparency as it applies
to the FSOC?
Ms. Yellen. I will need to study this issue more closely in
terms of what FSOC's procedures are, but I feel it should be
clear why a particular firm has been designated if that occurs.
Senator Tester. And the metrics that they are using for
that designation. OK.
In closing, I just want to say thank you for your
willingness to work on the end user issue that we discussed
last week. I very much appreciate it.
Thank you, Mr. Chairman.
Chairman Johnson. Senator Kirk.
Senator Kirk. Dr. Yellen, I would like to ask you a
technical question on behalf of large insurance employers in
Illinois, to extract a commitment from you to do a cost-benefit
analysis if we are to require them to switch from SAP to GAAP
accounting, which they have warned me could cost a couple
hundred million dollars.
Ms. Yellen. Senator, I am aware that there is an issue
around different accounting standards in insurance companies. I
have not had a chance to study that myself, but I would
certainly agree that this is something that we need to look
into and to consider very carefully, and pledge to do so.
Senator Kirk. Thank you, Dr. Yellen.
Mr. Chairman, thank you.
Chairman Johnson. Senator Warner.
Senator Warner. Thank you, Mr. Chairman, and thank you, Dr.
Yellen, for being here. I have a series of quick questions.
One, I guess I would like to make a comment. I understand
some of our colleagues' concerns about, you know, some of the
extraordinary measures the Fed has had to take on quantitative
easing. I guess I would simply make a comment and ask for a
short response on this. Part of our political dysfunction in
this town in terms of the ability to actually grapple with
getting our country's balance sheet right in terms of a so-
called grand bargain or even an actual budget in place, if we
were able to actually perform our functions, wouldn't that
allow you to move out of these extraordinary measures in a
quicker manner?
Ms. Yellen. Well, Senator, it is certainly the case that
the economy has suffered over the last year a substantial drag
from fiscal policy. The CBO estimates that the drag amounts to
something like 1.5 percent on growth, and as we commented in
our FOMC statement most recently, taking account of that large
amount of fiscal drag, the economy, even though it has only
been growing around 2 percent, is showing greater momentum. So
I think it is fair to say and I would expect that if there were
less fiscal drag--and I hope there will be less going forward--
that the economy's growth rate is going to pick up.
So certainly that has been a headwind on the economy and
something that we have tried to offset, but obviously our tools
to do so--it is not perfect, not----
Senator Warner. Right. And, obviously, Government
shutdowns, which cost, the latest estimate, $24 billion or
potential default threats, which result in spikes of interest
rates, sure as heck do not provide that predictability.
I want to actually follow up as well where Senator Tester
left off. I have to say, as someone, along with my friend
Senator Corker, we are very involved in Title I and Title II, I
have been personally disappointed in the FSOC's ability to kind
of be that interagency arbiter around regulatory conflicts. I
have also been somewhat disappointed with the actions so far of
the OFR, and I simply would say I think it is a--I hope as you
move into this role on the FSOC there will be financial
institutions, nonbank financial institutions that will be
SIFIs. Senator Tester mentioned asset management firms. It did
seem to me as well that the OFR's report did not have a lot of
collaboration, did not have a lot of clarity, and I would hope
that in your role on the FSOC--and, again, I think one of the
reasons why I wish we ended up with an independent chair on the
FSOC, but you will clearly have an outsized role as the Fed
representative--that we try to give some clarity that we do not
think we are going to view everything through a bank-centric
regulatory prism, that we realize as we look at nonbank
institutions that maybe require that SIFI designation, that we
give some clarity about how we are going to evaluate those
nonbank institutions.
Ms. Yellen. I think that is completely fair and a very
reasonable and logical objective for FSOC to have. Our staff
have been working very closely with FSOC and the OFR, trying to
participate constructively and facilitate the works of those
groups.
Senator Warner. Well, I would just add my voice to Senator
Tester's that we would like to see that transparency as we
start to evaluate nonbank institutions for SIFI designation so
we kind of all know the rules going forward. I think that would
be helpful.
One of the things--as we think about balance sheets and
stimulation or getting more private capital lent, one of the
things I know that the Fed pays interest on excess reserves of
the banks, but I believe now you are holding about $2.4
trillion of those banking excess reserves, and I think we pay
25 basis points. We have seen other central banks, I think
Denmark and others, start to lower those payments. Would you
consider that possibility of, in effect, incenting the banks to
get this capital not on your balance sheet but back out into
the marketplace to stimulate more loans and more private
capital into the market?
Ms. Yellen. Senator, that is something that the FOMC has
discussed and the Board has considered on past occasions, and
it is something we could consider going forward.
We have worried that if we were to lower that rate too
close to zero, we would begin to impair money market function,
and that has been a consideration on the other side. But it
certainly is a possibility, Senator.
Senator Warner. I would just say that I would ask you to
look at this as well because it is one of the ways, without
necessarily growing your balance sheet, that some of my
colleagues have expressed a concern with.
Thank you.
Ms. Yellen. Thank you, Senator.
Chairman Johnson. Senator Heller.
Senator Heller. Thank you, Mr. Chairman, and, Dr. Yellen,
thank you very much for being here today. And I also want to
thank your family for taking time and showing their support. I
think that makes a real difference.
Question: Do you follow gold prices?
Ms. Yellen. To some extent.
Senator Heller. Do you believe there is any economic
indicator behind the rise and fall of gold prices?
Ms. Yellen. Well, I do not think anybody has a very good
model of what makes gold prices go up or down, but certainly it
is an asset that people want to hold when they are very fearful
about potential financial market catastrophe or economic
troubles entail risks. And when there is financial market
turbulence, often we see gold prices rise as people flee into
them.
Senator Heller. Well, that was a better than I got from
Chairman Bernanke last July. I asked him the same question, and
he said that nobody really understands gold prices, and he went
on to say, ``And I do not pretend to really understand them
either.'' Do you share that view, clearly with the few extra
tidbits that you just shared with us?
Ms. Yellen. Beyond what I shared, I do not have strong
views on what drives them. I have not seen a lot of models that
have been successful in predicting them.
Senator Heller. Thank you. You talked in your general
statement at the beginning about the role of the Federal
Reserve: promoting conditions that foster maximum employment,
low and stable inflation, safe and sound financial system. Do
you believe we have a safe and sound financial system today?
Ms. Yellen. I think we have a much safer and sounder
financial system than we had pre-crisis, but as I indicated, we
need to do more. We are not at the end of the road in terms of
putting in place regulations and enhanced supervision that will
make the system as safe and sound as it needs to be to contain
systemic risk.
Senator Heller. The reason I raise the question is we had
this discussion when you were in my office about community
banks, and sitting as Chairwoman of the San Francisco Federal
Board, you have a pretty good understanding of what is going on
out West--California, Nevada. And as you are aware, and as I
shared with you, we have lost half of the community banks and
credit unions in our communities, making it very, very
difficult for choices, making it very difficult for housing
recovery, getting loans for small businesses. I guess the
question is: What steps will you take to avert a culture of
consolidation of these major banks and the loss of the small
community banks?
Ms. Yellen. Well, Senator, in the first place, to the
extent that the large banks have an advantage because they
benefit from a too-big-to-fail subsidy, I think our objective
in regulation should be to put in place tough enough
regulations and capital and liquidity standards that would
level the playing field. Since those firms do pose systemic
risk to the financial system, we should be making it tougher
for them to compete and encouraging them to be smaller and less
systemic.
And with respect to the community banks, we need a model
for supervision of them that is different and much less onerous
and has much less regulatory burden and is appropriate to their
business model. We are obviously imposing on the largest
systemic institutions much higher and more onerous prudential
standards.
Senator Heller. And I appreciate your comments, because I
do believe the one size fits all is what is really at a
disadvantage for the community banks and these smaller banks.
A quick question about quantitative easing. Do you see it
causing an equity bubble in today's stock market?
Ms. Yellen. Stock prices have risen pretty robustly, but I
think that if you look at traditional valuation measures, the
kind of things that we monitor akin to price equity ratios, you
would not see stock prices in territory that suggests bubble-
like conditions. When we look at a measure of what is called
the ``equity risk premium,'' which is the differential between
the expected return on stocks and safe assets like bonds, that
premium is somewhat elevated historically, which again suggests
valuations that are not in bubble territory.
Senator Heller. Do you believe there is a Federal role to
support the stock market?
Ms. Yellen. A Federal role to support the stock market?
Senator Heller. A Federal role.
Ms. Yellen. No.
Senator Heller. Thank you.
Thank you, Mr. Chairman.
Chairman Johnson. Senator Merkley.
Senator Merkley. Well, thank you, Mr. Chair, and thank you,
Dr. Yellen. And I do not believe any nominee for this position
has come with such an extensive set of qualifications, and it
is fascinating to read the diversity of your writings over the
last four decades.
I wanted to give a special welcome to Karla Chambers, who
represented Oregon very well on the Board of Directors of the
Federal Reserve Bank of San Francisco.
A number of issues have arisen in the international banking
community just since the meltdown in 2008, including LIBOR rate
manipulation, energy market manipulation, the London Whale,
massive issues related to money laundering, robo-signing fraud
on foreclosure documents. The Fed plays an important role in
regulation and supervision. Can the Fed under your leadership
help restore public faith in our regulatory system?
Ms. Yellen. Senator, I feel that that is an exceptionally
important goal and one that I am happy to espouse and work
toward. I absolutely feel that that is essential and
appropriate, yes.
Senator Merkley. Thank you very much. And, second, I wanted
to ask you to address the rules that are being completed on the
Volcker Rule or firewall, which creates a wall between hedge
funds that make risky bets with funds from private investors
and commercial banks that have insured deposits and access to
the discount window and play an essential role in providing
loans to individuals and businesses.
There has been a lot of concern that this firewall will be
compromised with loopholes related to liquidity management,
portfolio hedging, and market making. Can we count on the Fed
under your leadership to work with the other regulators to
produce a strong Volcker Rule? And perhaps it will be completed
before you are there because they are in the final stages. But
if so, to implement it in a fashion that keeps faith with this
goal of reducing systemic risk by keeping the commercial
banking world in the commercial banking sphere?
Ms. Yellen. Yes, Senator, we are working very closely and I
believe constructively on this rulemaking with the other
agencies. We are certainly trying to be faithful to the intent
of this rule, which is to eliminate short-term financial
speculation in institutions that enjoy the protection of the
safety net. The devil here is in the details. The rule does
permit appropriate hedging in market-making activities, and we
are trying to devise a rule that will permit those activities
but absolutely be faithful to the intent that Congress had
here.
Senator Merkley. Thank you. And, third, I wanted to ask you
to ponder an issue that received considerable attention
regarding commodities and the concern that under a certain
situation, large banks will be able to put their thumb on the
scale through their ownership of electric power generation
facilities, pipelines, oil tankers, warehouses for key metals.
And there is certainly a history in terms of Gramm-Leach-
Bliley, in terms of grandfathered commodity investments, and in
terms of related activities.
But there is concern that the ability to influence supply
and demand and affect price while at the same time as having
the ability to make bets on the price creates a conflict of
interest that provides essentially a hidden tax on the American
economy. And the Fed does have regulatory powers related to
this, and can you maybe chew on this a little bit in terms of
your perspectives?
Ms. Yellen. Senator, we are involved in a very
comprehensive review of commodities activities in financial
holding companies. As you indicated, we allowed some activities
that we deemed to be complementary to financial activities, and
we are reviewing what is appropriate there. In addition,
Congress, as you noted, grandfathered certain activities in
firms that later become financial holding companies. We want to
make sure that these are conducted in a safe and sound manner,
and we may be involved in additional rulemaking as we complete
this review.
With respect to market manipulation, I would just note,
though, that it is the role and responsibility of market
regulators, particularly the CFTC here, to be looking into
possibilities of market manipulation and we would certainly
cooperate in any look there. Our main role is prudential and
safety and soundness.
Senator Merkley. Well, thank you so much for being willing
to consider taking on this role at the Fed and bringing your
expertise to bear and your past public service, and I certainly
wish you well. Thank you.
Ms. Yellen. Thank you, Senator.
Chairman Johnson. Senator Corker.
Senator Corker. Thank you, Mr. Chairman. And, Dr. Yellen,
thank you for being here, and I appreciate the time in our
office and your transparency here today.
Just for the Committee's record, if you would, share with
all of us how many rate increases you have voted for during
your term on the Federal Reserve.
Ms. Yellen. I served as a Governor from 1994 to 1997, and
we had a cycle of rate increases during that time.
Senator Corker. If you could just give me the number so I
can----
Ms. Yellen. I believe 20 or more.
Senator Corker. Twenty or more. I think it was maybe 27 or
so.
Ms. Yellen. It could be.
Senator Corker. And how many have you voted against?
Ms. Yellen. None.
Senator Corker. OK. I thought that was just good to get
into the record, and I appreciate----
Ms. Yellen. I appreciate that.
Senator Corker. ----you very much for being here. We talked
a little bit about monetary policy, maybe more than a little
bit in the office, and I think one of the things that we
discussed was my concern--and I think yours, too--that in many
ways easy money is an elitist policy. It is the ultimate
trickle-down, and that, you know, it is based on the premise
that you are going to have this wealth creation. And what we
have seen, obviously, is the largest Wall Street institutions
have done the best and that fund managers have made a lot of
money, but it generally has not trickled down to the economy.
And as you were mentioning earlier, it is a blunt object.
Would you agree that while it has been an attempt to
stimulate the economy, the more well off have benefited much
better than those at the lower end of the spectrum?
Ms. Yellen. Well, to the extent that low interest rates do
have an impact on asset prices, these policies have probably to
some extent boosted the stock market, which may be an example
of what you are talking about. But it has also played an
important role, I think, in helping the housing sector and
boosting housing prices. And I think this is something that has
been broadly beneficial to all those Americans who own homes
and has improved their sense of financial well-being, and that
is broad based.
Senator Corker. We talked a little bit about the Fed in the
early summer began to talk about moderating the pace at which
it was going to be making purchases. And the market had a
pretty stringent reaction, and the Federal Reserve appeared as
if it had touched a hot stove and that this policy was going to
greatly affect, if you will, the wealth effect that you were
trying to create the policy of moderating. And so the Fed
jumped back, and it seemed to me--and I think you discussed
this a little bit in the office--that the Fed had become a
prisoner to its own policy, that to really try to step away
from QE3 was really going to shatter possibly the markets and,
therefore, take away from the wealth effect.
I wonder if you could talk a little bit about some of the
discussions that were taking place during that time.
Ms. Yellen. Well, Senator, I do not think that the Fed ever
can be or should be a prisoner of the markets. Our job----
Senator Corker. But to a degree in this case, it did affect
the Fed, did it not?
Ms. Yellen. Well, we do have to take account of what is
happening in the markets, what impact market conditions are
likely to have on spending and the economic outlook.
So it is the case--and we highlighted this in our
statement--when we saw a big jump in rates, a jump that was
greater than we would have anticipated from the statements that
we made in May and June, and particularly saw mortgage interest
rates rise in the space of a few months by over 100 basis
points, we had to ask ourselves whether or not that tightening
of conditions in a sector where we were seeing a recovery, and
a recovery in housing that could drive a broader recovery in
the economy, we did have to ask ourselves whether or not that
could potentially threaten what we were trying to achieve.
But overall we are not a prisoner of the markets. I
continue to feel that we are seeing an improvement in the labor
market, which was the goal of the program, and we will continue
to evaluate incoming data and to make decisions on the program
in that light going forward.
Senator Corker. Thank you. I am just a little bit of a
prisoner, maybe not fully. I understand. I would just--my last
question is: You talked a little bit about monitoring sort of
the financial markets, and I know that it is--again, monetary
policy is a blunt instrument. I know that you have been
credited with, back in 2005, signaling that the housing market
was bubbling, if you will, in that part of the country.
I guess my question is: Do you believe that under your
leadership the Fed would have the courage to, when it saw asset
bubbles, even though you only have blunt instruments--and I
realize that--would it have the courage to actually prick those
bubbles and ensure that we did not create another crisis?
Ms. Yellen. Senator, no one who lived through that
financial crisis would ever want to risk another one that could
subject the economy to what we are painfully going through and
recovering from. And we have a variety of different tools that
we could use if we saw something like that occur. They include
tools of supervision and monetary policy is a possibility----
Senator Corker. And you would have the courage to do that?
Ms. Yellen. I believe that I would, and I believe that this
is the most important lessons learned from the financial
crisis, Senator.
Senator Corker. Mr. Chairman, thank you for having this
hearing, and, Dr. Yellen, I do want to tell you I very much
appreciate your candor and transparency. I really do. I
appreciate the conversation both in the office--and I want to
thank you for giving the same answers to questioners here today
that you gave in the office, so thank you very much.
Ms. Yellen. Thank you very much, Senator. I appreciate
that.
Chairman Johnson. Senator Hagan.
Senator Hagan. Thank you, Mr. Chairman. Thank you, Ranking
Member Crapo. I want to echo what I am sure everybody has
stated. I have been impressed by the depth of your background,
your experience, and your expertise. We are very honored to
have you here and thank you for your testimony.
I wanted to talk about Section 716 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act. Section 716 requires
that banks with access to deposit insurance or the Federal
Reserve discount window to push out certain derivatives such as
equity and commodity-based swaps in to separately capitalized
affiliates.
This move would raise cost to the end users without
significantly reducing risk to the financial system. Chairman
Bernanke has consistently stated that the Federal Reserve had
concerns about the swaps push-out rule prior to the enactment
of Dodd-Frank and that they still have concerns about it today.
Are your views on this issue consistent with Chairman
Bernanke's? Would you share the view that it is a good idea to
repeal parts of the swaps push-out rule?
Ms. Yellen. Senator, as you indicated, the Federal Reserve
and other agencies did have concerns about this rule and they
expressed them when Dodd-Frank was being considered. We are
working very hard to address some of the concerns around this
rule, and we think that we are likely to be able to do so. I
certainly hope that in the final rule we will be able to
effectively address some of the concerns that people had. That
is my hope. We are certainly trying to do that.
Senator Hagan. What is your timeframe on that?
Ms. Yellen. I believe this is something we hope to get out,
hopefully, later this year.
Senator Hagan. You could address some concerns, but not
all, without changing Section 716?
Ms. Yellen. I believe that that is the case. We are hopeful
that we will be able to find ways to address the concerns.
Senator Hagan. OK.
Ms. Yellen. We understand the concerns and we are trying
very hard to----
Senator Hagan. Do you share Chairman Bernanke's viewpoint?
Ms. Yellen. I believe so. About the concerns that are there
and the need to address them, I am hopeful that we will be able
to do so in the rule.
Senator Hagan. OK. Thank you. Since the start of QE the
financial markets have responded to pronouncements by the
Federal Open Markets Committee. Are you at all concerned that
markets are too driven by speeches and official pronouncements
from central banks around the world? If the suggestion of
tapering can contribute to volatility in asset prices, can we
expect more volatility in the future?
