[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]


                     PROMOTING FINANCIAL STABILITY:
                        ASSESSING THREATS TO THE
                         U.S. FINANCIAL SYSTEM

=======================================================================

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CONSUMER PROTECTION
                       AND FINANCIAL INSTITUTIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 25, 2019

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 116-52
                           
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


                              __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
42-352 PDF                  WASHINGTON : 2020                     
          
--------------------------------------------------------------------------------------

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 MAXINE WATERS, California, Chairwoman

CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
BRAD SHERMAN, California             PETER T. KING, New York
GREGORY W. MEEKS, New York           FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri              BILL POSEY, Florida
DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas                      BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri            SEAN P. DUFFY, Wisconsin
ED PERLMUTTER, Colorado              STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut            ANN WAGNER, Missouri
BILL FOSTER, Illinois                ANDY BARR, Kentucky
JOYCE BEATTY, Ohio                   SCOTT TIPTON, Colorado
DENNY HECK, Washington               ROGER WILLIAMS, Texas
JUAN VARGAS, California              FRENCH HILL, Arkansas
JOSH GOTTHEIMER, New Jersey          TOM EMMER, Minnesota
VICENTE GONZALEZ, Texas              LEE M. ZELDIN, New York
AL LAWSON, Florida                   BARRY LOUDERMILK, Georgia
MICHAEL SAN NICOLAS, Guam            ALEXANDER X. MOONEY, West Virginia
RASHIDA TLAIB, Michigan              WARREN DAVIDSON, Ohio
KATIE PORTER, California             TED BUDD, North Carolina
CINDY AXNE, Iowa                     DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois                TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts       ANTHONY GONZALEZ, Ohio
BEN McADAMS, Utah                    JOHN ROSE, Tennessee
ALEXANDRIA OCASIO-CORTEZ, New York   BRYAN STEIL, Wisconsin
JENNIFER WEXTON, Virginia            LANCE GOODEN, Texas
STEPHEN F. LYNCH, Massachusetts      DENVER RIGGLEMAN, Virginia
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota

                   Charla Ouertatani, Staff Director
     Subcommittee on Consumer Protection and Financial Institutions

                  GREGORY W. MEEKS, New York, Chairman

DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
WM. LACY CLAY, Missouri              FRANK D. LUCAS, Oklahoma
DENNY HECK, Washington               BILL POSEY, Florida
BILL FOSTER, Illinois                ANDY BARR, Kentucky
AL LAWSON, Florida                   SCOTT TIPTON, Colorado, Vice 
RASHIDA TLAIB, Michigan                  Ranking Member
KATIE PORTER, California             ROGER WILLIAMS, Texas
AYANNA PRESSLEY, Massachusetts       BARRY LOUDERMILK, Georgia
BEN McADAMS, Utah                    TED BUDD, North Carolina
ALEXANDRIA OCASIO-CORTEZ, New York   DAVID KUSTOFF, Tennessee
JENNIFER WEXTON, Virginia            DENVER RIGGLEMAN, Virginia
                           
                           
                           C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 25, 2019...........................................     1
Appendix:
    September 25, 2019...........................................    37

                               WITNESSES
                     Wednesday, September 25, 2019

Brainard, Hon. Lael, Governor, Board of Governors of the Federal 
  Reserve System.................................................     5
Falaschetti, Hon. Dino, Director, Office of Financial Research, 
  U.S. Department of the Treasury................................     6

                                APPENDIX

statements:
    McHenry, Hon. Patrick........................................    38
    Brainard, Hon. Lael..........................................    40
    Falaschetti, Hon. Dino.......................................    49

              Additional Material Submitted for the Record

Meeks, Hon. Gregory W.:
    Letter to the Fed, the FDIC, and the OCC from Hon. Maxine 
      Waters and Hon. Sherrod Brown..............................    57
    Press release from Chairwoman Waters.........................    60

 
                     PROMOTING FINANCIAL STABILITY:
                        ASSESSING THREATS TO THE
                         U.S. FINANCIAL SYSTEM

                              ----------                              


                     Wednesday, September 25, 2019

             U.S. House of Representatives,
                Subcommittee on Consumer Protection
                        and Financial Institutions,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:07 a.m., in 
room 2128, Rayburn House Office Building, Hon. Gregory W. Meeks 
[chairman of the subcommittee] presiding.
    Members present: Representatives Meeks, Scott, Velazquez, 
Heck, Foster, Lawson, Tlaib, Porter, Wexton; Luetkemeyer, 
Posey, Barr, Tipton, Williams, Loudermilk, Kustoff, and 
Riggleman.
    Ex officio present: Representatives Waters and McHenry.
    Also present: Representatives Cleaver, and Garcia of 
Illinois.
    Chairman Meeks. The Subcommittee on Consumer Protection and 
Financial Institutions will come to order. Without objection, 
the Chair is authorized to declare a recess of the subcommittee 
at any time. Also, without objection, members of the full 
Financial Services Committee who are not members of this 
subcommittee are authorized to participate in today's hearing.
    I now recognize myself for 4 minutes to give an opening 
statement.
    Today's hearing is entitled, ``Promoting Financial 
Stability: Assessing Threats to the U.S. Financial System.'' 
This committee considers many important issues that impact the 
lives of American families and households, but I would argue 
that no issue cuts across every district, every ZIP code, and 
impacts every American like a financial crisis.
    While 10 years may seem like a long time ago, it frankly 
feels like yesterday when it comes to the financial crisis and 
the Great Recession. I was here and recall vividly, in 2008, 
when Secretary Paulson came to the House Floor and told us that 
we literally had just a few days to save the entire American 
economy and financial system from total collapse.
    I was here, as Chair of the International Monetary Policy 
Subcommittee, and a member of the Conference Committee, when we 
drafted the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. I know that documentaries and movies have been 
made about it, but there is frankly no way to describe or fully 
capture the deep, sinking feeling of being told that the 
greatest economy in the world is days away from a collapse, 
dragging the rest of the world with us.
    Today, the U.S. economy is slowing. Global trade is in 
turmoil. Chinese growth is stalling. European economies are 
slowing, with some entering recession and a hard Brexit poses a 
potential shock to global markets. Big sections of Latin 
America are in turmoil, oil markets are literally under attack, 
and I could go on.
    We are entering a period that may prove to be the first 
real test of the new regulatory framework put in place 
following the financial crisis. I fear that some actors in the 
economy, and even in government, suffer from a worrisome form 
of amnesia or selective memory. As they say, history may not 
repeat itself, but it certainly rhymes.
    There are echoes, not just of the last financial crisis, 
but of elements of previous crises in the state of the economy 
and markets today which cause me great concern. There are also 
new emerging threats, and I question whether the 
Administration, the Financial Stability Oversight Council 
(FSOC), or the Office of Financial Research (OFR) and 
regulators are taking seriously enough the potential risk to 
the economy. I hope so.
    Among those, I would include high equity valuations that 
appear well above fundamentals, seizures in short-term funding 
markets, leveraged lending that burdens companies with high 
debts and creates new complex securitization schemes, and an 
economy meant to be the best in 50 years propped up nearly 
entirely by consumers while 40 percent of American households 
barely make ends meet and can't afford a $400 emergency 
expenditure. Also, rapid concentration of the banking sector 
and disappearance of community banks and minority banks, 
creating expanding banking deserts and exposing a growing share 
of the population to predatory actors, and leaving many 
financially disenfranchised. Cyber-attacks and data breaches, 
and again, I could go on.
    So I am here, and we are here today, and I urge the 
regulators, FSOC, and, in particular, the Office of Financial 
Research, to invest in required resources to monitor, map, and 
quantify existing and emerging systemic risk. We owe it to 
every American family, worker, and homeowner to take an 
intellectually honest approach to monitoring and regulating 
markets to prevent the fallout of yet another financial crisis.
    The Chair now recognizes the ranking member of the 
subcommittee, Mr. Luetkemeyer, for 4 minutes for an opening 
statement.
    Mr. Luetkemeyer. Thank you, Chairman Meeks. A decade after 
the financial crisis, all signs are pointing towards a healthy 
U.S. financial system that is vastly safer and more resilient. 
According to FDIC Vice Chairman of Supervision Randy Quarles, 
every time we go through this analysis we conclude that 
financial stability risks are not meaningfully above normal 
because there is so much capital in the banking sector. 
Financial institutions across the nation are injecting capital 
into their communities and supporting American consumers, 
homeowners, and business owners through increased lending.
    This is not to say that we cannot improve. The stranglehold 
of regulatory burdens continues to affect financial 
institutions across the nation. The Trump Administration has 
been a strong partner in easing overly burdensome regulations, 
and together we can do more to free up additional capital. It 
is our responsibility, on this committee, to support pro-growth 
policies and responsible regulations that ensure the continued 
safety and stability of our financial system.
    When the CEOs of America's largest banks testified before 
this committee in April, they were asked to cite the biggest 
threat that their institutions faced. Many identified 
cybersecurity as a major threat, with Bank of America CEO Brian 
Moynihan going as far as to say thagt we are effectively in a 
war on cybersecurity.