Ms. Yellen. Well, at the Federal Reserve, and I think this
is true of other central banks, we are trying as hard as we can
to communicate clearly about monetary policy, both our goals
and our intentions in terms of how we carry out programs. Now,
this is challenging. We are in unprecedented circumstances. We
are using policies that have never really been tried before,
and multiple policies, and we are trying to explain to the
public how we intend to conduct these policies.
So it is a work in progress, and sometimes miscommunication
is possible. But I think my own view would be we certainly want
to diminish any unnecessary volatility. Sometimes there is
volatility because we all learn news about the economy that
changes our views about the course of the economy and the
course of policy, and there it is natural to see a response.
But to diminish unnecessary volatility, I think we have to
redouble our efforts to communicate as clearly as we possibly
can, and that will be my emphasis.
Senator Hagan. Thank you, Mr. Chairman.
Chairman Johnson. Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman, and Dr. Yellen,
thank you for being here. Thanks for our chat earlier this
week. I appreciate that.
I want to get back to where--some of the issues Senator
Corker was raising regarding monetary policy. But first, I just
think it is important to stress, and I know you are very well
aware of these, but the adverse consequences that we are
already experiencing directly as a result of the extraordinary
monetary policy is really problematic, I think.
We continue to have this artificially suppressed cost of
funding these excessively large deficits that we run. It
contributes to, I would argue, fiscal imbalances. We are
punishing middle class savers for years now, people who spent
an entire working lifetime choosing to forego consumption
because they decided they would save and they would have a
little sum, a little bit of income in their retirement and now
they have no income because they earn nothing on their savings,
but they do watch as it gradually gets eroded, even by a low
level of inflation, when they have no income from it.
We have exacerbated the problems of under-funded pension
plans and we have got distortions in financial markets. So
these are all the things that have been occurring, I would
argue, and continue to occur. And yet, what worries me perhaps
even more is the point that Senator Corker was getting to, I
think, which is, what happens when this morphine drip starts to
end?
At some point, some time, this is going to be--we are going
to move away from this, I assume. I think everybody believes
that. And the assumption seems to be that the markets will
behave very benignly when that occurs. And yet, we have seen, I
think, some worry, some glimpses that maybe that is not a safe
assumption.
Back in June, the mere suggestion that some of the members
of the Fed might be contemplating stepping back a little
earlier, and 10-year Treasury backs up 100 basis points.
Yesterday, the release of your testimony and the equity markets
rally.
Does this not feel like there is something a little
artificial here, and is it not possible that while you have
many tools available to begin and unwind, to retreat from this,
that the markets may not respond very well and that we could
end up creating a real problem as we try to exit from this?
Ms. Yellen. Senator, you made a number of different points
and I think the first point you mentioned is that low rates, in
a way, give rise to fiscal irresponsibility, that it takes the
pressure off Congress.
Senator Toomey. Make it easy.
Ms. Yellen. You know, we have established low rates in
order to get the economy moving, which is Congress's mandate to
us. I think it is important for Congress to recognize that as
the economy recovers and both short- and long-term rates move
up, a situation in which the Government's funding costs remain
as low as they are, if we are successful in achieving our goal
of getting the economy back on track, this is a very temporary
situation.
And so, I believe Members of Congress should be looking out
a few years to a time when rates are going to be higher. Low
interest rates harm savers; it is absolutely true. And this is
a burden on people who were trying to survive on the income
from a CD. There is not much they can get.
But if you think about, how can we get rates back up to
normal, I would argue that we cannot have normal rates unless
the economy is normal. At the moment, we have a lot of saving
and not very much investment, and there are fundamental reasons
here why rates are low.
So pursuing a policy of low rates to get the economy moving
will be enable us to normalize policy and to get rates back to
normal levels over time.
In terms of jumps in rates, we will, as the economy
recovers, need to withdraw the monetary accommodation we have
put in place, and we will make every effort to do so at a pace
that is appropriate to continue the recovery and to maintain
price stability, and to communicate that plan to markets.
But as we have seen, and as you indicated, it is possible
for rates to jump. It is not just true now, but in previous
tightening cycles like the one we had from 1994 to 1995, where
long rates moved up over the span of 6 months over 100 basis
points. We have tried to make sure the financial system is more
resilient.
In our stress tests, we have tested and continue to do so
in this round to make sure that banks are appropriately
managing interest rate risk. And that is a risk that we will
try to mitigate. But it is inherent in any tightening cycle.
Senator Toomey. Mr. Chairman, I know I am running out of
time. Just two quick points I would like to make. One is, I
would like to express my concern, which is the exact opposite
of the concern that was raised by Senator Merkley, which is, I
think, the danger of the implementation of the Volcker rule is
actually--it could be too restrictive and increase the cost of
especially corporate bond issuers.
I think the decision by Congress to exempt U.S. Treasuries
was an implicit acknowledgment that when you ban proprietary
trading in those instruments, you make them less liquid and
more expensive for issuers. I am told that the next rule might
very well also exempt other sovereign issuers, which is another
implicit acknowledgment of this problem.
This is a problem for corporate issuers in America and I am
very concerned that we not unnecessarily raise their cost of
borrowing.
And the last point I would make is, I am deeply concerned
about the consolidation that is happening in small banks, the
lack of new small banks. As you know, we used to routinely
launch sometimes hundreds of new community banks. I am told by
the FDIC there is not a single new community bank that has been
launched since 2010.
The regulatory compliance for institutions that have no
systemic risk to the economy is way overboard, and I hope you
will make an effort to diminish that burden.
Ms. Yellen. I promise to do so, Senator.
Senator Toomey. All right. Thank you.
Chairman Johnson. Senator Warren.
Senator Warren. Thank you, Mr. Chairman. Thank you, Dr.
Yellen.
There has been a lot of talk today about the Fed's use of
quantitative easing to try to help the economy get back on its
feet. But the truth is, if the regulators had done their jobs
and reigned in the banks, we would not need to be talking about
quantitative easing because we could have avoided the 2008
crisis altogether.
So I want to focus on the Fed's regulatory and supervisory
responsibilities to keep the big banks in check. Now, I am
concerned that those responsibilities just are not a top
priority for the Board of Governors. Earlier this year, the Fed
and the OCC reached a settlement with 13 mortgage servicers
that engaged in a long list of illegal foreclosure activities,
and the settlement was for over $9 billion. It directly
affected more than four million families. But the Fed's Board
of Governors never voted on whether to accept the settlement.
Instead, this decision was just left to the staff. Now, the
Fed has smart, hardworking staff, but the Board of Governors
would never delegate critical monetary policy to them. And yet,
even now, after the biggest financial crisis in generations,
the Board seems all too willing to delegate critical regulatory
and supervisory decisions.
So I think we need to make reigning in the banks a top
priority for the Board. So I know the Board meets regularly to
discuss monetary policy. Do you think the Board should have
regular meetings on supervisory and regulatory issues as well,
making it clear that both of those are important to the Fed?
Ms. Yellen. Well, Senator, I absolutely believe that our
supervisory responsibilities are critical and they are just as
important as monetary policy, and we need to take them just as
seriously and devote just as much time and attention to them as
we do to monetary policy.
The Board operates under a variety of restrictions. You may
know about the Government in the Sunshine Rule, and so when you
suggest that the Board meet to discuss regulatory matters, our
ability to do so outside of open meetings is very limited.
And so, we tend to handle those by meeting individually
with staff or meeting in small groups. We have a committee
system where committees are put in charge of managing
particular areas and making recommendations to the Board.
I remember in the 1990s that the Board did regularly meet
to discuss supervisory issues because there is confidential
supervisory information and it is easier for us to have a
meeting. I did consider those very valuable. And so, I think
that is a very worthwhile idea.
I should just say, when there are delegations to staff and
the Board of Governors does not vote, that does not mean that
Board members are not consulted, and maybe those with expertise
may have played a critical role and had very important input,
even when there is no formal vote by the Board of Governors.
Senator Warren. Fair enough. But I think it is an important
signal here and I am glad to hear that you are thinking about
this and thinking about the question of the appropriate
delegation to staff and when it is appropriate to delegate to
staff.
Could I ask you just to say something briefly about that,
about when it is appropriate to staff and when you have to
retain for the Board itself? Just very briefly, if you could,
because I want to get on to one other question.
Ms. Yellen. I believe there are certain matters that, under
law, the Board must vote on, supervisory findings, mergers, and
so forth, or rule changes. Typically, we delegate enforcement
matters to the staff in the area of supervision.
Senator Warren. And I am glad to hear, though, that you
want to continue to think about that, particularly when we are
talking about something this important.
Ms. Yellen. Yes.
Senator Warren. I want to ask you one other fundamental
question here, and that is, do you think that the Fed's lack of
attention to regulatory and supervisory responsibilities helped
lead to the crash of 2008?
Ms. Yellen. In the aftermath of the crisis, we have gone
back and tried to look carefully at what we should have done
differently, and there have been important lessons learned. We
have massively revamped our supervision, particularly of the
largest institutions, where we are simultaneously reviewing all
of the largest institutions, and the Federal Reserve system
works jointly on these reviews. We no longer delegate to
individual Reserve banks the supervision of, say, one or two of
these large institutions.
It has also become an interdisciplinary matter that the
economists and lawyers and others are involved in. So we have
learned a lot there about supervision. I would say, one of our
top priorities now is ramping up our monitoring of the
financial system as a whole to detect financial stability
risks. I think that is something that we were not doing in an
adequate basis before the crisis.
And so, we missed some of the important linkages whereby
problems in mortgages would rebound through the financial
system.
Senator Warren. Thank you very much. Thank you, Mr.
Chairman. I just want to say, Dr. Yellen, when you are
confirmed, and I very much hope you are confirmed, that I am
glad to hear you will make it a top priority for the Federal
Reserve to engage in the supervisory and regulatory
responsibilities that help keep our financial system safe, and
that cannot be something that is merely an afterthought, but
has to be a primary effort on your part.
Ms. Yellen. Thank you, Senator. I completely agree with
that.
Senator Warren. Good. Thank you. Thank you, Mr. Chairman.
Chairman Johnson. Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman, and
Governor, you demonstrated your wisdom early by going to Brown
University in Providence, Rhode Island.
Ms. Yellen. Thank you, Senator.
Senator Reed. Everything else after that is, I know,
anticlimactic, but when you are confirmed as the Chairman of
the Federal Reserve, it will be consistent with your record of
wise selections and wise choices.
Chairman Bernanke has indicated that many times our fiscal
policy and our monetary policy have been working at cross
purposes. The Federal Reserve has been quantitative easing.
They have been trying to get an expansive policy in place and
we have been contracting, shutting the Government down. We
anticipate--I hope we can avoid this--but we are going to end
unemployment--mercy unemployment insurance abruptly at December
31st.
How would your job and, obviously, the size and scope of
your portfolio and everything else, maybe the question has been
asked today, be affected if our fiscal policy was complementary
to your monetary policy?
Ms. Yellen. Well, Senator, I agree that fiscal policy has
been working at cross purposes to monetary policy. I certainly
recognize the importance of the objective of putting the U.S.
deficit and debt on a sustainable path. Congress has worried
about that and I think it is important to do so.
But some of the near-term reductions in spending that we
have seen have certainly detracted from the momentum of the
economy and from demand, making it harder for the Fed to get
the economy moving, making our task more difficult. And it
certainly would be helpful, going forward, if it were possible
for deficit reduction efforts to focus on achieving gains in
the medium term horizon and addressing those aspects of fiscal
policy that give rise to concerns about debt sustainability
over the medium term while not subtracting from the impetus
that we need to keep a fragile recovery moving forward.
Senator Reed. And such a policy, a fiscal policy, would
help you in terms of what we all anticipate is the point at
which you have to begin your tapering, because basically this
balance would allow you more flexibility and more confidence
that when you start to taper it, it would not lead to a reverse
to a poor economy. Is that fair?
Ms. Yellen. I think that is fair, Senator, because we are
worried about a fragile recovery and a more supportive fiscal
policy or one that, at least, had less drag that did no harm
would make life easier.
Senator Reed. Let me switch gears slightly, and that is
that we were a few weeks ago discussing the possibility of
default on our debt and the markets were beginning to react.
And given the central role that Treasury securities play, not
just in funding the Government, but also the tri-party
repurchase markets, the collateral markets across the globe.
Were you beginning to see at the Fed sort of ominous signs of a
potential catastrophic impact of the default?
Ms. Yellen. Well, Senator, I do believe that a default on
the U.S. debt would be catastrophic, and we did see some signs
in the run-up to the debt ceiling that suggested that financial
markets were taking notice and that there were preemptive
protective actions that market participants were beginning to
do to protect themselves from what could have been catastrophic
consequences.
More generally, I think we did see an impact on consumer
and business confidence that is not helpful to a general
willingness to make investments in the economy.
Senator Reed. And just a final point. We have been talking
a lot about the size of your portfolio, but essentially--and I
do not want to over-simplify it--the benchmarks that typically
you are looking at is inflation and deflation and unemployment.
Ms. Yellen. Correct.
Senator Reed. And I think for a while under Chairman
Bernanke there was a real fear, particularly in 2009 and 2010,
of deflation, which would have had adverse consequences. We
have avoided that. We have avoided inflation pressures.
Ms. Yellen. We have.
Senator Reed. And what we have not yet done is got the
employment numbers at a suitable level. So I think the focus,
the traditional and appropriate focus is on those measures,
rather than just the absolute size of your portfolio. Is that
sensible?
Ms. Yellen. I think that is sensible, Senator. We are very
focused on achieving our dual mandate, which is, we absolutely
want to avoid deflation. We have a 2 percent price stability
objective. We are trying to get the economy back to full
employment. I do think we have made progress, but we are not
there yet.
On the other hand, as we recognized from the outset of the
asset purchase program, there are costs and risks associated
with a large balance sheet.
Senator Reed. Thank you. Thank you, Mr. Chairman.
Chairman Johnson. Senator Johanns.
Senator Johanns. Mr. Chairman, thank you. It is good to see
you again and thanks so much for stopping by the office the
other day.
Ms. Yellen. It is my pleasure.
Senator Johanns. I felt like we had a good conversation and
I would like to continue, if I could, with a few questions
along the lines of what we talked about in my office.
I found your testimony about asset bubbles to be
interesting. Just before the Chairman turned to me, I looked at
where the dollar is at. It is about 15,850, an economy that,
quite honestly, most everybody would recognize as too much
unemployment, an economy where people continue to struggle, an
economy where it is kind of hard to see where the growth is
going to be.
We are now starting to see real estate bidding wars, just
like the old days. Now, that is confined to cities in certain
areas of the country. We are now starting to see private equity
firms, who I think are very good at looking where the economy
is headed, and lo and behold, they are buying single family
houses.
That was a shocker to me, having owned a few rentals in the
past. I was kind of amazed that they would do that. But
obviously, they see something there. And so, Dr. Yellen, I kind
of look at these factors and I think I could go on and on with
some other items, and I must admit, what am I missing here?
I see asset bubbles. And I think if you were to announce
today that over the next 24 months you are going to bring that
balance sheet down from $4 trillion to zero, or $1 trillion, I
think if you even said over the next 4 years we are going to
bring it down from $4 trillion to zero, I think we would see
how big those asset bubbles are. Would you not agree with me on
that?
Ms. Yellen. With respect to real estate, we certainly are
seeing, as you mentioned, private investors come in to invest
and often use all cash in certain markets in the country. Is
that evidence of an asset bubble?
If you look at the markets where that is occurring, it is
in some of the hardest hit, the markets where prices went up
the most like Las Vegas or Phoenix. In my part of the country
that had the biggest crashes where you have the largest number
of foreclosures with houses being put on the market and many of
these housing markets where these investments are taking place
are ones where you have a substantial fraction of underwater
borrowers and individuals who have lost houses, whose credit is
impaired, who are not in a position to be buying houses, and
these investors are purchasing these houses often at very low
prices for cash and appear to be in the business of renting
them out over a reasonably long period of time.
I would say, we have to watch this very carefully, but I do
not see that as an asset bubble. I see that as a very logical
response of the market to generate a recovery in very hard-hit
areas.
Senator Johanns. Dr. Yellen, I do not want to be rude and
interrupt you, but I am also running out of time. Here is what
I would offer, and I think you would agree with me, although
you probably will not want to agree with me in a public hearing
setting.
But I think if I were to say to you, Why do you not
announce today that you are going to draw this down over the
next 24 months from $4 trillion to zero? I think you would see
the impact of your policies on the value of real estate all
across the United States, not just in the hardest hit areas. I
think the real estate that I own and others own would go down
in value.
I also think that the stock market would have the same sort
of reaction that it has had when Chairman Bernanke just
suggested that there might be a phase-down here. Here is what I
am saying, because now I am out of time. I think the economy
has gotten used to the sugar you have put out there and I just
worry that we are on a sugar high.
That is a very dangerous thing for the little person out
there who is just trying to pay the bills and maybe put a buck
away for retirement. The last thing I will say, the flip side
of your policies that you are advocating for are very, very
hard on certain segments of our society.
You know, explain to the senior citizen who is just hoping
that CD will earn some money so they do not have to dig into
the principal, what impact you are having on a policy that says
we are going to, for as far as the eye can see or foreseeable
future, keep interest rates low. They are hurt by that policy.
Ms. Yellen. Senator, I agree and I understand that savers
are hurt by this policy, but, if we want to get back to
business as usual and a normal monetary policy and normal
interest rates, I would say we need to do that by getting the
economy back to normal. And that is what this policy, I hope,
will succeed in doing.
The other thing I think is important is to recognize that
savers wear a lot of different hats. They play many different
roles in the economy. They may be retirees who were hoping to
get part-time work in order to supplement their income. They
may be people who have children who were out of work and who
were suffering because of that, or grandchildren who were going
to college and coming out of college and hoped to be able to
put their skills to work, finding good jobs and entering the
job market when it is strong.
I think when those people who worry about our policy,
thinking about themselves as savers, take into account the
broader array of interest they have in a strong economy, they
would see that these policies, even though they may harm them
in one respect, are broadly beneficial to them as I believe
they are to all Americans.
Senator Johanns. My time has expired. Thank you, Mr.
Chairman.
Chairman Johnson. Thank you. Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman. And thank you,
Dr. Yellen, for hanging in there with us. Those of us at the
end of the desk will love an opportunity to ask you some
questions, as well.
I want to get back to the Fed goal of full employment, and
I want to ask you just some quick questions. Give me a number
on what you consider full employment?
Ms. Yellen. We do not have a precise estimate, but every 3
months all of the participants in the FOMC indicate what they
think the normal, longer-run level of unemployment is. And in
our most recent survey, in September, the range of opinion was
5 to 6 percent.