    At a House Financial Services markup last year, I lamented 
that at some point there will be another major breach, and 
without a comprehensive solution, our constituents will pay the 
price for our inaction. Fast forward a year, and we have seen 
numerous data breaches spanning every industry from financial 
services to retailers to social media companies.
    Data security is a challenging and constantly evolving 
issue that, unfortunately, doesn't get the attention it 
deserves until there is yet another breach affecting millions 
of Americans. We need clear rules of the road surrounding data 
security and breach notification across the nation. 
Unfortunately, this committee has not had any data security 
hearings this year. Current data security notification 
standards leave millions woefully unprotected, and the American 
people deserve more than a deafening silence on this critical 
issue.
    In addition to data security, I have been raising alarms 
with regard to the threat posed by the Financial Accounting 
Standards Board's (FASB's) Current Expected Credit Losses 
(CECL) standard. While FASB will vigorously argue that CECL has 
been years in the making, members of the Board have also 
admitted that there has not been, nor will there be an economic 
impact study performed, despite repeated warnings that the 
procyclical nature of CECL could exacerbate a downturn.
    JPMorgan Chase CEO Jamie Dimon, in this very committee, 
went as far as to say that CECL would put smaller institutions 
in a position that when a crisis hits, they will virtually have 
to stop lending, because putting up those reserves would be too 
much at precisely the wrong time.
    It is irresponsible for Congress to stand by and allow 
short-sighted, hastily implemented standards to threaten the 
ability of our financial institutions to continue lending. I 
welcome today's witnesses and I look forward to a robust 
discussion on how to support continued financial stability in 
the United States.
    With that, Mr. Chairman, I yield back.
    Chairman Meeks. Thank you. The gentleman yields back the 
balance of his time.
    I now recognize the gentleman from Georgia, Mr. Scott, for 
one minute.
    Mr. Scott. Thank you very much, Chairman Meeks, and it is 
really good to have Governor Brainard and Director Falaschetti 
here with us, because this is an incredibly important and 
timely hearing. We find ourselves now 10 years out from the 
collapse of our financial system. Our economy has come a long 
way. I think we have done a good job. The passage of Dodd-Frank 
took important steps to expose the cracks in the foundation of 
our financial structure and mitigate the damage that was done 
by decades of financial recklessness.
    Now, as we hear from our top regulatory experts, we must 
evaluate not only our efforts to correct past missteps, but we 
also must find ways to remain vigilant against new threats to 
our great financial stability and our great financial industry.
    So I look forward to the insights of my colleagues, and 
those of my colleagues on the subcommittee, and from our 
distinguished panelists.
    Thank you, Mr. Chairman.
    Chairman Meeks. The gentleman's time has expired.
    I now recognize Mr. Luetkemeyer for a unanimous consent 
request.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. Ranking Member 
McHenry wanted to be here and had a statement that he was going 
to read, but in his absence, I will just ask the subcommittee, 
without objection, to add it to the record.
    Chairman Meeks. Without objection, it is so ordered.
    Today, we welcome the testimony of two witnesses.
    First, Fed Governor Lael Brainard took office as a member 
of the Board of Governors of the Federal Reserve System on June 
16, 2014, to fill an unexpired term ending January 31, 2026. 
Prior to her appointment to the Board of Governors, Dr. 
Brainard served as Under Secretary of the U.S. Department of 
the Treasury from 2010 to 2013, and as Counsel to the Secretary 
of the Treasury in 2009.
    During this time, she was the U.S. representative to the G-
20 finance deputies and the G-7 deputies, and was a member of 
the Financial Stability Board. She received the Alexander 
Hamilton Award for her service.
    Dr. Brainard was also previously assistant and associate 
professor of applied economics at the Massachusetts Institute 
of Technology's Sloan School of Management. She received a BA 
with university honors from Wesleyan University in 1983. She 
received an MS and a Ph.D. in economics in 1989 from Harvard 
University, where she was awarded the National Science 
Foundation fellowship. She is also the recipient of a White 
House fellowship.
    Welcome, Governor Brainard.
    Also testifying is OFR Director Dino Falaschetti. Mr. 
Falaschetti was confirmed by the U.S. Senate and sworn in as 
Director of the Office of Financial Research in June 2019. He 
started his career by leading financial statement audits and 
managing at Fortune 100 corporate financial departments. 
Subsequently, he served as a professor of law, economics, and 
finance, where he leveraged professional experiences in 
business, policy, and law with firmly grounded data analytics 
to build a top-ranked research program. He earned tenure in 
both law and economics, an endowed Chair in finance, and 
research appointments at Stanford University and the University 
of California at Berkeley.
    Prior to joining OFR, he served as the Chief Economist for 
the U.S. House Financial Services Committee, so he is really 
coming back home. He has also served as a Senior Economist for 
the White House Council on Economic Advisors, and contributed 
in leadership roles at policy research institutions. He earned 
a doctorate degree in economics from Washington University in 
St. Louis, an MBA with high honors from the University of 
Chicago Booth School of Business, and a bachelor of science 
degree with distinction from the Indiana University Kelley 
School of Business.
    I remind the witnesses that your oral testimony today will 
be limited to 5 minutes, and without objection, your written 
statements will be made a part of the record.
    Governor Brainard, you are now recognized for 5 minutes to 
give your oral presentation.

 STATEMENT OF THE HONORABLE LAEL BRAINARD, GOVERNOR, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Ms. Brainard. Thank you, Chairman Meeks, Ranking Member 
Luetkemeyer, and members of the subcommittee. I appreciate the 
opportunity to be here today, along with my colleague from OFR, 
Dino Falaschetti.
    Following the financial crisis, Congress created the FSOC 
and assigned financial stability responsibilities to domestic 
regulators. The Federal Reserve Board, in turn, created a new 
board, the Committee on Financial Stability, which I Chair, and 
the Division of Financial Stability, which provides a financial 
stability assessment each quarter to the Board and to the 
Federal Open Market Committee (FOMC), and I just want to 
acknowledge Andreas Lehnert, who has led that Division. We now 
publish a Financial Stability Report semi-annually in order to 
increase transparency and accountability, and I brought a copy 
today.
    Because the build-up of financial imbalances in good 
economic times has the potential to lead to disruptions in 
credit that can amplify a subsequent downturn, we assess 
financial vulnerabilities as well as mitigants that build 
resilience. Let me briefly run through these.
    First, overall household borrowing has come down in recent 
years and is now growing more slowly than the economy overall. 
While much of the increase before the crisis reflected 
borrowing that proved unsustainable, more recently it has been 
concentrated among households with stronger credit profiles. In 
addition, there has been an increase in student debt in recent 
years, which deserves attention.
    Second, far-reaching reforms have made the regulated 
financial sector more resilient. Insurers appear generally 
well-capitalized and broker-dealers have lower leverage. Banks 
increased capital buffers following the crisis, although the 
ratio of capital relative to risk assets at the largest banks 
has moved down somewhat as payouts have exceeded earnings over 
the past couple of years. Financial reforms have also 
importantly reduced funding risks. Large banks subject to 
liquidity regulation have stronger liquidity buffers and are 
less reliant on unstable short-term wholesale funding.
    There are, however, two areas that I am monitoring closely. 
First, a range of asset prices are high relative to historical 
benchmarks. Relative to Treasury yields, spreads on high-yield 
corporate bonds remain somewhat narrow, relative to historical 
norms. Spreads on leveraged loans remain in the bottom half of 
their range since the crisis, and capitalization rates on 
commercial real estate have been low.
    Declines in those valuations could make it more challenging 
for firms to obtain or extend financing, which could be 
amplified by high levels of risky corporate debt, and that is 
the second area of note. Business borrowing has risen more 
rapidly than GDP for much of the current expansion and now sits 
near its historical peak. It appears that firms with high 
leverage, high interest expense ratios, and low earnings and 
cash holdings have been increasing their debt loads the most.
    While the share of high-yield bonds rated ``deep junk'' has 
stayed well below the financial crisis peak within the 
investment-grade segment, half of those corporate bonds are now 
rated at the lowest level, and that is a near record. 
Widespread downgrades of those low-rated investment-grade bonds 
to speculative-grade ratings could induce some investors to 
sell them rapidly, and this bears watching, as total assets 
under management and bond mutual funds have more than doubled 
in the past decade and they now hold about one-tenth of the 
corporate bond market.
    In addition, net issuance of leveraged loans grew rapidly 
last year. The total is now over a trillion, although the pace 
of issuance has slowed as the interest rate environment has 
shifted. Covenants issued for the loans issued in the last few 
years have weakened notably, and they often include terms that 
increase opacity and risk. A substantial share of those are 
packaged in CLOs and many large banks originate leveraged loans 
with an intent to distribute. While the direct exposures of the 
banking system in the form of loan portfolios and warehousing 
exposures are being monitored, there are indirect exposures, 
including through investments and CLOs and credit lines, and, 
of course, non-bank exposures are hard to monitor.
    Overall, corporate credit conditions have been favorable. 
However, history points to the risk that excesses in corporate 
debt markets could amplify negative shock.
    That brings me to the final point, recognizing that we must 
be especially vigilant to fortify financial system resilience 
in good times. Our toolkit includes a countercyclical capital 
buffer (CCyB) that is intended to be on top of strong through 
the cycle requirements. The CCyB is simple, predictable, and 
slow-moving. It applies equally across all large banks. The 
criteria for implementing it were released in September 2016. 
The Board voted to set it at zero earlier this year, but many 
other jurisdictions have raised their countercyclical buffers 
above zero.
    Thank you. I look forward to any questions.
    [The prepared statement of Governor Brainard can be found 
on page 40 of the appendix.]
    Chairman Meeks. I now yield 5 minutes to Mr. Falaschetti 
for his oral testimony.