Senator Heitkamp. OK. And tell me, what do you believe the
real unemployment rate is today?
Ms. Yellen. Well, the measured unemployment rate is 7.3
percent----
Senator Heitkamp. I know what the measured unemployment
rate is. That was not the question.
Ms. Yellen. ----but as we have discussed previously, we
have very high incidents of involuntary part-time employment.
We have all too many people who appear to have dropped out of
the labor force because they are discouraged----
Senator Heitkamp. I do not want to belabor this Committee
hearing any longer than what I have to but would you agree that
it is at least close to or probably over 10 percent?
Ms. Yellen. Well, certainly by broader measures, it is that
high.
Senator Heitkamp. And would you also agree that right now
in America we have the greatest income disparity that we have
had since the Great Depression, right before the Great
Depression?
Ms. Yellen. We have had widening wage inequality and income
inequality in this country going back to the mid- to late-
1980s, and that continues.
Senator Heitkamp. So I just want to take a moment to speak
for maybe those folks who are on the lower end who look at the
Fed policy and look at the stock market, do not have a stake as
they see it--as you just explained to Senator Johanns. We all
have a stake in this economy, but they are day-to-day. They do
not see a stake. They do not see their economic condition
getting any better. And certainly, they do not see their
employment opportunities getting any better, especially for
those with low job skills. I will not say low education but low
job skills.
So what can you do or what you done to address income
disparity, unemployment disparity in this country? And what
would you suggest that the Fed pursue to avoid the consequences
long-term of that income disparity?
Ms. Yellen. Senator, I think that you are asking about
something that is a very deep problem that has afflicted the
U.S. economy and other advanced economies. Economists have
spent a lot of time trying to understand what is responsible
for widening inequality.
Many of the underlying factors are things that are outside
of the Federal Reserve's ability to address.
Senator Heitkamp. Do you believe your policies have added
to the problem?
Ms. Yellen. I believe that the policies we have undertaken
have been meant to generate a robust recovery. I would like to
see the U.S. economy and the job market recovering more rapidly
than they are, but I believe our policies have helped.
I think, as we saw during the 1990s, when we still had
trends toward widening inequality, we did have real wage gains
and we did have a reduction in inequality when we had an
exceptionally strong and getting ever stronger job market.
So faster growth in the United States is going to help, a
stronger job market. And you know, when the economy recovers,
we are going to see firms be more willing to undertake training
when they cannot find workers. They are going to be willing
more to invest in people, to hire, to make capital investments
that will make workers more productive when they are on the
job, and we will see greater wage gains.
Senator Heitkamp. Just a final comment. I would suggest
that those at the bottom are not feeling the effects of these
policies. The trickle down has not happened for them. And so
they struggle every day and they may not see their wealth grow
because they do not hold a lot of assets.
And so anything that you can do, taking a look at this
broader issue--because this is an issue that will affect the
American economy for years to come and affect our
competitiveness in years to come. They are the consuming class.
When you look at why consumers are not consuming, because we
are not getting resources to those who do consume.
And so I thank you for your willingness to serve and look
forward to a long relationship with you.
Ms. Yellen. Thank you, Senator.
Chairman Johnson. Senator Manchin.
Senator Manchin. Thank you, Mr. Chairman. And thank you,
Ms. Yellen. I enjoyed our visit and you have done a great job
today.
Let me just say this, that I look at you and think if there
is a person who involved the last time we had a balanced
budget, the last time that we would have been on track to be
debt free, if you go back to those days I am sure there was
naysayers then said we could not do it, it will never happen.
But you all did it.
And then we went off the tracks. What I am asking is how we
get back on the tracks.
I know quantitative easing, you and I have a little
difference of opinion on this, or concern. I have a concern but
you have a concern. You have a little, I think, broader view of
what has worked or not worked around the world. I think we
spoke about Japan and why you believe that what we are doing
needs to be done.
I would only say this, if $85 billion a month in
quantitative easing has not really given us the results that we
desired, why would you not recommend doing $200 billion a
month? Why just $85 billion? We know that has not worked.
Of course, I have concerns with continuing it because I do
not think--as I think that Senator Johanns had said--we are on
a sugar high. The bottom line is you all have done your job.
You have done everything possible to prop up this economy. We
have failed miserably, as Congress, to do our job.
And to me, to get even a budget--we do not even have a
budget--and then to say that we could have a balanced budget
where people think we are crazy, it cannot happen, it will be
too harmful, a balanced budget.
Those of us who were Governors and come from the executive
branch, that is all we understand. We had to, by law.
And then to even thing that we could be debt free in the
next generation or beyond. Do you think those are impossible or
unreachable goals?
Ms. Yellen. Well, Senator, I feel achieving debt
sustainability over the medium term for this country is an
exceptionally important goal.
Senator Manchin. Could we balance a budget again?
Ms. Yellen. It requires very tough decisions, as you know--
--
Senator Manchin. Well, you all made decisions back in the
1990s. I remember the dialog, it could not be done.
Ms. Yellen. Well, we did make tough decisions. Congress and
the Administration made very tough decisions in the 1990s. They
did it in a way that I would think would set a model, in a
sense, for this Congress. When President Clinton was elected,
the economy had high unemployment. It was just beginning to
recover. The Administration and Congress wanted to achieve
deficit reduction but to do so in a way that would not harm the
economic recovery.
And so they agreed on a set of tax increases and spending
cuts, not all of which came into effect immediately but were
phased in over time.
There has been, at that time, a lot of uncertainty among
businesses and in the markets, among households, about whether
or not the Government would ever balance its budget. And the
response was very positive. Long-term interest rates came down.
Now the Fed had scope to use monetary policy to offset any
adverse impact on the economy. But we really did not see a lot
of adverse impact because of the fiscal tightness was phased in
over a period of years and the economy enjoyed a long and
robust boom.
Senator Manchin. Let me just say this, that you having that
experience and lived through it, worked through it, and was
successful with it. And we have the utmost respect for the
Reserve, yourself, and I am sure that you see the Committee has
that much respect for you.
We just need you to speak out and help us a little bit more
and challenge us to do our job. If people like yourself, who
are in the know, are unwilling to challenge us I will guarantee
you we do not have the political will, it seems like, to do
what needs to be done.
We have got to get our financial house in order. Every
citizen in America has to face a budget. Every one of them has
to live within that budget. And we are unwilling to make that
difficult decision. We are on not only a sugar high, we are
going to go into sugar shock pretty soon. That is what I have
been talking--but unless we hear the unbridled truth from
people in the know, people who have been there. They said you
could not do it and you did it.
So it is not like it is the impossible dream. We have had
budgets--we have not had one for five, going on 6 years. We
have balanced budgets. And we have had surpluses. I would like
to get back to that again, and I think people like yourself can
help us be steered in that direction.
So be bold.
Ms. Yellen. Thank you, Senator.
Senator Manchin. Be bold.
Ms. Yellen. Thanks, I appreciate that.
Chairman Johnson. Senator Schumer.
Senator Schumer. Hi, thank you, Madame Chair, and thank
everybody.
I just want to follow up first on a question that Heidi
Heitkamp talked about. And I agree with Senator Manchin that
the deficit is a serious problem. It is less of a problem than
it was a year or two ago, and I know you acknowledge that. But
it is not our greatest problem.
Our greatest problem is that middle class incomes are
declining in America for the first time in American history, in
my judgment, in terms of our political economy. And the amazing
thing is they declined not just because of the recession but
they actually declined between 2001 and 2007. And
serendipitously, if that is a word, the person who alerted me
to this tension was a professor at Harvard Law School named
Elizabeth Warren, who wrote articles about this long before
being a Senator was a gleam in her eye.
But it is our most serious problem. And if middle class
incomes continue to decline, they declined close to 10 percent
between 2001 and today, this is going to be a different
America. I tell this particularly to business executives I
meet. I get in New York, ``what is all of this populism
about?''
Well, I say you know, the American people are a generous
people. And they do not mind if the people at the top income
goes up 20 percent if theirs goes up 3 or 4 percent. When
theirs starts going down, it is a different story. We have
never had that in America.
So my question to you is how concerned are you about this?
What impact will it have on growth and our economic potential?
And does the Fed have tools to do this? I understand this
relates to some of my Republican colleagues' skittishness about
continuing some policies that maintain growth, but I do think--
given the seriousness, at least, which I regard this problem--
that the Fed has really a dual mandate which I know you
observe, which is not simply keeping inflation down and not
simply monitoring the budget deficit and its effects on our
economy, but in trying to get jobs and middle class incomes
back up again.
It is so serious, and frankly no one gives it the attention
that it needs.
Ms. Yellen. Well, Senator, I want to echo my agreement with
you that this is a very serious problem. It is not a new
problem. It is a problem that really goes back to the 1980s, in
which we have seen a huge rise in income inequality with, as
you said, for many, many years the middle and those below the
middle actually losing absolutely. And frankly, a
disproportionate share of the gains. It is not that we have not
had pretty strong productivity growth for much of this time in
the country. But a disproportionate share of those gains have
gone to the top 10 percent, and even to the top 1 percent. So
this is an extremely difficult and, to my mind, very worrisome
problem.
There is a lot of research, a lot of debate about exactly
what the causes of this problem are, perhaps having to do in
part with the nature of technological change with
globalization, with institutional changes in the United States
including the decline of unions. But there are many things that
are involved in this problem.
What can the Fed do? We cannot change all of those trends.
The solutions involve a multitude of things, including
education, maybe early childhood education, job training, other
things.
But what we can do is try to achieve, as we are, a robust
recovery so that we create jobs, we have a stronger job market.
And in a stronger job market people who are having a lot of
trouble getting jobs will be drawn into jobs. They will get
better jobs. There will be more training. People will move up
job ladders and opportunities will increase.
It is not going to put an end to the problems, these long-
term structural problems that are driving this. But it will be
helpful. And I think it is the contribution the Federal Reserve
can try to make.
Senator Schumer. Just related to that, but in a specific,
some of my colleagues have criticized for keeping rates
``artificially low.'' But is not the zero lower bound on the
short-term interest rates in some way also artificial? So let
us say rates were 5 percent today but we had high unemployment,
very low inflation. Would you not lower rates? And is not QE2
just another way to influence interest rates when you get close
to the zero mark?
So if you did not do QE, would not real interest rates be
artificially high, so to speak?
Ms. Yellen. I think that is fair, if you judge what is high
or low by the needs of the economy. People sometimes talk about
a concept called the equilibrium real rate, it is what is
natural given the levels of saving and investment in the
economy. When there is a lot of saving and not very much
investment, which is where we are now in a weak economy, the
natural forces of the economy are pushing interest rates down.
And it is these forces that we are trying to go with to--if we
were to try to push rates up when the economy has that much
saving and such weak investment, we would truly harm the
recovery.
And of course, having pushed rates to zero, according to
many estimates we would ideally have negative short-term
interest rates. Of course, we cannot achieve that. And as you
indicate, that is why we are trying to push down longer term
interest rates.
Senator Schumer. I think you will--I think you will make a
great Chair and your Brooklyn wisdom shines through.
[Laughter.]
Ms. Yellen. Thank you, very much. I never forget my roots
and I appreciate that.
Chairman Johnson. Thank you, Dr. Yellen, for your excellent
testimony.
I ask the Members of this Committee to submit any written
questions for the record for Dr. Yellen by close of business
tomorrow. Dr. Yellen, please respond promptly so that the
Committee may proceed to a markup as soon as possible.
This hearing is adjourned.
[Whereupon, at 12:16 p.m., the hearing was adjourned.]
[Prepared statement, biographical sketch of nominee, and
responses to written questions supplied for the record follow:]
PREPARED STATEMENT OF JANET L. YELLEN
To be Chairman of the Board of Governors of the Federal Reserve System
November 14, 2013
Chairman Johnson, Senator Crapo, and Members of the Committee,
thank you for this opportunity to appear before you today. It has been
a privilege for me to serve the Federal Reserve at different times and
in different roles over the past 36 years, and an honor to be nominated
by the President to lead the Fed as Chair of the Board of Governors.
I approach this task with a clear understanding that the Congress
has entrusted the Federal Reserve with great responsibilities. Its
decisions affect the well-being of every American and the strength and
prosperity of our Nation. That prosperity depends most, of course, on
the productiveness and enterprise of the American people, but the
Federal Reserve plays a role too, promoting conditions that foster
maximum employment, low and stable inflation, and a safe and sound
financial system.
The past 6 years have been challenging for our Nation and difficult
for many Americans. We endured the worst financial crisis and deepest
recession since the Great Depression. The effects were severe, but they
could have been far worse. Working together, Government leaders
confronted these challenges and successfully contained the crisis.
Under the wise and skillful leadership of Chairman Bernanke, the Fed
helped stabilize the financial system, arrest the steep fall in the
economy, and restart growth.
Today the economy is significantly stronger and continues to
improve. The private sector has created 7.8 million jobs since the
post-crisis low for employment in 2010. Housing, which was at the
center of the crisis, seems to have turned a corner--construction, home
prices, and sales are up significantly. The auto industry has made an
impressive comeback, with domestic production and sales back to near
their pre-crisis levels.
We have made good progress, but we have farther to go to regain the
ground lost in the crisis and the recession. Unemployment is down from
a peak of 10 percent, but at 7.3 percent in October, it is still too
high, reflecting a labor market and economy performing far short of
their potential. At the same time, inflation has been running below the
Federal Reserve's goal of 2 percent and is expected to continue to do
so for some time.
For these reasons, the Federal Reserve is using its monetary policy
tools to promote a more robust recovery. A strong recovery will
ultimately enable the Fed to reduce its monetary accommodation and
reliance on unconventional policy tools such as asset purchases. I
believe that supporting the recovery today is the surest path to
returning to a more normal approach to monetary policy.
In the past two decades, and especially under Chairman Bernanke,
the Federal Reserve has provided more and clearer information about its
goals. Like the Chairman, I strongly believe that monetary policy is
most effective when the public understands what the Fed is trying to do
and how it plans to do it. At the request of Chairman Bernanke, I led
the effort to adopt a statement of the Federal Open Market Committee's
(FOMC) longer-run objectives, including a 2 percent goal for inflation.
I believe this statement has sent a clear and powerful message about
the FOMC's commitment to its goals and has helped anchor the public's
expectations that inflation will remain low and stable in the future.
In this and many other ways, the Federal Reserve has become a more open
and transparent institution. I have strongly supported this commitment
to openness and transparency, and will continue to do so if I am
confirmed and serve as Chair.
The crisis revealed weaknesses in our financial system. I believe
that financial institutions, the Federal Reserve, and our fellow
regulators have made considerable progress in addressing those
weaknesses. Banks are stronger today, regulatory gaps are being closed,
and the financial system is more stable and more resilient.
Safeguarding the United States in a global financial system requires
higher standards both here and abroad, so the Federal Reserve and other
regulators have worked with our counterparts around the globe to secure
improved capital requirements and other reforms internationally. Today,
banks hold more and higher-quality capital and liquid assets that leave
them much better prepared to withstand financial turmoil. Large banks
are now subject to annual ``stress tests'' designed to ensure that they
will have enough capital to continue the vital role they play in the
economy, even under highly adverse circumstances.
We have made progress in promoting a strong and stable financial
system, but here, too, important work lies ahead. I am committed to
using the Fed's supervisory and regulatory role to reduce the threat of
another financial crisis. I believe that capital and liquidity rules
and strong supervision are important tools for addressing the problem
of financial institutions that are regarded as ``too big to fail.'' In
writing new rules, however, the Fed should continue to limit the
regulatory burden for community banks and smaller institutions, taking
into account their distinct role and contributions. Overall, the
Federal Reserve has sharpened its focus on financial stability and is
taking that goal into consideration when carrying out its
responsibilities for monetary policy. I support these developments and
pledge, if confirmed, to continue them.
Our country has come a long way since the dark days of the
financial crisis, but we have farther to go. Likewise, I believe the
Federal Reserve has made significant progress toward its goals but has
more work to do.
Thank you for the opportunity to appear before you today. I would
be happy to respond to your questions.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
FROM JANET L. YELLEN
Q.1. The Federal Reserve is currently developing the regulatory
framework for the first nonbank financial institutions
designated by the Financial Stability Oversight Council.
Chairman Bernanke and Governor Tarullo have stated that the
Collins Amendment limits the Fed's ability to regulate
insurance companies differently than bank holding companies. Do
you agree that the Fed is constrained by the Collins Amendment?
If the Fed is required to apply bank-like capital requirements
to insurers, would you support bipartisan legislation to
address that?
A.1. Section 171 of the Dodd-Frank Act, by its terms, requires
the appropriate Federal banking agencies to establish minimum
risk-based and leverage capital requirements for bank holding
companies (BHCs), savings and loan holding companies (SLHCs),
and nonbank financial companies supervised by the Board
(supervised nonbank companies) on a consolidated basis. This
statutory provision further provides that these minimum capital
requirements ``shall not be less than'' the generally
applicable capital requirements for insured depository
institutions. In addition, the minimum capital requirements
cannot be ``quantitatively lower than'' the generally
applicable capital requirements for insured depository
institutions that were in effect in July 2010. Section 171 does
not contain an exception from these requirements for an
insurance company (or any other type of company) that is a BHC,
SLHC, or supervised nonbank company (Board-regulated company),
or for a Board-regulated company that has an insurance company
subsidiary. This requirement constrains the scope of the
Board's discretion in establishing minimum capital requirements
for Board-regulated companies.
The final capital rule approved by the Board earlier this
year, \1\ did, however, take into consideration differences
between the banking and insurance business within these
constraints. The final capital rule included specific capital
treatment for policy loans and separate accounts, which are
assets typically held by insurance companies but not by banks.
Additionally, the Board determined to defer application of the
final capital rule to SLHCs with significant insurance
activities (i.e., those with more than 25 percent of their
assets derived from insurance underwriting activities other
than credit insurance) and to SLHCs that are themselves State
regulated insurance companies.
---------------------------------------------------------------------------
\1\ See, 11 FR 62018 (October 11, 2013).
---------------------------------------------------------------------------
To the extent permitted by law, the Board continues to
carefully consider how to design capital rules for Board-
regulated companies that are insurance companies or that have
subsidiaries engaged in insurance underwriting in determining
how to design an appropriate capital framework for these
companies.
Q.2. The Dodd-Frank Act created an expanded regulatory
structure in which the Fed plays a significant role. Dodd-Frank
significantly expanded the Board's regulatory authority over
banking institutions, financial firms, and their subsidiaries,
and new authority over several types of other institutions, as
well as to monitor financial system risk. How will you balance
these expanded responsibilities with the Fed's traditional
mandate and political independence?
A.2. The Dodd-Frank Act instituted substantial changes to
financial sector supervision and regulation. For instance, the
Act established the multiagency Financial Stability Oversight
Council (Council), of which the Chairman of the Board is a
member, in order to promote a more comprehensive approach to
monitoring and mitigating systemic risk. In addition to the
Board's role as a member of the Council, the Dodd-Frank Act
gives the Board other new important responsibilities. These
responsibilities include supervising nonbank financial firms
that are designated as systemically important by the Council,
supervising thrift holding companies, and developing enhanced
prudential standards--including those for capital, liquidity,
stress tests, single-counterparty credit limits, and living
will requirements--for large bank holding companies and
systemically important nonbank financial firms designated by
the Council. In addition, the Dodd-Frank Act expanded the
supervisory responsibilities of the Board and the other Federal
banking agencies to include consideration of the effects on
financial stability in the United States of the operations of
banking organizations that we each supervise.
The Board's duty to supervise financial institutions for
safety and soundness and financial stability is complementary
to the Board's monetary policy mandate to pursue maximum
employment, stable prices, and moderate long-term interest
rates. While the Dodd-Frank Act expanded the Board's
supervisory and financial stability duties, the Federal
Reserve's role as a supervisor of banking organizations is
longstanding and dates from the founding of the Federal Reserve
System a century ago. The Federal Reserve has long operated in
the role of a banking supervisor as an independent agency.
The Board has made a number of internal changes to better
carry out its responsibilities. Prior to the enactment of the
Dodd-Frank Act, we had begun to reorient our supervisory
structure to strengthen supervision of the largest, most
complex financial firms, through the creation of the Large
Institution Supervision Coordinating Committee, a centralized,
multidisciplinary body. Relative to previous practices, this
body makes greater use of horizontal, or cross-firm,
evaluations of the practices and portfolios of firms. It relies
more on additional and improved quantitative methods for
evaluating the performance of firms, and it employs the broad
range of skills of the Federal Reserve staff more efficiently.
In addition, we have reorganized to more effectively
coordinate and integrate policy development for and supervision
of systemically important financial market utilities. As the
Dodd-Frank Act recognizes, supervision should take into account
the overall financial stability of the United States, in
addition to the safety and soundness of each individual firm.
Our revised internal organizational structure facilitates our
implementation of this macroprudential approach to oversight.
Q.3. In December of 2012, the GAO issued a report on Dodd-Frank
implementation and found deficiencies with most agencies' cost
benefit analyses. One concern is that agencies are not
considering the cumulative burden of the new rules. The Board
does not have an express mandate to conduct economic analysis
in connection with its rulemakings. However, economic analysis
is a useful tool for tracking the impacts of all of these new
rules. Are you willing to perform economic and regulatory
analysis for new Fed rules?
A.3. I agree that economic analysis is a useful tool for
evaluating the potential impacts of rulemakings and support the
Federal Reserve's continued use of this tool.
The Federal Reserve takes quite seriously the importance of
evaluating the burdens imposed by our rulemaking efforts. To
become informed about these benefits and costs, before we
develop a regulatory proposal we often collect information
directly from parties that we expect will be affected by the
rulemaking through surveys of affected parties and meetings
with interested parties and their representatives. This helps
us craft a proposal that is both effective and minimizes
regulatory burden. In the rulemaking process, we also generally
seek comment from the public on the costs and benefits of our
proposed approach as well as on a variety of alternative
approaches to the proposal. In adopting the final rule, we
consider a variety of alternatives and seek to adopt a
regulatory alternative that faithfully reflects the statutory
provisions and the intent of Congress while minimizing
regulatory burden. We also provide an analysis of the costs to
small depository organizations of our rulemaking consistent
with the Regulatory Flexibility Act and compute the anticipated
cost of paperwork consistent with the Paperwork Reduction Act.
Q.4. With several rulemakings affecting foreign banking
organizations, including under Section 165 of Dodd-Frank and
the Volcker rule, some have argued that these proposals could
risk a protectionist backlash from foreign Governments that
could make it more difficult and costly for U.S. banks to
operate abroad. What would you do differently to encourage and
foster international cooperation?
A.4. Since the financial crisis, the Federal Reserve has
consistently worked with its international counterparts to
increase the stability of the global financial system and to
promote economic growth. U.S. and global financial stability
and the preservation of competitive equity among U.S. and
foreign banks can be best achieved by reaching global
agreements on the core financial sector reforms. In the core
reform areas, our efforts have led to a number of
internationally agreed regulatory approaches, such as the Basel
III capital and liquidity frameworks for global banks. In some
instances, however, it has been appropriate for countries to
develop different solutions that are tailored to their unique
risks, institutional situations, and industry structures.
The Board's foreign bank proposal under section 165 of the
Dodd-Frank Act was designed to provide a consistent platform
for the supervision and regulation of the U.S. operations of
foreign banks and to help ensure that the U.S. operations of
foreign banks have sufficient capital and liquidity. The
proposal was responsive to the evolution of the foreign banking
sector in the United States over the past couple decades and to
lessons learned in the financial crisis. Although the impact of
potential reciprocal actions in other markets on U.S. banking
firms is difficult to forecast with precision, we do not expect
the impact of such potential actions on U.S. banking firms to
be significant--principally because most of the material
foreign subsidiaries of U.S. banking firms are already subject
to local, bank-like risk-based capital and other prudential
requirements.
Q.5. In late 2011 the regulators issued a highly complex and
lengthy proposal to implement the Volcker rule. Because of the
size and complexity, it is essential that the regulators get
this right. Otherwise, there will be significant unintended
consequences for our financial system and economy. Some
regulators are in favor or reproposing the rule if it differs
significantly from the initial proposal. Are you in favor of
reproposing the Volcker rule? How would you distinguish hedging
from proprietary trading? Would you allow portfolio-wide
hedging limit risks? How would you propose that financial firms
comply by 2014?
A.5. The Federal Reserve is committed to getting the rules
implementing section 619 of the Dodd-Frank Act right and has
been working for some time with the FDIC, OCC, SEC, and CFTC to
develop a final rule that effectively implements that section
in a manner faithful to the words and purpose of the statute.
We are striving to consider this rule before year-end in order
to provide clarity and certainty to the affected members of the
industry and to the public more broadly about the requirements
of section 619. In developing the rule, the Federal Reserve has
met with numerous members of the public about a wide variety of
issues raised by the statute and the original agency proposal
and has considered more than 18,000 comments on the proposal.
As you note, section 619 of the DFA provides an exception
from the prohibition on proprietary trading for ``risk-
mitigating hedging activities in connection with and related to
individual or aggregated positions, contracts, or other
holdings of the banking entity that are designed to reduce the
specific risks to the banking entity in connection with and
related to such positions, contracts and other holdings.'' 12
U.S.C. 1851(d)(1)(C). By its terms, the statute permits risk-
mitigating hedging of individual positions or aggregated
positions of the banking entity. Risk-mitigating hedging
focuses on reducing risk associated with individual or
aggregated positions of the banking entity as distinguished
from proprietary trading, which focuses on attempting to
achieve short-term profits or gains. The agencies are working
hard to ensure this exception is implemented as written.
By its terms, section 619 became effective on July 21,
2012. Section 619 provides banking entities an additional 2
year period following the statute's effective date to conform
activities and investments to the prohibitions and restrictions
of that section and any final implementing regulation. \2\
Under the statute, the Board may, by rule or order, extend the
2-year conformance period for up to three, 1-year periods, if
in the judgment of the Board, an extension is consistent with
the purposes of section 619 and would not be detrimental to the
public interest. The statute provides that the Board may grant
these extensions for not more than 1 year at a time. As it
considers the merits of adopting a final rule, the Board will
also consider the public interest in granting an extension of
the conformance period.
---------------------------------------------------------------------------
\2\ See, 12 U.S.C. 1851(c).
Q.6. With a number of Fed rulemakings affecting capital in a
proposed or final stage, much emphasis has been placed on
increasing the quantity of capital. Is it possible that we can
end up with a higher capital ratio but lower quality of
capital? If so, what would be the implication of that scenario
on financial stability? Liquidity and capital rules work in
concert but also serve overlapping ends. How do you view the
trade-offs between higher capital and liquidity rules and, in
that light, how do you view progress in both of these areas to
---------------------------------------------------------------------------
date?
A.6. Higher capital and liquidity standards work in concert to
bolster the stability of individual institutions and the
financial system, and the Federal Reserve has made significant
progress in both of these areas. We believe that it is
important that large banking firms have both sufficient capital
to absorb losses and a sufficiently strong liquidity risk
profile to prevent creditor and counterparty runs. The
financial crisis demonstrated that preventing the insolvency or
material financial distress of large banking firms requires
regulating both their capital adequacy and liquidity risk.
Our final Basel III capital rule strengthens the quantity
and quality of banking organizations' capital, thus enhancing
their ability to continue functioning as financial
intermediaries, particularly during stressful periods.
Accordingly, the Basel III capital rule should reduce risks to
the deposit insurance fund and the chances of taxpayer bailouts
and improve the overall resilience of the U.S. financial
system. The capital requirements in the final Basel III rule
would serve as the foundation for other key initiatives
designed to strengthen financial stability, including the
capital plan rule, Dodd-Frank Act stress testing, and capital
surcharges for systemically important financial institutions.
The Basel III capital reforms are a very important part of the
global regulatory community's effort to improve financial
stability.
Our recent Basel III liquidity coverage ratio (LCR)
proposal is also a core element in our effort to strengthen the
resiliency of large banking firms. The LCR would impose
standardized minimum liquidity requirements on large banking
firms for the first time. The LCR would require large banking
firms to hold an amount of high-quality liquid assets that is
sufficient to meet expected net cash outflows over a 30-day
time horizon in a standardized supervisory stress scenario.
There is more to be done on both the capital and liquidity
fronts, however. In particular, the Board intends to supplement
the new Basel III capital rules with a proposal to implement a
risk-based capital surcharge for the largest global
systemically important banking institutions, and is working
with the Basel Committee to develop a longer-term structural
liquidity requirement.
Q.7. In the recent Basel III rule the Fed adhered to the
standard set by the Basel Committee for banks. With regard to
the capital standards for insurers, the Fed said that it is
limited by the Collins amendment in Dodd-Frank. In the recently
proposed liquidity coverage ratio rule, the Fed went beyond the
criteria set forth by the Basel Committee. Can you explain when
is it appropriate for the Fed to adhere to the Basel Committee,
Dodd-Frank or go beyond the requirements set by either the
Basel Committee or Dodd-Frank?
A.7. The Federal Reserve is bound by the applicable statutes in
all cases; accordingly, our Basel III capital rules for bank
holding companies and savings and loan holding companies
reflect the requirements of section 171 of the Dodd-Frank Act
(the Collins amendment) and section 939A of the Dodd-Frank Act,
which prohibits references to credit ratings in Federal
regulations. Future capital rules for such companies and
nonbank SIFIs with substantial insurance activities will also
reflect the requirements of the Collins amendment and section
939A.
We work with our international colleagues on the Basel
Committee on Banking Supervision to develop global regulatory
and supervisory standards for internationally active banks.
However, the baseline standards developed by the Basel
Committee do not always reflect the unique legal, supervisory,
and market conditions present in the United States and do not
always provide sufficient protection for the safety and
soundness of U.S. banking firms or U.S. financial stability.
Therefore, when drafting U.S. banking rules, we analyze the
provisions of the relevant Basel standards and in cases where
it is warranted, we decide to apply different requirements in
the United States. When analyzing whether to go beyond the
requirements of the Basel Committee in a particular regulatory
regime, we weigh the safety and soundness and financial
stability benefits of implementing stricter provisions against
the competitive equity and other potential adverse effects of
the stricter provisions.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM JANET L. YELLEN
Q.1. On October 9th, the IAIS announced its plan to develop a
``risk based global insurance capital standard'' by 2016. These
bank-like capital standards would be imposed on U.S. insurers
that have not been designated nonbank systemically important
financial institutions (SIFIs) under U.S. law and were not
among the insurance groups designated as Global Systemically
Important Insurers (G-SIIs) in July by the FSB. The IAIS stated
in its announcement that the development and testing in 2014 of
new capital requirements for the G-SIIs will be used to inform
the development of the insurance capital standard for other
internationally active insurers.
Does the Fed support this development? If not, did it voice
its concerns? If so, why are we allowing the imposition of
European-based, bank-centric capital standards on U.S.
insurance companies that (a) were not responsible for the
financial crisis, and (b) have not been designated as nonbank
SIFIs under Dodd-Frank or among the insurance groups designated
as G-SIIs in July by the FSB?
A.1. The Federal Reserve participated in, and supported, the
FSB's July decision to endorse the enhanced policy measures
promulgated by the IAIS for G-SIIs, including the plan to
develop capital requirements for G-SIIs. As a new member of the
IAIS, we plan to work in a coordinated manner with the other
U.S. members on current IAIS initiatives, including development
of international capital standards for G-SIIs and other
internationally active insurance groups. The IAIS is comprised
of insurance regulators, supervisors and central banks from
more than 130 countries around the world, including the United
States. The Federal Reserve recently became a member of the
IAIS. The Federal Insurance Office, the National Association of
Insurance Commissioners and the State insurance departments are
also members of the IAIS. The IAIS works in a collaborative way
to develop supervisory and regulatory standards to address the
solvency and financial stability risks inherent in global
insurance firms. Participation by the Federal Reserve and other
U.S. members in the IAIS helps us to better understand the
global insurance industry and to influence the development of
global insurance supervisory and regulatory standards.
The IAIS is undertaking work to develop international
capital requirements for G-SIIs and other internationally
active insurance groups. The work of the IAIS is conducted
principally by insurance supervisors--supervisory agencies with
substantial insurance expertise and responsibility for the
supervision of insurance firms. It is my understanding the
capital requirements under development by the IAIS will be
insurance-based and will address the types of assets held and
liabilities incurred by insurance firms.
Q.2. What will the Federal Reserve's process be for developing
capital standards for insurance savings and loan holding
companies and insurance SIFIs? Will the Federal Reserve propose
rules that are specific to insurance companies, and will there
be a notice and comment period and opportunity for public
input? How will the Fed ensure that these companies have a
sufficient transition period to adjust to a new capital regime?
A.2. The Board is taking additional time to evaluate the
appropriate capital framework for insurance nonbank SIFIs and
savings and loan holding companies (SLHCs) that are
significantly engaged in insurance activities. We have been
carefully evaluating public comments (including industry
feedback) on how to design such a capital framework. The
business model and associated risk profile of insurance
companies can differ materially from those of banking
organizations, and the Board is taking these differences into
account. The Board is committed to taking the necessary amount
of time to develop workable capital requirements for insurance-
related firms. To the extent permitted by law, the Board
continues to carefully consider how to design capital rules for
Board-regulated companies that are insurance companies or that
have subsidiaries engaged in insurance underwriting in
determining how to design an appropriate capital framework for
these companies.
We do not have a specific deadline for issuing a proposal,
but once we have developed a proposal, we will issue it for
public notice and comment.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGAN
FROM JANET L. YELLEN
Q.1. In today's hearing you indicated that the Federal Reserve
Board was taking steps to address certain concerns about
Section 716 of the Dodd-Frank Act through rulemaking and that a
final rule could be completed as early as this year.
As a clarification of your comments, were you referring to
the Federal Reserve Board's interim final rule issued on June
5, 2013, regarding the treatment of uninsured U.S. branches and
agencies of foreign banks under Section 716, or were you
referring to some other regulatory effort to interpret or
address concerns about Section 716?
A.1. I was referring in my testimony to the interim final rule
issued by the Federal Reserve to address the problem created by
section 716 for U.S. branches and agencies of foreign banks. As
you know, U.S. branches and agencies of foreign banks, by
statute, have access to the Federal Reserve discount window in
the same manner as insured depository institutions. It is this
treatment of U.S. branches and agencies of foreign banks that
causes them to become subject to section 716. Consequently, the
Federal Reserve proposed to treat these branches and agencies
as insured depository institutions for all purposes under
section 716. We have received a few comments on this interim
rule and, as I mentioned at the hearing, we expect to consider
final action on it by year-end.
Q.2. In today's hearing you discussed the Financial Stability
Oversight Council's process for the consideration and
designation of nonbank systemically important financial
institutions with Senator Tester.
Senator Tester: If you're confirmed, you will be
participating in FSOC. And the question is about
transparency and it's the transparency of metrics that
will be used that people need to have the ability to
comment on before they are applied. And I guess my
question to you is will you be willing to make that
commitment to transparency as it applied to FSOC?
Governor Yellen: I will need to study this issue more
closely in terms of what FSOC's procedures are, but I
feel it should be clear why a particular firm has been
designated if that occurs.
As a clarification, if you are confirmed, will you support
a transparent process for the consideration and designation of
nonbank systemically important financial institutions that
includes the release of any determination metrics for asset
managers before those metrics are applied--as Senator Tester
stated and regulators have indicated--and not after the
designation has occurred, as your answer suggests.
A.2. Designation has significant implications for a company, so
it is important that the designation framework and process is
careful and deliberative. To implement this authority, the FSOC
developed a framework and criteria and sought public comments
twice on the designation framework. After publishing guidance,
FSOC began the process of assessing individual companies from a
list of companies that met the quantitative criteria set out in
the guidance. The guidance is available at: http://
www.treasury.gov/initiatives/fsoc/documents/
nonbank%20designations%20-%20final%20rule%
20and%20guidance.pdf.
The OFR study on Asset Management and Financial Stability
did not propose any metrics for the FSOC to use to consider
asset management firms for designation. If the FSOC develops
metrics for asset manager firms beyond the metrics in the
current guidance, if confirmed, I would support that it provide
the public an opportunity to review and comment on any proposed
metrics.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM JANET L. YELLEN
Q.1. As you know, Congress has mandated that the Federal
Reserve use monetary policy to achieve maximum employment while
maintaining price stability and moderate long-term interest
rates. At its December 2012 meeting, the Federal Reserve stated
that it would continue to keep interest rates low until the
unemployment rate reached 6.5 percent. Yet a 6.5 percent
unemployment rate does not reflect maximum employment. As you
testified, members of the Federal Open Market Committee stated
in response to a September 2013 survey that an unemployment
rate of between 5 percent and 6 percent would more accurately
represent maximum employment.
The difference between a 6.5 percent unemployment rate and
an unemployment rate between 5 percent and 6 percent is
hundreds of thousands of jobs. Do you think the Federal Reserve
must lower its unemployment rate target to fulfill its
statutory mandate of pursuing maximum employment?
A.1. In December of 2012, the FOMC established economic
thresholds to provide greater clarity to the public about the
period over which short-term interest rates could be expected
to remain at current exceptionally low levels. In particular,
the committee indicated that an exceptionally low range for the
Federal funds rate would remain appropriate at least as long as
the unemployment rate remained above 6.5 percent and projected
inflation between 1 and 2 years ahead remains below 2.5
percent. It is important to note that these economic thresholds
for the Federal funds rate are not our long-run goals for
monetary policy. Rather, they are intended as useful benchmarks
for the public in understanding how the level of the Federal
funds rate may evolve over time.