 STATEMENT OF THE HONORABLE DINO FALASCHETTI, DIRECTOR, OFFICE 
     OF FINANCIAL RESEARCH, U.S. DEPARTMENT OF THE TREASURY

    Mr. Falaschetti. Chairman Meeks, Ranking Member 
Luetkemeyer, and members of the subcommittee, thank you for 
inviting my testimony on behalf of our Office of Financial 
Research (OFR). I am honored to appear with the Governor and 
look forward to discussing the productive role that OFR plays 
in our government's financial stability framework.
    Throughout my career, I have enjoyed developing firmly 
grounded perspective on important financial and economic 
matters, and I have especially enjoyed doing so through public 
service on the President's Council of Economic Advisors, this 
committee, and now, as Director of our office.
    Before starting my testimony, I want to recognize our 
staff. Prior to my appointment, our office extensively 
reexamined its mission, culture, and structure. Throughout, our 
staff never let go of a mission that they and I support. I am 
grateful to each and every one of you for your dedicated 
service as individuals and a team. I begin my testimony today 
by acknowledging you all. My priority in commitment to them is 
a safe, collegial, and fulfilling workplace so that they can 
thrive personally and professionally by furthering our 
important mission of serving FSOC and its member agencies.
    When it comes to economic opportunity, our United States 
stands as the world's leader. A resilient financial sector is 
vital to every American. While the great financial crisis is 
sometimes characterized as a perfect storm, credible warnings 
were available. For example, the President's Economic Report in 
2006 highlighted the importance of financial services for 
upward mobility. In doing so, it also called on regulators to 
``mitigate the likelihood of systemic events.'' Despite their 
accessibility and timeliness, such warnings could not mitigate, 
let alone stop the crisis that was to come.
    Reflecting on this history, a prominent economist rejected 
calls for increased regulation of an already heavily regulated 
sector. Instead, he highlighted opportunities for data analysis 
and monitors to increase transparency for inter-institution 
exposures and concentrations of risk.
    OFR was established to increase the likelihood that future 
warnings will be more credible when grounded on economic 
fundamentals and informed by high-quality data and careful 
research. OFR supports FSOC and its member agencies with data 
and research services that work toward this important end.
    Our office's latest Annual Report to Congress was published 
in November 2018. It saw financial stability risks in the 
medium range while indicating relatively high market and 
cybersecurity risks. Credit risk appeared moderate overall, 
with increased risk from leveraged lending tempered somewhat by 
lower risk from consumer credit. Risk from solvency and 
leverage remain low, in general, while funding and liquidity 
risk was low overall. However, these risks can change quickly.
    Cybersecurity risk continued to warrant attention. Our 
office first discussed risks from cybersecurity in the 
inaugural 2012 annual report. Our 2018 annual report also 
highlights how network analysis could provide increased 
transparency for cyber risks.
    Our office expects publication of its 2019 annual report 
later this year. That report remains a work in progress so I 
cannot speak to details. Based on currently available data, 
however, our overall risk assessment will remain in the medium 
range.
    American economic opportunity is the envy of the world. The 
OFR plays an important role in fortifying financial stability 
for the world's greatest economy. I am honored to lead our 
office and proud of our good people who wake up every day to 
advance its important mission.
    Thank you for your invitation to testify. I look forward to 
your questions.
    [The prepared statement of Director Falaschetti can be 
found on page 49 of the appendix]
    Chairman Meeks. Thank you. I now recognize myself for 5 
minutes for questions.
    Let me start with you, Governor Brainard. The Fed has done 
a rapid pivot to cutting rates, just last week, and I asked 
this question yesterday to the members of the SEC Commission--
they are intervening aggressively in the repo market, short-
term lending. And I get those echoes, as I talked about in my 
opening statement, about, ``I don't ever want to be back where 
we were in 2008,'' and Secretary Paulson. And then I look at 
what is happening with Brexit and the situation with China 
slowing down, et cetera.
    You mentioned in your opening one of the key risks you 
worry about, and I think I heard ``leveraged lending.'' Would 
you also expand on leveraged lending, why that may be a 
potential risk, and any other factors that you think we should 
be really paying attention to?
    Ms. Brainard. Thank you for your question. First of all, 
with regard to leveraged lending, we really saw very rapid 