Indeed, in its September economic projections, FOMC
participants' estimates of the longer-run normal rate of
unemployment had a central tendency of 5.2 percent to 5.8
percent. In essence, this is the unemployment range that the
committee believes that the economy can achieve over the longer
run.
It is also important to note that the thresholds are not
triggers--that is, once a threshold has been crossed, the
committee will not necessarily raise the Federal funds rate
target immediately. Instead, crossing a threshold will lead the
committee to consider whether an increase in rates would be
appropriate, with the FOMC determining the appropriate stance
of monetary policy based on its assessment of the economic
outlook. We will, as always, follow a balanced approach in
fostering our objectives of maximum employment and stable
prices. Under that approach, as Chairman Bernanke has said,
monetary policy is likely to remain highly accommodative long
after one of the economic thresholds for the Federal funds rate
has been crossed. For example, in their economic and policy
projections prepared for the September FOMC meeting, many FOMC
participants anticipated that the Federal funds rate at the end
of 2016 would be at or below a level of about 2 percent, well
below the anticipated long-run level of the Federal funds rate
of about 4 percent. These FOMC participants judged that
continued highly accommodative policy over an extended period
would likely be appropriate to achieve and maintain our
congressionally mandated objectives of maximum employment and
stable prices.
Q.2. I am interested in your views on the following question,
which I asked Governor Tarullo on July 11, 2013. Under 12
U.S.C. 1818(e), Federal banking agencies may remove
``institution-affiliated parties'' from participation in the
affairs of an insured depository when they directly or
indirectly violate banking laws or regulations. Were officers
or directors of any bank that was party to the mortgage
servicer settlements removed because they directly or
indirectly participated in the violations that led to the
settlements? If no officer or director was removed, can you
explain why?
A.2. I fully support the use of the full range of the Federal
Reserve's enforcement tools, including actions to bar insiders
of banking organizations from the banking business, where
appropriate. The statutory requirements to bring a removal or
prohibition action are rigorous. Under 12 U.S.C. 1818(e), the
Board must initially find that the insider engaged in a
violation of law, unsafe or unsound practice, or a breach of
fiduciary duty that resulted in a benefit to the insider, a
loss to the institution, or prejudice to the bank's depositors.
In addition, the Board must determine that the conduct involved
personal dishonesty or willful or continuing disregard for the
safety and soundness of the institution. This standard does not
permit an action against an insider whose conduct only involved
poor, or even negligent, business decisions that resulted in
losses to an institution. There must be additional evidence
showing heightened culpability, such as personal dishonesty or
reckless or willful disregard for safety and soundness.
Applying these standards, the Federal Reserve has not, to
date, taken any actions removing or prohibiting insiders of the
mortgage servicing organizations that were subject to the 2011
and 2012 mortgage servicing enforcement actions for their
conduct in connection with servicing or foreclosure activities.
We are, however, continuing to investigate whether such removal
or prohibition actions are appropriate.
In the past 5 years, the Federal Reserve has issued 68
prohibition orders, including several orders that also assessed
a civil money penalty. Also in the past 5 years, the Federal
Reserve has notified more than 200 individuals that they are
banned by statute from banking under section 19 of the Federal
Deposit Insurance Act (12 U.S.C. 1829). Section 19 prohibits a
person convicted of a criminal offense involving dishonesty or
a breach of trust from directly or indirectly owning,
controlling, or participating in the affairs of any insured
depository institution, or a bank or savings and loan holding
company without the consent of the FDIC in the case of an
insured depository institution, or of the Federal Reserve in
the case of a holding company. The Federal Reserve has worked
with the Department of Justice as it determines whether to
bring criminal actions against individuals, including in
connection with mortgage servicing and foreclosure activities.
Q.3. You testified that the Federal Reserve's supervisory
responsibilities should be just as important as its monetary
policy responsibilities. If that is to be the case, the Federal
Reserve needs to dedicate enough staff to supervision--
particularly for the largest, most complex financial
institutions. Otherwise, significant problems will likely
remain undetected until it is too late.
According to the Federal Reserve System's 2013 Budget,
there are 412 staff budgeted for Bank Supervision and
Regulation at the Board of Governors, and another 3,904 staff
budgeted for Supervision and Regulation at the Federal Reserve
Banks. How many of these staff are assigned full-time to
supervision of the six largest bank holding companies (JPMorgan
Chase & Co., Bank of America Corporation, Citigroup, Inc.,
Wells Fargo & Company, The Goldman Sachs Group, and Morgan
Stanley), which collectively hold far more than half of the
total banking assets in the country? Given that a bank holding
company like Citigroup dedicates several thousand of its
employees to risk management and internal auditing, do you
think the Federal Reserve needs to significantly increase the
number of staff dedicated to supervising the largest financial
institutions in order to carry out its supervisory
responsibilities?
A.3. As a result of lessons learned from the financial crisis,
the Federal Reserve has taken a number of steps to strengthen
its ongoing supervision of the largest, most complex banking
firms. Most importantly, we established the Large Institution
Supervision Coordinating Committee (LISCC) to ensure that
oversight and supervision of the largest firms incorporates a
broader range of internal perspectives and expertise; involves
regular, simultaneous, horizontal (cross-firm) supervisory
exercises; and is overseen through a centralized process to
facilitate consistent supervision and the resolution of issues
that may be present at more than one firm.
The LISCC is chaired by the Director of the Board's
Division of Banking Supervision and Regulation and includes
senior bank supervisors from the Board and relevant Reserve
Banks as well as senior Federal Reserve staff from the
financial stability, research and legal divisions, as well as
from each of the other divisions at the Board and from the
Markets and payment systems groups at the Federal Reserve Bank
of New York. The LISCC provides strategic and policy direction
for supervisory activities at the largest bank holding
companies (BHCs) across the Federal Reserve System and, to
date, has developed and administered important new supervisory
exercises focused on the largest firms, most notably including
the Federal Reserve's annual supervisory stress tests and the
related annual reviews of capital adequacy and internal capital
planning practices at the Nation's largest BHCs.
At the largest BHCs, the Federal Reserve has on-site teams
in place full time. At the six firms mentioned in your
question, there are approximately 215 Federal Reserve staff
members on the on-site teams. The work of these teams, however,
is just one piece of the supervision program for these firms.
The work of the on-site teams is supported and complemented by
System-wide teams of specialists, including those focused on
credit, market and operational risk management, compliance,
capital adequacy and capital planning assessments, liquidity
and funding, and stress testing practices. All of these System-
wide teams participate in the supervision of the firms in the
LISCC portfolio.
In addition to the on-site teams, we have approximately 200
experts from across the Federal Reserve involved in the annual
comprehensive capital analysis and review (CCAR) that focus on
assessments of the risk measurement, stress testing and
internal capital planning practices supporting the 8 largest
firms' capital planning processes. Also, there are
approximately 100 economists, supervisors, and other
specialists that carry out the annual supervisory stress
testing, which is applied to the 30 largest domestic BHCs,
including those mentioned in your question. Furthermore, the
Office of the Comptroller of the Currency also has supervisory
staff that supervise large national banks, including Wells
Fargo, JPMorgan Chase, Citigroup, Inc., and Bank of America
Corporation. We coordinate with the OCC in supervisory planning
and the execution of supervisory activities of these firms.
We are still adding more personnel that will be devoted to
supervision of systemically important firms. Staffing needs are
being driven by further focus on and enhancements to the
supervision program for the largest U.S. banking firms, FSOC-
designated nonbank SIFIs, and the U.S. operations of large
foreign banking organizations.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
FROM JANET L. YELLEN
Q.1. The GAO reports that ``Although the Dodd-Frank Act
requires the Federal Reserve Board to promulgate regulations
that establish policies and procedures governing any future
lending under section 13(3) authority, Federal Reserve Board
officials told us that they have not yet drafted these policies
and procedures and have not set timeframes for doing so.'' At
the hearing, I asked you to submit for the record the Federal
Reserve's detailed plans for how the it will implement the
Dodd-Frank requirements to limit the Federal Reserve's bailout
including a time line for drafting and implementing these rules
along with how the Fed proposes to implement these rules.
Please submit those details here for the record.
A.1. The Dodd-Frank Act made several major changes to the
statutory text of section 13(3). The Federal Reserve believes
that the provisions enacted in the Dodd-Frank Act governing its
emergency lending authority have governed the use of that
authority since enactment of that act. The Federal Reserve has
undertaken substantial work both internally and with other
agencies on the policies and procedures intended to implement
the Dodd-Frank Act amendments to section 13(3). The Board
expects to issue a proposal for public comment on the section
13(3) policies and procedures shortly.
Q.2. I have heard from many, including Senator Collins and a
number of lawyers, that the minimum capital requirements of
Section 171 of Dodd-Frank, commonly referred to as the Collins
amendment, that the Federal Reserve Board of Governors has
sufficient flexibility as to how it will apply the minimum
capital standards to nonbank financial companies primarily
engaged in the insurance business that are designated as SIFIs
by FSOC. It seems that the Federal Reserve lawyers are the only
ones who believe the Fed needs additional legislation passed to
give them flexibility in how to apply this capital requirement
to insurance companies. Are you aware of the issue?
Do you believe that insurance companies should have
bank-like capital standards or is that a different
industry, holding different assets and needing a
different set of requirements?
Some attorneys of insurance companies have argued
that the Board could determine the application of bank-
centric capital requirements under the Collins
amendment would be duplicative of the Risk-Based
Capital framework and that the Board could take
appropriate action to avoid that duplication. Or, since
section 171 does not provide proscriptive capital
standards the Board has the ability to tailor standards
for insurance companies differently. Have you looked at
that issue and do you think that argument has merit?
Has the Federal Reserve fully taken into
consideration the clear congressional intent embodied
in Section 165 of the Dodd-Frank Act that requires the
Board to ``tailor'' prudential rules, including capital
requirements, that are applied to nonbank SIFIs? Why
exactly do you believe the Collins Amendment overrides
the clear statutory language in Section 165?
In addition to the clear directive to the Board in
Section 165 to ``tailor'' the rules for insurer nonbank
SIFIs, Section 616 of Dodd-Frank includes a general
directive that gives the Board sufficient discretion to
ensure that capital standards for insurers--both
nonbank SIFI and thrift insurers--are appropriately
aligned with insurance risk, rather than bank risk. It
is clear that Congress did not intend for bank-centric
capital rules to be applied to insurers. And no one
seems to be arguing that a bank capital regime is
appropriate for insurers. So what is the Board's plan
for addressing this issue? Will you issue a proposed
rule specifically for insurance capital requirements,
and if so, when?
A.2. Section 171 of the Dodd-Frank Act, by its terms, requires
the appropriate Federal banking agencies to establish minimum
risk-based and leverage capital requirements for bank holding
companies (BHCs), savings and loan holding companies (SLHCs),
and nonbank financial companies supervised by the Board
(supervised nonbank companies) on a consolidated basis. This
statutory provision further provides that these minimum capital
requirements ``shall not be less than'' the generally
applicable capital requirements for insured depository
institutions. In addition, the minimum capital requirements
cannot be ``quantitatively lower than'' the generally
applicable capital requirements for insured depository
institutions that were in effect in July 2010. Section 171 does
not contain an exception from these requirements for an
insurance company (or any other type of company) that is a BHC,
SLHC, or supervised nonbank company (Board-regulated company),
or for a Board-regulated company that has an insurance company
subsidiary. This requirement constrains the scope of the
Board's discretion in establishing minimum capital requirements
for Board-regulated companies.
The final capital rule approved by the Board earlier this
year, \1\ did, however, take into consideration differences
between the banking and insurance business within these
constraints. The final capital rule included specific capital
treatment for policy loans and separate accounts, which are
assets typically held by insurance companies but not by banks.
Additionally, the Board determined to defer application of the
final capital rule to SLHCs with significant insurance
activities (i.e., those with more than 25 percent of their
assets derived from insurance underwriting activities other
than credit insurance) and to SLHCs that are themselves State
regulated insurance companies.
---------------------------------------------------------------------------
\1\ See, 11 FR 62018 (October 11, 2013).
---------------------------------------------------------------------------
To the extent permitted by law, the Board continues to
carefully consider how to design capital rules for Board-
regulated companies that are insurance companies or that have
subsidiaries engaged in insurance underwriting in determining
how to design an appropriate capital framework for these
companies.
Q.3. On Tuesday, Andrew Huszar published a piece in the Wall
Street Journal entitled ``Confessions of a Quantitative
Easer''. It is a significant piece because of the job that Mr.
Huszar used to hold. In 2009-10, he managed the Federal
Reserve's $1.25 trillion agency mortgage-backed security
purchase program. As the person responsible for executing the
Fed's experimental and risky monetary policy known as
``quantitative easing'' he had a simple message, ``I'm sorry,
America.'' And, that the Fed ``has allowed QE to become Wall
Street's new `too big to fail' policy.''
Mr. Huszar described the primary goal in rolling the dice
with QE was to ``to drive down the cost of credit so that more
Americans hurting from the tanking economy could use it to
weather the downturn.'' And he laments that when the trading
for the first round of QE ended on March 31, 2010, ``[t]he
final results confirmed that, while there had been only trivial
relief for Main Street, the U.S. central bank's bond purchases
had been an absolute coup for Wall Street. The banks hadn't
just benefited from the lower cost of making loans. They'd also
enjoyed huge capital gains on the rising values of their
securities holdings and fat commissions from brokering most of
the Fed's QE transactions. Wall Street had experienced its most
profitable year ever in 2009, and 2010 was starting off in much
the same way.'' However, more than 3\1/2\ years later the Fed
continues to purchase about $85 billion in bonds each month and
delaying any reduction in its purchases. Do you disagree with
Mr. Hauser's assertion that QE is Wall Street's new ``Too Big
to Fail'' policy, if so, why?
A.3. The FOMC's asset purchases are aimed at promoting the
Federal Reserve's statutory objectives of maximum employment
and stable prices. By putting downward pressure on longer-term
interest rates and helping to make financial conditions more
accommodative, the Federal Reserve's asset purchases have
supported a stronger economic recovery, improved labor market
conditions, and helped keep inflation closer to its 2 percent
objective. In particular, lower interest rates have allowed
many homeowners to refinance their mortgages at lower rates and
thus supported growth in consumer spending. Lower mortgage
rates also have helped to strengthen home sales and housing
construction. In addition, lower interest rates have boosted
auto sales. Through these channels, our asset purchases have
helped strengthen growth and employment. Moreover, the Federal
Reserve's asset purchases have helped to guard against
disinflationary pressures that could otherwise have exacerbated
the debt burdens faced by some households and businesses. In
all of these ways, our asset purchases have benefited American
families and Main Street businesses.
It is important to emphasize our asset purchases have been
conducted in the open market and have followed a competitive
process. The changes in overall financial conditions spurred by
our asset purchases have not been directed toward benefiting
any particular institution or class of institutions. Rather, by
strengthening the economic recovery, fostering improved labor
market conditions, and maintaining stable inflation and
inflation expectations, the Federal Reserve's asset purchase
programs have benefited all Americans.
Q.4. At Jackson Hole speech Chairman Bernanke talked about the
tradeoffs associated with this experimental monetary policy--
namely higher liquidity premiums on Treasury securities, lack
of confidence in the Fed's ability to exit smoothly from its
extremely accommodative policies, and risk to financial
stability by driving longer-term yields lower incentivizing
risky behavior in the markets. It seems to me that Mr. Huszer
and Mohammed El Erian at the PIMCO investment firm are right
when they point out--``that the Fed may have created and spent
over $4 trillion for a total return as little as 0.25 percent
of GDP, that QE really isn't working.'' As someone who is
viewed as very dovish, in favor of continuing or being more
aggressive with these accommodative monetary policies, why
haven't we reached the tipping point where the costs and risks
associated with this experiment outweigh the benefits?
A.4. A growing body of research by economists at central banks
and academic institutions has found that asset purchases by
central banks help to lower longer-term interest rates and ease
financial conditions. These developments, in turn, help to
foster a stronger economic recovery, improved labor market
conditions, and stable inflation and inflation expectations.
While monetary policy is not a panacea for all of the Nation's
economic difficulties, our economic situation would almost
certainly be far worse had the Federal Reserve not acted
aggressively to address the severe economic shock stemming from
the financial crisis and the continuing headwinds that have
slowed the economic recovery. The historical precedents of the
United States in the 1930s and Japan since the 1990s provide
sobering examples of the potential costs when central banks
fail to adequately address severe economic and financial
shocks.
While a strong majority of the FOMC judges that asset
purchases have been effective in fostering its macroeconomic
objectives, the committee is aware of the potential costs and
risks associated with asset purchases. As noted in the minutes
of recent FOMC meetings, policy makers have noted various
potential risks of asset purchases, including possible
challenges in removing policy accommodation at the appropriate
time and the possibility of encouraging imprudent risk-taking
in the financial sector. Regarding challenges associated with
exit, the Federal Reserve has developed, and is continuing to
refine, a range of tools that will allow the Federal Reserve to
remove policy accommodation at the appropriate time. Regarding
excessive risk-taking in financial markets, there are few signs
to date of the types of financial imbalances and excessive
reliance on leverage that were evident in the runup to the
financial crisis. That said, the Federal Reserve is monitoring
financial markets very carefully for signs of excessive risk-
taking and is prepared to take supervisory and other policy
actions as appropriate to address developments that could pose
a threat to financial stability.
On balance, the FOMC has judged that the economic benefits
of continued asset purchases outweigh the potential costs.
However, asset purchases are not on a preset course and the
pace of asset purchase will remain contingent on the economic
outlook and the FOMC's ongoing assessment of their likely
efficacy and costs.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHANNS
FROM JANET L. YELLEN
Q.1. How active is the Federal Reserve with the Financial
Stability Board (FSB) on insurance issues? How does the Fed
coordinate its insurance-related work within the FSB with
Treasury and State regulators?
A.1. As a member of the FSB, the Federal Reserve participates
actively in discussions and decisions with respect to
insurance-related issues. The Federal Reserve recently joined
the International Association of Insurance Supervisors (IAIS),
the international standard setting body for insurance. The
Federal Reserve is working with the other U.S. members of the
IAIS to provide a coordinated U.S. perspective in the
development of standards by the IAIS.
The FSB was established to coordinate at the international
level the work of national financial authorities and
international standard setting bodies and to develop and
promote the implementation of effective regulatory, supervisory
and other financial sector policies to promote financial
stability. The U.S. Treasury, the Federal Reserve, and the SEC
are the U.S. members of the FSB. Governor Daniel Tarullo serves
as the Federal Reserve's representative to the FSB Plenary and
is the chairman of the FSB's standing committee on Supervisory
and Regulatory Cooperation (SRC).
As the international standard-setting body for insurance,
the IAIS reports to the FSB through the SRC with respect to
supervisory and regulatory matters. The IAIS includes insurance
regulators, supervisors, and central banks from around the
world, including the United States. The U.S. members of the
IAIS include the Federal Insurance Office, the Federal Reserve,
the National Association of Insurance Commissioners, and the
State insurance departments.
Q.2. The bank-centric Basel 3 framework was developed by
banking regulators for banks, not for insurers. Do you think it
is appropriate for insurers to be subject to bank-centric Basel
3 capital rules that were never intended for them, or does it
make more sense to have an insurance-based framework for
insurers?
A.2. The Board's final revised capital framework for bank
holding companies and savings and loan holding companies from
summer 2013 does not apply to savings and loan holding
companies that are engaged substantially in insurance
activities. The Board decided to take more time to develop
appropriate capital requirements for insurance holding
companies, including insurance nonbank SIFIs. We want to get
this right--it is important that we have strong consistent
capital requirements for all depository institution holding
companies and that we have a treatment for insurance risks that
is economically sensible.
Q.3. Will you work with Congress to ensure that an insurance-
based framework is applied to the insurance companies under Fed
supervision? If you are confirmed, will you revisit the Fed's
interpretation of the statute to determine if the Fed has the
authority, as many in the Senate believe that it does, to avoid
the negative impact of bank rules applied to insurance
companies, and instead apply a more appropriate insurance
framework? Do you support bipartisan legislation that my
colleague Senator Brown and I drafted that clarifies that the
Fed does have the flexibility to distinguish capital standards
between banks and insurance companies?
A.3. The Board recognizes that insurance companies that are
savings and loan holding companies (SLHCs) or are designated by
the Council as nonbank financial companies may present
different business models and risks than bank holding
companies. Section 171 of the Dodd-Frank Act, by its terms,
requires the appropriate Federal banking agencies to establish
minimum risk-based and leverage capital requirements for bank
holding companies (BHCs), savings and loan holding companies,
and nonbank financial companies supervised by the Board on a
consolidated basis. This statutory provision further provides
that these minimum capital requirements ``shall not be less
than'' the generally applicable capital requirements for
insured depository institutions. In addition, the minimum--
capital requirements cannot be ``quantitatively lower than''
the generally applicable capital requirements for insured
depository institutions that were in effect in July 2010.
Section 171 does not contain an exception from these
requirements for an insurance company (or any other type of
company) that is a BHC, SLHC, or supervised nonbank financial
company (Board-regulated company), or for a Board-regulated
company that has an insurance company subsidiary. This
requirement therefore constrains the scope of the Board's
discretion in establishing minimum capital requirements for
Board-regulated companies.
The final capital rule approved by the Board earlier this
year \1\ took into consideration differences between the
banking and insurance business within these constraints. The
final capital rule included specific capital treatment for
policy loans and separate accounts, which are assets typically
held by insurance companies but not by banks. Additionally, the
Board determined to defer application of the final capital rule
to SLHCs with significant insurance activities (i.e., those
with more than 25 percent of their assets derived from
insurance underwriting activities other than credit insurance)
and to SLHCs that are themselves State regulated insurance
companies.
---------------------------------------------------------------------------
\1\ See, 11 FR 62018 (October 11, 2013).
---------------------------------------------------------------------------
To the extent permitted by law, the Board continues to
carefully consider how to design capital rules for Board-
regulated companies that are insurance companies or that have
subsidiaries engaged in insurance underwriting in determining
how to design an appropriate capital framework for these
companies. The Board remains willing to work with Congress on
this important matter.
Q.4. The Federal Reserve has oversight for nonbank financial
institutions that are designated as systemically important by
the Financial Stability Oversight Council (FSOC). How will you
ensure that the Fed does not apply a one-size-fits-all approach
to regulating these entities? Is the Fed limited in its ability
to tailor requirements by the Collins Amendment or any other
provision of Dodd-Frank?
A.4. The Dodd-Frank Act directs the Board to apply prudential
standards to nonbank financial companies that have been
designated by the FSOC for supervision by the Board that are
more stringent than the standards applied to banking
organizations that do not pose such significant risks to
financial stability. The prudential standards must include
enhanced risk-based capital, leverage, liquidity, stress test,
resolution planning, and risk management requirements as well
as single-counterparty credit limits, and a debt-to-equity
limit for companies that pose a grave threat to the financial
stability of the United States.
In establishing enhanced prudential standards for BHCs and
nonbank financial companies under section 165 of the Dodd-Frank
Act, section 165(a)(2) provides that the Board may tailor
application of the standards imposed under that section on an
individual basis or by category. The Board intends, in
prescribing prudential standards for a particular nonbank
financial company under section 165, to thoroughly assess the
business model, capital structure, and risk profile of the
designated company to determine how the proposed enhanced
prudential standards should apply, and if appropriate, would
tailor application of the standards by order or regulation to
that nonbank financial company or a category of nonbank
financial companies.
The Board recognizes that insurance companies that are
SLHCs or are designated by the Council as nonbank financial
companies may present different business models and risks than
bank holding companies. The final capital rule the Board issued
this summer implementing the Basel III capital standards
included specific capital treatment for policy loans and
separate accounts held by insurance companies, which are assets
not held by banks. Additionally, the Board determined to defer
application of the final capital rule to SLHCs with significant
insurance activities (i.e., those with more than 25 percent of
their assets derived from insurance underwriting activities
other than credit insurance) and to SLHCs that are themselves
State regulated insurance companies.
To the extent permitted by law, the Board continues to
carefully consider how to design capital rules for Board-
regulated companies that are insurance companies or that have
subsidiaries engaged in insurance underwriting in determining
how to design an appropriate capital framework for these
companies.
Q.5. The U.S. Department of the Treasury's Office of Financial
Research (OFR) recently delivered a report to the FSOC on ways
that activities in the asset management industry may create,
amplify, or transmit systemic risk. While the OFR report stops
short of calling for SIFI designations for asset managers, it
does lay out potential factors that could be used to determine
if an asset manager poses systemic risk. Many have commented
publicly that the process for the OFR study and FSOC's review
of asset managers is flawed and lacks transparency.
As a voting member of FSOC, if the FSOC undertakes to
designate asset managers as systemically important, would you
support the metrics for designation being put out for public
comment?
If the FSOC ultimately designates asset managers as
systemically important, do you agree that asset managers should
be regulated differently than bank holding companies and that a
one-size-fits-all approach is not appropriate?
A.5. The study on Asset Management and Financial Stability was
written by the OFR in response to a request by the FSOC to
identify data gaps and provide analysis to better inform the
FSOC's analysis of how to consider asset management firms for
enhanced prudential standards and supervision under Section 113
of the Dodd-Frank Act. The study is not an FSOC publication.
The OFR study did not propose any metrics for the FSOC to use
to consider asset management firms for designation. If the FSOC
develops metrics for asset manager firms beyond the metrics in
the current guidance (available at: http://www.treasury.gov/
initiatives/fsoc/documents/nonbank%20designations%20-
%20final%20rule%
20and%20guidance.pdf), if confirmed, I would support that it
provide the public an opportunity to review and comment on any
proposed metrics.
Section 165 of the Dodd-Frank Act requires the Federal
Reserve to establish enhanced prudential standards both for
bank holding companies with total consolidated assets of $50
billion of more and for nonbank financial companies designated
by the Council. In the Federal Reserve's proposed rule, we may
tailor the application of the enhanced standards to different
companies on an individual basis or by category, taking into
consideration each company's capital structure, riskiness,
complexity, financial activities, size, and any other risk-
related factors that the Federal Reserve deems are appropriate.
This commitment to tailoring is reflected in the recently
finalized capital rules in which the Federal Reserve excluded
savings and loan holding companies that are predominantly
engaged in insurance activities in order to allow for the
development of more appropriate capital standards. Still, our
ability to tailor the enhanced standards may be limited by the
Collins Amendment and other provisions of the Dodd-Frank Act.
Q.6. As chairman of the Fed, what specifically will you do to
increase the transparency of the Fed with regard to insurance
regulators and the insurance industry? How will you consult
with State insurance regulators before taking a position on
insurance regulatory matters and will that position be
consistent with the advice you receive from State insurance
regulators?
A.6. The Federal Reserve has a long history of cooperation,
consultation, and engagement with Federal and State regulators,
key stakeholders, and other interested parties.
To raise transparency with respect to the development of
our supervisory programs and regulations for the insurers under
Federal Reserve supervision, Federal Reserve staff regularly
meets with the Federal Insurance Office, insurance industry
groups and company representatives, the National Association of
Insurance Commissioners, State insurance regulators, and others
regarding issues related to insurance capital requirements,
supervision, risk management, and other insurance matters.
The Federal Reserve considers and assesses the views of
industry groups and State regulators and has made adjustments
in our approach to supervising and regulating insurers to
reflect such input. The Federal Reserve recognizes the
differences between banking and insurance, and is committed to
tailoring its supervisory and regulatory regime for insurance
holding companies to reflect the unique business lines and
risks of insurance--to the extent permitted by law. We will
continue to engage the industry and State regulators to further
expand the Board's expertise and gain additional perspectives
regarding the regulation and supervision of insurance
companies, with the goal of continuing to promote a financially
safe and sound financial system.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK
FROM JANET L. YELLEN
Capital Rules for Insurance Companies
Q.1. While many of us believe that the Dodd-Frank Act already
gives the Federal Reserve the authority to distinguish between
insurance companies and banks when promulgating capital
standards under the Collins Amendment, the Federal Reserve has
made statements publicly that it does not believe it has the
statutory authority to do so. Therefore, a number of Senators
on this Committee introduced legislation, S.1369 to codify and
clarify that the Federal Reserve can and should make
distinctions between insurance companies and banks when setting
capital standards. Is it your interpretation that this
authority currently exists?
A.1. Section 171 of the Dodd-Frank Act, by its terms, requires
the appropriate Federal banking agencies to establish minimum
risk-based and leverage capital requirements for bank holding
companies (BHCs), savings and loan holding companies (SLHCs),
and nonbank financial companies supervised by the Board
(supervised nonbank companies) on a consolidated basis. This
statutory provision further provides that these minimum capital
requirements ``shall not be less than'' the generally
applicable capital requirements for insured depository
institutions. In addition, the minimum capital requirements
cannot be ``quantitatively lower than'' the generally
applicable capital requirements for insured depository
institutions that were in effect in July 2010. Section 171 does
not contain an exception from these requirements for an
insurance company (or any other type of company) that is a BHC,
SLHC, or supervised nonbank company (Board-regulated company),
or for a Board-regulated company that has an insurance company
subsidiary. This requirement therefore constrains the scope of
the Board's discretion in establishing minimum capital
requirements for Board-regulated companies.
The final capital rule approved by the Board earlier this
year, \1\ did, however, take into consideration differences
between the banking and insurance business within these
constraints. The final capital rule included specific capital
treatment for policy loans and separate accounts, which are
assets typically held by insurance companies but not by banks.
Additionally, the Board determined to defer application of the
final capital rule to SLHCs with significant insurance
activities (i.e., those with more than 25 percent of their
assets derived from insurance underwriting activities other
than credit insurance) and to SLHCs that are themselves State
regulated insurance companies.
---------------------------------------------------------------------------
\1\ See, 11 FR 62018 (October 11, 2013).
---------------------------------------------------------------------------
The Board continues to carefully consider how to design
capital rules for Board-regulated companies that are insurance
companies or that have subsidiaries engaged in insurance
underwriting in determining how to design an appropriate
capital framework for these companies.
Q.2. This ability for distinction should also transfer to the
Fed's ability to distinguish between insurance companies and
banks for purposes of accounting practices. I have at least two
insurance companies in my State that are supervised by the Fed
as savings and loan holding companies. These companies are not
publicly traded and do not prepare financial statements in
accordance with GAAP--but rather, in accordance with GAAP-based
insurance accounting known as Statutory Accounting Principles
(SAP). Every person I consult tells me that SAP is the most
effective and prudential way to supervise the finances of an
insurance company. It is my understanding that the Federal
Reserve may want to force these insurance companies that have
used SAP reporting for many decades to spend hundreds of
millions of dollars preparing GAAP statements--primarily
because the Fed is comfortable with GAAP and understands it
since it's what banks use. Is this is true? If it is true, is
it simply because the Fed is so accustomed to bank regulation
and not insurance regulation that it simply wants to make
things easier for itself? Do you agree with this one-size-fits-
all approach to regulation? Can you provide a cost benefit
analysis to this as it seems to not add any additional
supervisory value and only adds astronomic costs to these
companies?
A.2. The Federal Reserve is still considering regulatory
capital and financial reporting requirements for companies with
significant insurance activities in light of the Collins
amendment requirement that we institute consolidated capital
requirements for all bank holding companies (BHCs), savings and
loan holding companies (SLHCs), and nonbank SIFIs. SLHCs with
significant insurance activities are not covered by the new
regulatory capital rules published this summer.
Our willingness to take more time to develop a capital rule
for insurance holding companies is an acknowledgement that the
business model and associated risk profile of insurance
companies can differ materially from those of banking
organizations and that further evaluation of the appropriate
capital framework for these entities is warranted.
Because the calculation of insured depository institution
capital requirements begins with consolidated GAAP
measurements, and because statutory accounting has a legal
entity rather than a consolidated basis, the Collins amendment
is an impediment to use of statutory accounting as the basis
for consolidated capital requirements for BHCs, SLHCs, and
nonbank SIFIs with insurance operations.
Q.3. Each Chairman of the Federal Reserve can appoint other
Governors to specific posts and issues--such as representation
to the Financial Stability Oversight Council, representing the
Federal Reserve to the Financial Stability Board (FSB), etc. Do
you have a written list of any changes in Fed governors you
will make to these posts that you can provide in writing?
A.3. No, I do not have a list at this point. If confirmed as
Chairman, I look forward to working with my fellow governors to
fulfill the important responsibilities of the Federal Reserve.
FSOC
Q.4. FSOC has been in existence for more than 3 years. Since
that time, three companies have been deemed systemically
significant and a second round of companies appear to be under
consideration. There have been a number of calls, supported by
a 2012 GAO report, on the FSOC to provide greater transparency
about the process used for designation and the criteria
followed. Can you provide greater details on why more
transparency has not been achieved?
A.4. Although I have not participated in the Financial
Stability Oversight Council (Council) matters, I understand it
is firmly committed to promoting transparency and
accountability in connection with its activities. In November
2012, the Council and the Office of Financial Research jointly
provided a response to Congress and the GAO with a description
of the actions planned and taken in response to each of the
recommendations in the report. The report made a number of
recommendations on ways in which the Council could further
enhance its transparency, including improving the Council's Web
site.
Subsequently, the Council's Web site was reintroduced, in
December 2012, to improve transparency and usability, to
improve access to Council documents, and to allow users to
receive email updates when new content is added. The Council is
firmly committed to holding open meetings and closes its
meetings only when necessary. However, the Council must
continue to find the appropriate balance between its
responsibility to be transparent and its central mission to
monitor emerging threats to the financial system. Council
members frequently discuss supervisory and other market-
sensitive data during Council meetings, including information
about individual firms, transactions, and markets that require
confidentiality. In many instances, regulators or firms
themselves provide nonpublic information that is discussed by
the Council. Continued protection of this information, even
after a period of time, is often necessary to prevent
destabilizing market speculation or other adverse consequences
that could occur if that information were to be disclosed.
Congress authorized the FSOC to designate nonbank financial
companies whose material financial distress could threaten U.S.
financial stability. Congress provided the FSOC with a list of
10 factors for consideration but left it to FSOC to determine
how these factors, such as interconnectedness, size, leverage,
and activities, should be considered in determining whether a
company posed a threat to financial stability.
Designation has significant implications for a company, so
it is important that the designation framework and process is
careful and deliberative. To implement this authority, FSOC
developed a framework and criteria and sought public comments
twice on the framework. After publishing guidance, FSOC began
the process of assessing individual companies from a list of
companies that met the quantitative criteria set out in the
guidance. The guidance is available at: http://
www.treasury.gov/initiatives/fsoc/documents/
nonbank%20designations%20-%20final%?0rule%
20and%20guidance.pdf.
As described in the guidance, FSOC screens companies
through a three-stage process which provides a company with
more due process than set forth in the enabling provisions of
Dodd-Frank. This authority is focused on individual companies,
not categories of activities or industries. Because being
considered for designation is an important event for a firm,
and the process may involve evaluation of proprietary
information, there may be some costs to providing too much
information to the public.
Q.5. The methodology and blanket statements made in the OFR
Study on Asset Management and Financial Stability have been
highly criticized as making broad assumptions, blanket
statements, and for a misuse/misstatement and misunderstanding
of data to analyze the industry. Can you speak to the reports'
accuracies and/or if there are errors how best to address these
since these reports are presumably part of the basis for
designation?
A.5. The study on Asset Management and Financial Stability was
written by the OFR in response to a request by the FSOC to
identify data gaps and provide analysis to better inform the
FSOC's analysis of how to consider asset management firms for
enhanced prudential standards and supervision under Section 113
of the Dodd-Frank Act. The study is not an FSOC publication. In
addition, because the designation authority is focused on
individual companies rather than industries, it will be only
one of many inputs used by the FSOC in its analysis.
Q.6. In terms of Asset Management companies, the Council has
previously stated that in any additional metrics are developed
``it intends to provide the public with an opportunity to
review and comment on any such metrics and thresholds.'' Why
was it the SEC then and not the FSOC that released these for
public comment? Can you speak to other reports/studies that the
OFR may do and if there will be some kind of open/regular
process that will be followed for the public to review and
comment? In terms of the OFR's Study on Asset Management and
Financial Stability, do you know how many comments were
received and the general nature/issues raised in these
comments?
A.6. The study on Asset Management and Financial Stability was
written by the OFR in response to a request by the FSOC to
provide data and analysis to better inform the FSOC's analysis
of how to consider asset management firms for enhanced
prudential standards and supervision under Section 113 of the
Dodd-Frank Act. The OFR study did not propose any metrics for
the FSOC to use to consider asset management firms for
designation. If the FSOC develops metrics for asset manager
firms beyond the metrics in the current guidance (available at:
http://www.treasury.gov/initiatives/fsoc/documents/
nonbank%20designations%20-%20final%20rule%
20and%20guidance.pdf, I would support that it provide the
public an opportunity to review and comment on any proposed
metrics.
Volcker
Q.7. Can you update me on the timing of the rule and will the
conformance period be extended for firms to implement it?
A.7. The Federal Reserve is committed to getting the rules
implementing section 619 of the Dodd-Frank Act right and has
been working for some time with the FDIC, OCC, SEC, and CFTC to
develop a final rule that effectively implements that section
in a manner faithful to the words and purpose of the statute.