increases in leveraged lending over the past several years, 
although some of that has slowed as the interest rate 
environment has made bond issuance again more attractive.
    The thing that is notable, apart from the very large 
increase in leveraged loan issuance that we saw, is just that 
the covenants on those leveraged loans have weakened quite 
notably, relative to what they would have looked like 
historically, and there are features that make them less 
secure, and more opaque, for some of the investors. Now, they 
are being securitized, many of them, in CLO structures.
    And so what is important, I think, going forward, is to be 
able to have as much visibility as we can into those structures 
and who is holding those loans through those structures. We 
look at banking system exposures, but, of course, there is a 
very large component, which is non-bank, that I think bears 
attention.
    I don't know if you wanted me to also turn to repo--
    Chairman Meeks. Yes, please.
    Ms. Brainard. --but I am happy to do that.
    Just to take a brief moment to separate how the FOMC looked 
at the economy, so with the interest rate decision, the Federal 
funds rate decision that was made at the September FOMC 
meeting, that was really a traditional kind of monetary policy 
lens, where looking at the economy, looking at downside risks 
from trade policy uncertainty, in particular, from slowing 
growth abroad, in an environment of muted inflation, the 
Committee, or at least in my view, was wise to take out some 
insurance against downside risks to the economy.
    What is separate from that is the pipes of the short-term 
money markets, which is really what we are talking about in the 
repo markets, and what we saw was that a number of events--
there was a confluence of both increased supply of Treasury 
Securities that needed to be funded at the same time as we also 
had some of the suppliers of cash in that market withdrawing 
because they had large corporate tax payments that they were 
taking care of.
    So, it was a confluence of factors that led to an imbalance 
of supply and demand in the pipes of the system. I would really 
say that the New York Fed is very focused. They have been 
providing ample operations to relieve those temporary 
frictions. But the operations that they undertook were not for 
purposes of monetary policy. It was to address those technical 
issues in the pipes in the system.
    Chairman Meeks. Thank you very much.
    Let me ask the Director, I noticed that you had a staff 
reduction of more than 43 percent, and a budget cut of 25 
percent. So I am really concerned about OFR having the ability 
to have the personnel necessary to do what you were charged to 
do.
    Can you tell us how you are committed to, and how you plan 
on rebuilding the OFR team to ensure that it is clearly focused 
on the monitoring and mapping and qualifying systemic risk 
wherever it might be, so regulators are well-equipped to do 
their work?
    Mr. Falaschetti. Thank you for your question, Mr. Chairman. 
I just lost my nametag, but you know who I am.
    We are in the process right now of--and thank you for the 
meeting yesterday--our head count right now is in the 
neighborhood of 100 employees at our shop. We are building--we 
are recruiting vigorously. We are interviewing and we are 
retaining the people that we are bringing on. We are making 
good progress on that.
    In addition, with our staff, I have a mission which is well 
on its way to meet with every staff member in our building. I 
host lunches twice a week with our staff members. I want to 
hear everything that is going on within our organization, and I 
think, going forward, as we fill out that team, it will not 
only be a larger team but it will be a more collegial and 
effective team.
    Chairman Meeks. Thank you. My time has expired. I now yield 
5 minutes to the ranking member of the subcommittee, Mr. 
Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. Mr. Falaschetti, 
you and I had a conversation last week, I believe, with regards 
to your ability to do a study that would give us some idea of 
the impact of CECL. And I think you indicated to me that you 
need to have some sort of directive from one of the members of 
the FSOC or FSOC itself, is that correct?
    Mr. Falaschetti. That is correct, sir.
    Mr. Luetkemeyer. So exactly what is the process to be able 
to get a study? In other words, if Governor Brainard asked you 
to do that today, would that be sufficient?
    Mr. Falaschetti. It is the members of the FSOC who would 
make that decision, and they are regularly briefed on issues 
like this. But I understand that has not come up in our FSOC 
meetings.
    Mr. Luetkemeyer. What would the typical study look like? 
What are the factors you would examine?
    Mr. Falaschetti. On CECL per se?
    Mr. Luetkemeyer. Yes. Do you look at the macroeconomic 
effect of it? Is that what you do, I assume?
    Mr. Falaschetti. Sure. Yes. Whether it is countercyclical, 