We are striving to consider this rule before year-end in order
to provide clarity and certainty to the affected members of the
industry and to the public more broadly about the requirements
of section 619.
By its terms, section 619 became effective on July 21,
2012. Section 619 provides banking entities an additional 2-
year period following the statute's effective date to conform
activities and investments to the prohibitions and restrictions
of that section and any final implementing regulation. \2\
Under the statute, the Board may, by rule or order, extend the
2-year conformance period for up to three, 1-year periods, if
in the judgment of the Board, an extension is consistent with
the purposes of section 619 and would not be detrimental to the
public interest. The statute provides that the Board may grant
these extensions for not more than 1 year at a time. As it
considers the merits of adopting a final rule, the Board will
also consider the public interest in granting an extension of
the conformance period.
---------------------------------------------------------------------------
\2\ See, 12 U.S.C. 1851(c).
Q.8. Can you assure me that the rule will be structured so it
---------------------------------------------------------------------------
doesn't negatively impact small issuers?
A.8. Among other things, section 619 of the Dodd-Frank Act
prohibits banking entities from engaging in proprietary
trading, which is defined by the statute to be trading in
financial instruments for the purpose of selling in the near
term or the intent to resell in order to profit from short-term
price movements. Section 619 also provides an exception from
this prohibition for underwriting activities and for market-
making activities that are designed not to exceed the
reasonably expected near term demands of clients, customers,
and counterparties. Underwriting activities and market-making
activities serve a very important role in providing capital to
businesses and liquidity to markets.
The Federal Reserve has been working for some time with the
FDIC, OCC, SEC, and CFTC to develop a final rule that
effectively implements section 619, including the exceptions
for underwriting and market-making activities and the other
activities permitted by the statute, in a manner faithful to
the words and purpose of the statute. In developing the rule,
the Federal Reserve has met with numerous members of the public
about a wide variety of issues raised by the statute and the
original agency proposal, including the issues you have raised,
and has considered more than 18,000 comments on the proposal.
We are striving to consider this rule before year-end in order
to provide clarity and certainty to the affected members of the
industry and to the public more broadly about the requirements
of section 619.
Enhanced Banking System: Ending Too Big to Fail and Protecting Against
Future Collapses
Q.9. It is safe to say that in 2008 the U.S. Government did not
have the tools to wind down a large failing financial
institution. This inability is one of the primary reasons
behind the Orderly Liquidation Authority (OLA) enacted in the
Dodd-Frank Act. Recently, Bank of England's Paul Tucker stated,
`` . . . the U.S. authorities have the technology--via Title II
of Dodd-Frank; and just as important, most U.S. bank and dealer
groups are, through an accident of history, organized in a way
that lends them to top-down resolution on a group-wide basis. I
don't mean to it would be completely smooth right now; it would
be smoother in a year or so as more progress is made, but in
extremis, it should be done now. That surely is a massive
signal to bankers and markets.'' Do you agree with Mr. Tucker's
statement and what does progress on this front mean for those
arguing large banks benefit from an implicit subsidy?
A.9. The Dodd-Frank Act and Basel III approach to addressing
systemically important financial institutions (SIFIs) involves
much stricter regulation of SIFIs and improving the
resolvability of SIFIs. This is a sensible path that will lower
the probability of failure of SIFIs, improve market discipline
of SIFIs, and reduce the damage to the system if a SIFI does
fail. The Board, the FDIC, and other regulators have made much
progress on this path. Market participants and some rating
agency actions for large bank holding companies have recognized
this progress.
The FDIC's orderly liquidation authority (OLA) is effective
today and its core regulatory implementation architecture is in
place. The FDIC's single-point-of-entry approach to
implementing Title II of the Dodd-Frank Act is a big step
forward in this regard. More work remains to be done around the
world to maximize the prospects for an orderly SIFI resolution,
but the basic framework has been established in the United
States.
Potential impediments to an orderly SIFI resolution
remain--including the need for other countries to adopt
workable statutory resolution regimes for SIFIs, the need to
ensure that SIFIs have sufficient gone concern loss absorption
capacity and resolution-friendly internal organizational
structures, the need to provide host regulators of SIFIs with
credible assurances that local operations will be protected in
a resolution, and the need to address the potential disorderly
unwind of cross-border derivative contracts. The Federal
Reserve is committed to working with the FDIC and our
supervised firms to remove these impediments.
The Fed, in consultation with the FDIC, has been developing
a regulatory proposal that would require the largest, most
complex U.S. banking firms to maintain a minimum amount of
outstanding long-term unsecured debt that could be converted to
equity in resolution. Such a requirement would increase the
prospects for an orderly resolution under OLA by ensuring that
shareholders and long-term debt holders of a systemic financial
firm can bear potential future losses at the firm and
sufficiently capitalize a bridge holding company in resolution.
In addition, by increasing the credibility of OLA, a minimum
long-term debt requirement should help counteract the moral
hazard arising from taxpayer bailouts and improve market
discipline of systemic firms.
U.S. regulators are in active discussions with their
foreign counterparts with respect to crisis planning around
potential future SIFI failures. In particular, the U.S. and
U.K. resolution authorities--the FDIC and the Bank of England--
together with the Federal Reserve Board, the Federal Reserve
Bank of New York and the U.K. Financial Services Authority,
have been working closely to develop contingency plans for the
failure of global SIFIs with significant operations on both
sides of the Atlantic.
Q.10. There have been some that have expressed concerns that
winding down a large bank is impossible because of cross border
problems. One solution offered has been the Single Point of
Entry (SPOE) approach. Does this approach significantly
mitigate the challenge posed by winding down a firm that has
operations in multiple jurisdictions?
A.10. The FDIC's single-point-of-entry approach to resolution
of a systemic financial firm does mitigate the challenges posed
by winding down a large, cross-border banking firm. Under the
single-point-of-entry approach, the FDIC will be appointed
receiver of only the top-tier parent holding company of the
failed firm. After the parent holding company is placed into
receivership, the FDIC will transfer assets of the parent
company to a bridge holding company. The firm's operating
subsidiaries (foreign and domestic) will remain open for
business as usual. To the extent necessary, the FDIC will then
use available parent holding company assets to recapitalize the
firm's critical operating subsidiaries. Equity claims of the
failed parent company's shareholders will effectively be wiped
out, and claims of its unsecured debt holders will be written
down as necessary to reflect any losses or other resolution
costs in the receivership. The FDIC will ultimately exchange
the remaining claims of unsecured creditors of the parent for
equity or debt claims of the bridge holding company and return
the restructured firm back to private sector control.
This conceptual approach to resolution under Title II of
the Dodd-Frank Act represents an important step toward
addressing the market perception that any U.S. financial firm
is too big or too complex to be allowed to fail. The aim of the
single-point-of-entry approach is to stabilize the failed firm
quickly, in order to mitigate the negative impact on the U.S.
financial system, and to do so without supporting the firm's
equity holders and other capital liability holders or exposing
U.S. taxpayers to losses. The single-point-of-entry approach
offers the best potential for the orderly resolution of a
systemic financial firm under Title II, in part because of its
potential to mitigate run risks and credibly impose losses on
parent holding company creditors and, thereby, to enhance
market discipline.
As noted in my previous answer, although use of the single-
point-of-entry resolution approach materially improves the
prospects for the orderly resolution of a cross-border banking
firm as compared to alternative implementation paths,
impediments to such an orderly resolution remain. The Federal
Reserve is committed to working with the FDIC in the coming
months and years to mitigate those residual impediments.
Q.11. Liquidity and capital rules work in concert, but also
serve overlapping ends. How do you view the trade-offs between
higher capital and liquidity rules and in that light, how do
you view progress in both of these areas?
A.11. Higher capital and liquidity standards work in concert to
bolster the stability of individual institutions and the
financial system, and the Federal Reserve has made significant
progress in both of these areas. We believe that it is
important that large banking firms have both sufficient capital
to absorb losses and a sufficiently strong liquidity risk
profile to prevent creditor and counterparty runs. The
financial crisis demonstrated that preventing the insolvency or
material financial distress of large banking firms requires
regulating both their capital adequacy and liquidity risk.
The new capital framework published by the U.S. banking
agencies this summer will increase the quantity and quality of
banks' required capital, whereas the proposed liquidity
coverage ratio will establish for the first time a standardized
minimum liquidity requirement for large banking organizations.
Both measures enhance banking organizations' ability to
continue functioning as financial intermediaries, particularly
during stressful periods, thereby reducing risks to the deposit
insurance fund and the chances of taxpayer bailouts and
improving the overall resilience of the U.S. financial system.
There is more to be done on both the capital and liquidity
fronts, however. In particular, the Board intends to supplement
the new Basel III capital rules with a proposal to implement a
risk-based capital surcharge for the largest global
systemically important banking institutions, and is working
with the Basel Committee to develop a longer-term structural
liquidity requirement for global banks.
Macro Economic
Q.12. To what extent could potential challenges within the
Chinese banking and ``shadow'' banking industry transmit credit
risk into the global financial markets?
A.12. The Chinese economy has experienced very rapid credit
growth in recent years. Along with bank loans, nonbank (shadow)
financing has expanded substantially, which includes lending
via trust companies, corporate bond issuance, and off-balance
sheet lending undertaken by banks. This rapid and sizable
credit expansion has raised concerns about asset quality at
banks and in the shadow banking sector. A future rise in
problem loans could lead to capital shortfalls in the banking
sector and potentially large expenses for the Government. That
said, currently banks report sound capital buffers, and the
Chinese Government has extensive resources to meet potential
shortfalls in capital. In addition, Chinese authorities appear
to recognize the potential risks of excessive credit growth to
their economy, and have signaled intentions to curb it.
However, notable risks remain and the situation bears
monitoring closely. Although China has a relatively closed
financial system with fewer financial links to other countries
than many other major economies, a sharp slowdown in the
Chinese economy would slow growth in other countries as well.
Q.13. How do you view the bond purchase program orchestrated by
the Bank of Japan? How does it differ from quantitative easing?
Does it appear that the Japanese are attempting to manipulate
their currency, or is this a proper response to Japan's more
than 20 years of economic stagnation and deflation?
A.13. Japan has experienced low growth coupled with mild
deflation or very low inflation for nearly two decades. It is
important to address this problem, and the Bank of Japan (BOJ)
has recognized that aggressive action is necessary. The BOJ has
taken a couple of steps. In January, the BOJ introduced an
inflation target of 2 percent, similar to that of other major
central banks. In April, the Bank of Japan announced it would
be greatly expanding its existing asset purchase program and
increasing the maturity of its purchases (a break from prior
quantitative easing, which was focused on shorter-term maturity
assets) with the goal of raising inflation to the 2 percent
goal in 2 years. These asset purchases are mainly concentrated
in Japanese Government bonds.
These measures have already contributed to supporting
economic activity in Japan--with real GDP accelerating in the
first half of the year--and deflationary pressures have also
begun to recede. However, ultimately Japan will need to take
steps to restore fiscal sustainability and implement pro-growth
structural reforms.
Q.14. Do you believe that the recent increases in mortgage
interest rates this past summer--that went up nearly 100 basis
points from May 2012 \3\ were an overreaction to the Fed's June
statements on ``tapering'' the stimulus? Do you believe that
these moves are indicative that housing sector is being over-
stimulated by economic policies?
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\3\ http://www.bankrate.com/finance/mortgages/mortgage-
analysis.aspx
A.14. The increase in longer-term interest rates over the
summer reflected a number of factors. First, the incoming
economic data suggested a somewhat stronger economic outlook,
which boosted rates. Second, as you note, in June the FOMC
provided additional information on its expectations regarding
its current purchase program, offering a conditional outlook
for reductions in the pace of purchases over coming quarters if
the incoming economic data continued to be consistent with the
outlook for ongoing improvement in labor market conditions. The
committee was clear that the policy outlook was conditional on
economic and financial developments--our purchases are by no
means on a preset course. Nonetheless, some investors who had
taken on leveraged positions in longer-term instruments
reportedly decided to exit those positions, putting additional
upward pressure on rates. While the resulting tightening of
financial conditions was unwelcome, and could slow the recovery
in the housing sector to some degree, the reduction in
leveraged positions should reduce the risks to financial
stability going forward. The committee will continue to adjust
policy as appropriate to foster our dual objectives of maximum
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employment and price stability.
Q.15. After the initial round of the Federal Reserve's monetary
measures to keep the financial system solvent during the
financial crisis, the threshold for additional central bank
easing action has become lower and lower, especially with each
successive round of QE. We now see loose central bank policies
in the U.S., Japan, Europe, and elsewhere. Policy makers appear
to be relying on monetary manipulation as a substitute for
necessary tough decisions to structurally reform our tax,
spending, and trade policies that would make for long-term,
true economic growth. Do you believe that the U.S. Federal
Reserve can continue to be a shining example of Central Bank
independence? Do you anticipate that you will have the courage
to end the stimulus programs and make some of the more
difficult decisions to get our economy back to a ``true''
functioning economy rather than an economy that only functions
with Government stimulus?
A.15. Americans can be confident that the FOMC has both the
ability and the will to slow our asset purchases and eventually
end our asset purchase program, and ultimately to begin to
remove policy accommodation, when the economy is strong enough
to make doing so appropriate. We have clearly indicated that
the purchase program is conditional on economic and financial
developments. We anticipate ending our purchases once we have
seen a substantial improvement in the outlook for the labor
market in a context of price stability. More broadly, we are
providing a high degree of monetary policy accommodation in
order to support a stronger economic recovery and move
inflation back toward its 2 percent longer-run objective--that
is, to foster our congressionally mandated objectives of
maximum employment and price stability.
That said, as economic conditions normalize, it will become
appropriate to begin removing policy accommodation. In
considering the timing of such a step, our objective will be to
assure a strong and robust recovery while keeping inflation
under control. On the one hand, it is important not to remove
support too soon, especially when the recovery is fragile. On
the other hand, it is crucial not to wait too long to withdraw
accommodation, and so allow an undesirable rise in inflation.
My colleagues and I are committed to our longer run inflation
goal of 2 percent, and we will need to ensure that, as the
recovery takes hold and progresses, we bring monetary policy
back to normal in a timely fashion.
Q.16. The Federal Reserve's recent monetary actions have
created somewhat of an unfair recovery, where investors and
banks seem to be fairing quite well while the middle and lower
classes seem to continue to struggle. Do you agree that the
monetary policies put into place by the Federal Reserve since
the financial crisis have been a ``top-down'' approach to
bolstering the economy? Do you think that the Fed's easy money
policies punish savers? We've seen a growth and love spawned in
the equities market--Do you think that this artificial ``boom''
in equities will falter once the Fed begins tapering?
A.16. It is certainly true that savers and those who rely on
investments such as certificates of deposit and Government
bonds are receiving very low returns. However, savers typically
wear many economic hats. For example, many savers are
homeowners or would like to be homeowners, and low interest
rates make it easier to own a home and contribute to rising
house prices. In addition, many savers own stocks and other
assets through pension funds and 401(k) accounts; low interest
rates are supporting the economic recovery and are thus good
for businesses' sales and earnings, and so for stock investors.
And a stronger economy will help people who need jobs to find
them. Without a job, it is difficult to save for retirement or
to buy a home or to pay for an education, irrespective of the
current level of interest rates.
More broadly, we cannot have a more normal configuration of
interest rates until the economy returns to a more normal
state. Currently, interest rates are low for fundamental
economic reasons, not just because the Federal Reserve and
other central banks are providing accommodative monetary
policy. Those fundamental reasons include slow growth and low
inflation in the U.S. and other major economies. Pursuing an
accommodative monetary policy now will help to get the economy
moving and so will best enable us to normalize policy and to
get rates back to normal levels over time. Indeed, an improved
economic outlook has contributed to the rise in interest rates
we have seen of late, and most forecasters anticipate that
rates will rise further as the economy strengthens.
Q.17. When does the Fed plan to begin tapering?
A.17. As we have emphasized, our purchase program is not on a
pre-set course. Instead, our decisions regarding the purchase
program are data dependent. Our goal for the purchase program,
as stated in September 2012 and reiterated since then, is to
achieve a substantial improvement in the outlook for the labor
market.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
FROM JANET L. YELLEN
Q.1. Community banking is undergoing a change, especially in
rural America. There are fewer banks in Kansas, but the banks
that remain are growing due to mergers and acquisitions. One
consequence of this growth is that the bank holding companies
absorbing these smaller institutions fall under greater
regulatory thresholds due to their increasing asset size. These
small bank holding companies (SBHCs) are increasingly exposed
to the current $500 million threshold under the Federal
Reserve's Small Bank Holding Company Policy Statement. For
example, an SBHC located in Kansas has seven branches. These
branches are located in rural communities where they are, in
some instances, one of the only remaining businesses located on
Main Street. But since an SBHC brought those small banks under
its purview and kept a branch open for these small communities,
that SBHC is now very close to exceeding that $500 million
threshold. As I understand it, the Federal Reserve has the
discretion to alter the Small Bank Holding Company Policy
Statement and has exercised that discretion in raising the
threshold in the past.
I have introduced legislation along with Sen. Tester and
Sen. Kirk along with an additional 13 of our Senate colleagues
as cosponsors. Section 3 of the CLEAR Relief Act, S.1349, would
require the Federal Reserve to raise that threshold. This seems
to me a commonsense reform we could make that would ensure that
small communities across the country will maintain access to
hometown banking services. This is only one example of a
regulatory burden the Federal Reserve could lift for the
betterment of community banking. Would you comment on how you
will go about reducing the regulatory burden on small banks,
utilizing the Federal Reserve's discretionary regulatory
framework, so that communities in Kansas will still have access
to a hometown bank?
A.1. Community banks play a critical role in the U.S. economy,
and the Federal Reserve is committed to implementing a
supervisory and regulatory regime for community banks that is
appropriate for their business model and economic function. To
better tailor our oversight framework to the specific
characteristics of community banks, the Federal Reserve has
formed a Community Depository Institutions Advisory Council and
a small bank subcommittee of its Committee on Bank Supervision.
The Federal Reserve has been very focused on addressing
too-big-to-fail (TBTF) and protecting financial stability by
strengthening the regulatory regime for systemically important
financial institutions (SIFIs). TBTF is a damaging economic
phenomenon that corrodes market discipline of our largest
banking firms and contributes to an unlevel playing field
between large banks and small banks. The much stricter
regulatory regime that the Federal Reserve and other U.S. and
global regulators are implementing for SIFIs should help level
that playing field. Consistent with this principle, our recent
final Basel III capital rule also created substantial
differences between the regulatory capital regime that will
apply to large U.S. banking firms as compared to community
banks.
The Federal Reserve periodically reviews the scope of
application of its Small Bank Holding Company Policy Statement.
The Federal Reserve raises the asset threshold when appropriate
in light of changes to U.S. banking markets and the economy.