procyclical, those sorts of issues could come up.
    Mr. Luetkemeyer. Have you taken into account the other 
industry reports that I have seen that show the amount of money 
they are going to have to have, the additional reserves, the 
cost that it would incur that would have to be passed on to 
consumers? All of that would be part of it, I assume?
    Mr. Falaschetti. Cost-benefit analysis would certainly be 
in that report, yes.
    Mr. Luetkemeyer. Okay. Thank you.
    Governor Brainard, I have discussed this issue with every 
single member of the Federal Reserve Board. I think I have even 
discussed it with you in the past. This is, obviously, 
something that is very concerning to me, because of the impact 
I think it would have on our economy, on the financial services 
industry, and on our consumers, to be able to have access to 
affordable home loans. And so, this is really a big deal to me.
    You have heard Mr. Falaschetti's concern, and I think you 
know enough about CECL to be willing to--would you be willing 
to go to your Board members and ask them to do a study for us?
    Ms. Brainard. Thank you, Ranking Member Luetkemeyer. First, 
I will say that I have heard from many banks that they don't 
understand, especially small banks, how CECL might impact them. 
Now, of course, CECL is a standard that is put in place by an 
independent standard-setting body, so it is really something 
that we are simply obligated to accept. It is not something 
that we make determinations on.
    Mr. Luetkemeyer. But now you are going to have to enforce 
it. If you have to enforce a rule that is going to be 
detrimental to our economy, to the industry that you oversee, 
don't you think you ought to push back on that a little bit?
    And before you answer that, let me read you what--I don't 
normally put credence in any of these political rags around 
here, but this one, as of last Thursday, The Hill, is quoting 
Chairman Powell directly. And the Chairman said, in response to 
a question, ``The Fed has no role in the formulation of trade 
policy, but we do take into account anything that can 
materially affect the economy relative to our employment and 
inflationary goals.''
    When you look at the impact of this, that has direct and 
material effects on employment and inflationary goals. You are 
not going to consider that?
    Ms. Brainard. Just to continue, there have been a number of 
quantitative studies that have been undertaken. Of course, we 
have looked at those very carefully. They do not conclusively 
suggest that there would be a negative impact. That said, I am 
not, as you know, a representative to FSOC.
    Mr. Luetkemeyer. Yes, but you are on the Board, Governor, 
and you have nput. I have files from credit union folks, I have 
the testimony from the bankers who were in this committee not 
too long ago, of billions and billions of additional dollars 
that are going after reserve. Those costs have to be passed on. 
That should be a concern.
    Ms. Brainard. Absolutely, and to the extent that FSOC wants 
to ask OFR to do a study, that is certainly something that--
    Mr. Luetkemeyer. Would you be willing to help push for 
that?
    Ms. Brainard. I would certainly be happy to convey these 
concerns to the Chair in his role as our representative to--
    Mr. Luetkemeyer. Yesterday, I relayed a story, an analogy 
of what is going on here, and the analogy goes like this. A few 
months ago, we celebrated the 50th anniversary of putting a man 
on the moon. Imagine yourself in a lunar module on top of a 
rocket, knowing that the last market, i.e., mark to market, 
that was done without a study of cost-benefit analysis, blew up 
on the launching pad. And now you are sitting on top of another 
rocket called CECL, that has not had a cost-benefit analysis or 
a study on it. Would you be willing to light that rocket?
    Ms. Brainard. Again, I think it is very important to 
understand--
    Mr. Luetkemeyer. Would you be willing to light that rocket, 
without a study or a cost-benefit analysis, knowing that the 
last one just blew up?
    Ms. Brainard. I think that there have been a fair amount of 
quantitative studies done, and, of course, I am always 
interested--
    Mr. Luetkemeyer. You are the only one who would be willing 
to send that rocket--to light it and let it go. Everybody else, 
every regulator I have talked to said, no way. They need to be 
sure that it is tested, to be sure that--you are willing to put 
the economy at risk without a cost-benefit analysis study, that 
this gentleman is ready to do. That is not very responsible, 
Governor. Thank you.
    Chairman Meeks. The gentleman's time has expired. I now 
recognize the gentleman from Georgia, Mr. Scott, for 5 minutes.
    Mr. Scott. Thank you, Mr. Chairman. Governor Brainard, let 
me start with you. In recent weeks, the Fed has had to take 
extraordinary steps to maintain liquidity in short-term debt 
markets and repo markets, including the actions of the New York 
Fed earlier this week. It injected almost $50 billion for 