Q.2. The drafting process of the Volcker Rule has caused some
confusion among investors and regulators alike. Without delving
into the specifics of the rule, I would simply mention that I
have heard concerns as to where market making ends and
proprietary trading begins. As you well know, market making
serves a very important role in providing liquidity. I am
concerned that an overly restrictive Volcker Rule could damage
a business's ability to operate and expand. I have also heard
discussions about certain asset classes, namely non-U.S.
sovereign debt, that may be under consideration for an
exemption from the Volcker rule. If you believe the Volcker
Rule is structured in a way to not have an overly negative
impact on liquidity and the costs of issuing debt, for what
purpose would certain asset classes require exemptions? Could
not an asset class exemption of this nature be viewed as
favoring foreign countries over American companies?
A.2. Among other things, section 619 of the Dodd-Frank Act
prohibits banking entities from engaging in proprietary
trading, which is defined by the statute to be trading in
financial instruments for the purpose of selling in the near
term or the intent to resell in order to profit from short-term
price movements. Section 619 also provides an exception from
this prohibition for market-making activities that are designed
not to exceed the reasonably expected near term demands of
clients, customers and counterparties. As you note, market-
making activities serve a very important role in providing
liquidity to markets.
The statute also provides exceptions from the proprietary
trading prohibition for trading in certain asset classes. In
particular, the statute permits trading by banking entities in
obligations of the United States, obligations of any agency of
the United States (including the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, the
Federal Home Loan Banks, and the Government National Mortgage
Association) and obligations of any State or political
subdivision thereof.
The Federal Reserve has been working for some time with the
FDIC, OCC, SEC, and CFTC to develop a final rule that
effectively implements section 619, including the exception for
market-making activities and the other activities permitted by
the statute, in a manner faithful to the words and purpose of
the statute. In developing the rule, the Federal Reserve has
met with numerous members of the public about a wide variety of
issues raised by the statute and the original agency proposal,
including the issues you have raised, and has considered more
than 18,000 comments on the proposal. We are striving to
consider this rule before year-end in order to provide clarity
and certainty to the affected members of the industry and to
the public more broadly about the requirements of section 619.
Q.3. Among the concerns that have been raised about Basel III,
the possibility of bank-centric capital standards being applied
to insurance companies is among the most difficult to justify.
I realize the Federal Reserve may feel it is obligated to
regulate certain components of the insurance industry due to
the Collins Amendment language of the Dodd-Frank Act. However,
I believe, as do many of my Senate colleagues, that the Federal
Reserve does have flexibility in the statute to develop
insurance-based standards. I am concerned that the very
different capital accounting methods utilized by the insurance
industry will make bank-centric Basel III standards unworkable
and disruptive if applied to insurers. Are you able to provide
any insight as to whether the Federal Reserve intends to saddle
insurance companies with bank-centric prudential standards, and
do you believe there is a way to develop strong insurance-based
standards that would make more sense? Could you elaborate on
the process moving forward?
A.3. Section 171 of the Dodd-Frank Act, by its terms, requires
the appropriate Federal banking agencies to establish minimum
risk-based and leverage capital requirements for bank holding
companies (BHCs), savings and loan holding companies (SLHCs),
and nonbank financial companies supervised by the Board
(supervised nonbank companies) on a consolidated basis. This
statutory provision further provides that these minimum capital
requirements ``shall not be less than'' the generally
applicable capital requirements for insured depository
institutions. In addition, the minimum capital requirements
cannot be ``quantitatively lower than'' the generally
applicable capital requirements for insured depository
institutions that were in effect in July 2010. Section 171 does
not contain an exception from these requirements for an
insurance company (or any other type of company) that is a BHC,
SLHC, or supervised nonbank company (Board-regulated company),
or for a Board-regulated company that has an insurance company
subsidiary. In addition, because the calculation of insured
depository institution capital requirements begins with GAAP
measurements, and because statutory accounting is on a legal
entity rather than a consolidated basis, consideration of
accounting methods is part of the analysis in determining
whether capital regulations meet the requirements of section
171 of the Dodd-Frank Act.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR COBURN
FROM JANET L. YELLEN
Q.1. Was there any task more important for the Fed since the
1930s than understanding the financial system, understanding
the financial institutions which were using more and more
leverage and building massive opaque books of complicated
derivatives positions, and heading off the next financial
collapse? Fed minutes from 2006 and 2007 show that the Fed did
not understand the risks of the modern financial system. Now,
the Fed contends that its policy of quantitative easing does
not present a serious inflation risk. However, considering the
failure of the Federal Reserve to anticipate broad changes in
the economy--including the 2008 financial crash and the worst
recession in 50 years--why should Americans have confidence in
that judgment?
A.1. Americans can be confident that the FOMC has both the
ability and the will to prevent inflation. Everyone on the
committee, including myself, is firmly committed to our 2
percent longer-run goal for inflation. Over the past 5 years
inflation has averaged near, but a bit below, our goal of 2
percent. More recently, inflation has generally been running
more significantly below our 2 percent objective, and falling
inflation has been a concern.
At some point as economic conditions normalize, maintaining
price stability will require removing accommodation. At that
time, the Federal Reserve will tighten the stance of monetary
policy by raising its target for the Federal funds rate and the
interest rate it pays on reserve balances, which will put
upward pressure on short-term market interest rates to avoid an
overheated economy and higher-than-target inflation in the
historically normal and well understood way. The Federal
Reserve has also developed a number of tools that it can use if
necessary to help keep market rates near the interest rate on
reserve balances. Moreover, the FOMC intends to gradually
reduce its securities holdings once the economy is strong
enough so that it no longer needs the support provided by the
committee's large scale asset purchases. We are confident we
have the tools to normalize the stance of policy when doing so
becomes appropriate, and that we can do so in a way that will
avoid inflationary consequences down the road.
Q.2. Fiat money is very difficult to preserve in value, and
generations of central bankers have tried hard to project an
image of sobriety and proprietary regarding the purchasing
power of paper money. Do you think the Fed has put at risk the
confidence of investors and citizens in paper money by its
zero-percent-interest-rates and successive rounds of QE?
A.2. Investors and citizens can be confident that the FOMC has
both the will and the ability to prevent rapid inflation.
Everyone on the committee, including myself, is firmly
committed to our 2 percent longer-run goal for inflation. The
FOMC has employed its nontraditional policy tools in order to
support a stronger recovery and move inflation back toward its
longer-run goal--that is, to better foster its Congressionally
established goals of maximum employment and price stability.
Investors would only have reason to lose confidence in the
purchasing power of the dollar if inflation had been excessive
or was at risk of being excessive in the future. However, as
described in my answer to the previous question, inflation has
been low in recent years and remains below our 2 percent
target, and the committee has the tools necessary to remove
policy accommodation when doing so becomes appropriate.
Q.3. Are the Fed's statements that it could snuff out inflation
in 15 minutes by raising rates consistent with past historical
experience? This past spring the mere mention of slightly
reducing the Fed's pace of bond-buying sent global fixed income
markets into a panic, and prices of long-term debt reversed
almost all of the price elevation caused by QE since the spring
of 2009. It is impossible to know whether this market reaction
was the beginning of an anticipation of serious inflation, or
the beginning of a loss of confidence in long-term claims on
paper money that are seen as being debased by the Fed's
policies. What do you think about what happened in the markets
this past spring, and what is the support for the Fed's
statement that if inflation arises, the Fed can get rid of it
in 15 minutes?
A.3. As you note, last spring, the FOMC provided additional
information on its expectations regarding its purchase program,
suggesting a conditional outlook for reductions in the pace of
purchases. That outlook was explicitly conditional on economic
and financial developments--our purchases are by no means on a
preset course. Partly in response to the information the
committee provided about the possible path for policy, but also
reflecting some strengthening in the economic data at that
time, interest rates rose. In addition, some investors who had
taken on leveraged positions in longer-term instruments
reportedly decided to exit those positions, putting additional
upward pressure on rates. However, measures of inflation
expectations, such as the difference between yields on nominal
Treasury securities and those on Treasury Inflation Protected
Securities, did not change appreciably and remained close to 2
percent, indicating that investors did not anticipate high
inflation.
As I noted above, the FOMC is firmly committed to its 2
percent longer-run goal for inflation. The committee has the
tools it needs to address incipient inflation risks, should
they develop, and it can take steps to address unwelcome
increases in inflation very rapidly if required. Such steps
would include increases in our target for the Federal funds
rate and in the interest rate paid on reserve balances as well
as the use of other tools to tighten the relationship between
short-term market interest rates and the rate paid on reserves.
Q.4. After the first round of the Fed's emergency monetary
measures to keep the financial system afloat, the threshold for
additional central bank easing action has become lower and
lower with successive rounds of QE. As a result, loose central
bank policies in the U.S., in Japan, and elsewhere, has
resulted in policy makers relying on monetary policy as a
substitute for necessary tough decisions to structurally reform
our tax, spending, and trade policies that would allow for long
lasting growth. Do you believe it is a critical role of the Fed
Chair to tell the President and Congress that monetary policy
can only go so far, and that it is up to the President and
Congress to do everything they can to remove the impediments to
strong sustainable growth so that the Fed can discontinue its
unprecedented monetary accommodations and their associated
risks?
A.4. Policy makers should understand that monetary
accommodation is not a panacea, and that other parts of the
Government need to take the necessary steps to address the
challenges our economy faces. In particular, I have emphasized
that it would be helpful to the economy to put in place a
strategy for fiscal policy that is not as restrictive in the
near term, but that focuses on the longer-term fiscal issues
that are at the heart of achieving fiscal sustainability, and
that over the longer run can boost the capacity of the economy
through greater national saving, higher investment and, in
turn, increased productivity and long-run economic growth.
Q.5. The Fed's policies of zero-percent interest rates and QE
have created a distorted, unfair recovery. Investors in bonds
and stocks are doing great, with record highs in stock prices
and very high prices of bonds across the yield curve. At the
same time, ordinary people are experiencing just about
recessionary unemployment and underemployment conditions, and
millions of Americans have become discouraged by long-term
unemployment and are no longer even looking for work. Moreover,
QE has boosted the prices of some of the necessities of life
and has made it impossible for savers to earn a safe fair
return on their savings, forcing them to take higher risks.
This set of distortions naturally creates resentment in those
not experiencing a full economic recovery. Do you count this
widening of inequality as a cost of QE and zero-percent
interest rate policy?
A.5. Too many people remain unemployed or have stopped looking
for work, and the extent of long-term unemployment is still
very troubling. However, only a stronger economy will allow
people who need jobs to find them. It is certainly true that
savers and those who rely on investments such as certificates
of deposit and Government bonds currently are receiving low
returns. But savers also participate in the economy in many
other ways as well. Many are workers or would-be workers, and
low interest rates boost economic growth and help create jobs
throughout the economy. Many are borrowers or would-be
borrowers, and Federal Reserve policy has kept mortgage and
other interest rates lower than they would have been otherwise,
helping those who want to buy homes, automobiles, and other
durable goods. Many are investors in stocks and other financial
investments, and a stronger economy will naturally generate
better returns on those other investments. More generally, in
light of the continued headwinds restraining economic growth,
the FOMC judges that low interest rates are needed at this time
to provide support to the ongoing recovery. Unequivocally, the
goal of our accommodative monetary policy is to foster a more
rapid return to an economy that works better for everyone, by
promoting a return to maximum employment in a context of price
stability.
Q.6. Since 2008, our Nation's largest banks are even larger
than prior to the crisis, and studies have found they can raise
money at lower rates due to their TBTF status. A major reason
these firms retain the perception of TBTF is that even the most
sophisticated market participants cannot understand the complex
risks embedded in their derivatives books, which were at the
heart of the recent crisis and which still contain trillions of
dollars of potentially volatile positions. In the absence of
adequate derivatives disclosures, the market will continue to
lack confidence that these firms are actually safe and sound
and won't threaten a breakdown of the financial system. Dodd-
Frank gave the Fed vast new powers to end TBTF. A key component
of ending TBTF is ensuring that the market understands the risk
exposures of these multi-trillion dollar derivatives books.
Will you commit to using the Fed's new powers to make sure that
the market has significantly more robust access to the
derivatives exposures of financial institutions?
A.6. I agree that TBTF is a damaging economic phenomena, and
regulators around the world need to work to address TBTF. We
have made progress in reducing the TBTF problem since the
financial crisis by reducing the probability of failure of
systemically important financial institutions (SIFIs), by
reducing the damage to the system if a SIFI were to fail, and
by strengthening the broader financial markets and
infrastructure. For example, we have substantially raised bank
capital requirements, implemented stress tests for large bank
holding companies and disclosed results, strengthened our
approach to large bank supervision, and agreed on new liquidity
rules for global banking firms. Progress also has been made to
address the failure of a SIFI, through the resolution planning
process and through the development of the FDIC's single-point-
of-entry approach to orderly liquidation authority. In
addition, the Federal Reserve is now required to consider
financial stability when reviewing merger and acquisition
applications by bank holding companies. Finally, we have
strengthened financial markets and infrastructures by, among
other things, improving the tri-party repo settlement
infrastructure, strengthening the supervision of financial
market utilities, moving more over-the-counter derivatives to
central clearing, and substantially improving transparency in
the derivatives markets.
Market participants and some rating agency actions for
large bank holding companies have recognized this progress. But
we still have work to do to eliminate residual TBTF subsidies.
We are committed to that work. If the existing regulatory
reform efforts in train prove to be insufficient to solve the
TBTF problem, we are willing to look at the costs and benefits
of other approaches.
On the specific issue of disclosure of bank derivatives
activities, the Federal Reserve has been working in concert
with other agencies--in particular the CFTC and SEC--to
implement the broad set of derivatives reforms mandated by the
Dodd-Frank Act. These reforms should substantially increase
transparency regarding banking firms' derivatives activities,
as more derivatives trading takes place through central
counterparties (CCPs) and data regarding such activity is
stored and accessible via trade repositories (TRs). This
information should augment existing data on firms' derivatives
activities publicly disclosed in regulatory filings (e.g., Y-
9Cs and 10-K/Qs).
In addition, firms' derivatives exposures are included in
the Federal Reserve's Dodd-Frank Act Stress Test and
Comprehensive Capital Analysis and Review (CCAR) exercises, the
results of which are released publicly each year.
The Federal Reserve has a long history of supporting
enhancements in bank disclosure practices.
Q.7. The Bank for International Settlements noted in its annual
report that ``in the years ahead, exiting from the
extraordinarily accommodative policy stance will raise
significant challenges for central banks. They will need to
strike the right balance between the risks of exiting
prematurely and the risks associated with delaying exit
further. While the former are well understood, it is important
not to be complacent about the latter just because they have
not yet materialized.'' Do you believe there could be a
tendency to delay exiting because the risks related to waiting
too long (asset bubbles, inflation, misallocation of credit)
are not clear until it is too late?
A.7. There are risks associated with both keeping monetary
policy accommodative for too long and tightening policy too
soon. As you note, keeping policy accommodative for too long
could result in an unwelcome increase in inflation and could
encourage excessive risk-taking that might eventually lead to
financial instability. Tightening policy too soon could cut off
an incipient strengthening of the recovery, preventing a
beneficial decrease in unemployment, and possibly causing
inflation to move further below the FOMC's target of 2 percent.
In order to determine the appropriate setting of monetary
policy, the Federal Reserve assesses the outlook for economic
conditions as well as the risks around that outlook on an
ongoing basis.
I agree that there are unique risks associated with the
unconventional monetary policy instruments the FOMC is
currently employing, including its large-scale asset purchases
and forward guidance for the Federal funds rate, but I do not
believe those risks result in a tendency for the FOMC to keep
policy accommodative for too long. The Federal Reserve is
carefully monitoring the sources of risk associated with
accommodative policy. In particular, the Federal Reserve has
increased considerably the resources it is devoting to
monitoring risks to financial stability. While there are
currently some indications of ``reach for yield'' in the low-
rate environment, there does not appear to be a widespread
increase in excessive risk taking.
It is important to note that there are also unique risks
associated with removing policy accommodation too soon because
of the current policy situation. Indeed, I think the best way
to bring about an expeditious end to unconventional monetary
policy is to avoid a premature removal of accommodation.
Q.8. In a speech this spring, Fed Board Governor Jeremy Stein
indicated that certain sectors of the credit market are showing
signs of overheating due to the extended period of low interest
policy. He noted these risks are developing in the corporate
junk bond markets, the mortgage REIT sector, and commercial
bank securities, and he concluded that these risks may need to
be dealt with through rate increases. FSOC also identified the
extended period of low-interest as potentially causing banks to
push further out along the risk curve to ``reach for yield,''
increasing credit risk for near-term earnings but sacrificing
long term stability in the event of a sudden large rise in
rates or widening in credit spreads. Do your views of the
overheating of certain markets differ from Governor Stein's? Do
you believe there is a potential that we can experience a boom
and bust in asset prices without ever experiencing a full
economic recovery?
A.8. We follow a great many markets and overall, I do not think
we see very much evidence of troubling excesses. I agree with
Governor Stein, however, that we saw some issues in some
markets this spring and that these warrant careful monitoring.
The rise in interest rates over the summer may have helped
reign in some behavior that might otherwise have grown even
more concerning. Still we continue to monitor a number of
areas. We are mindful of the fact that financial excesses can
appear even before a full recovery is complete.
As Governor Stein noted, we have a number of tools for
dealing with such problems should they reach the point that a
response is required. My preferred first lines of defense
involve supervisory and regulatory tools. This is because
monetary policy is a very blunt tool for addressing excesses in
particular markets. Raising the price of credit for everyone in
the economy may help to reign in some troubling behavior, but
would also impose costs on all those behaving prudently. Thus,
while it is important to maintain the monetary policy option
for dealing with financial excesses, I believe it should be a
backstop used if more directed approaches fail.
Q.9. How much are the Fed's tools to lower interest rates to
stimulate consumer spending on durable goods and mortgages
diminished by the fact that the private sector is deleveraging
from recent overleveraging and massive asset bubbles? To what
extent is incentivizing consumer debt counterproductive to a
stable long-run economy? How could fixing our fiscal, tax, and
regulatory policies impact the economy as compared to
accommodative monetary policies?
A.9. One key factor shaping the contours of the recovery has
been the effort of the private sector to reduce its leverage.
Substantial progress in that direction has been accomplished,
and that progress helps lay the groundwork for a more secure
economic expansion going forward. Another important factor
helping to lay that groundwork is a highly accommodative
monetary policy. These factors are complementary, in that they
both help to boost consumer confidence, boost hiring above
where it would otherwise be, and increase business demand for
capital. That said, monetary policy is not a panacea, and
policy makers of all types should be endeavoring to align their
policies similarly toward bolstering the recovery and ensuring
a solid foundation for growth and stability going forward.