overnight repurchase agreements, or repo, to relieve funding 
pressure in money markets. The last time that this happened was 
back in 2008, as you probably know, during the financial 
crisis. Why is this happening now?
    Ms. Brainard. Thank you for your question. We certainly 
recognize that we have important pipes in the short-term money 
markets, which the repo market is part of, and we want to make 
sure there is ample liquidity so that we don't see these kinds 
of frictions. And it is important to understand exactly where 
these frictions are arising.
    Now, market participants did anticipate that there would be 
an increased need for repo.
    Mr. Scott. Let me ask you this: What are the risks? That is 
what I am after. What are the risks to our financial 
institutions that they may become unwilling to lend to each 
other, as happened in 2008?
    Ms. Brainard. From what our market discussions and surveys 
are able to tell, this is a very different episode, a different 
set of frictions than in 2007-2008. In 2007-2008, we had 
counterparties pulling away from each other because there were 
concerns about the underlying quality of collateral and the 
creditworthiness of those counterparties. Today, we are in a 
different environment, and we believe that what we saw was a 
simple imbalance between those who were willing to supply and 
those who needed to finance repo. I believe that we have said, 
the committee has said that we are operating in an ample 
reserves regime, and it may simply be that we are close to the 
lowest level of reserves that are necessary for the contact of 
monetary policy.
    But the kind of intervention that the New York Fed too, 
that is a pretty standard open-market operation, and my own 
inclination would be to look at mechanisms like allowing the 
balance sheet to continue organic growth in order to make sure 
there are enough reserves in the system so we don't see those 
kinds of frictions.
    Mr. Scott. Okay. Now all of this is happening at the same 
time that there is an upcoming transition from LIBOR (London 
Inter-Bank Offered Rate) to what could be SOFR (Secured 
Overnight Financing Rate). I think that this poses one of the 
greatest potential disruptions to our financial system ever, 
and this is why: uncertainty. It has a large part to play in 
how smoothly this transition plays out. We are talking about 
$400 trillion on contractors, worldwide, $200 trillion in 
contracts here, and this massive change between these benchmark 
rates.
    And so, we are after a smooth transition in terms of how 
this new reference rate will perform, particularly with what we 
call these transition legacy contracts. So are you concerned 
about this volatility and how it may add to the uncertainty 
associated with this rate change? This is a big issue. Can you 
explain it to us, and share with me and the audience and C-
SPAN, how serious this issue is?
    Ms. Brainard. Thank you. I think the transition away from 
the reference rate that was shown to be subject to manipulation 
and is becoming increasingly fragile, as fewer participants 
provide input into that rate, that transition to a more market-
based rate that is going to be more resilient, and not subject 
to manipulation, is a very important transition, and it is a 
transition that I think we should all be paying a lot of 
attention to, and financial institutions prime among those who 
should be paying attention.
    Chairman Meeks. Thank you. The gentleman's time has 
expired. I now recognize the gentleman from Florida, Mr. Posey, 
for 5 minutes.
    Mr. Posey. Thank you very much, Mr. Chairman. I appreciate 
your and the ranking member's leadership in holding this 
hearing today. We are here today to examine the role of our 
regulatory community in monitoring and ameliorating the 
systemic stability of our financial institutions. I welcome the 
witnesses and thank them both for being here today.
    The current framework for responding to systemic risk in 
our financial system centers on the Financial Stability 
Oversight Council's, or FSOC's, as we refer to it, role in 
identifying and designating non-bank financial companies as 
posing systemic risk. Identifying such a company as posing this 
kind of risk makes the company subject to enhanced supervision 
by the Federal Reserve Board.
    We recall that one of the big interventions during the 
financial crisis recently was rescuing the American 
International Group (AIG). Assuming FSOC had been in place 
prior to the crisis, can you give the committee and the public 
a description of how FSOC would have worked to prevent the 
outcome we had with AIG?
    Governor, you can go first, and then the Director.
    Ms. Brainard. I think the intention of the designation--
again, I am not a member of FSOC so I can't speak to the 
designation process. But I think the intention certainly of 
that designation authority was to be able to take institutions 
that were not supervised banks and subject them to consolidated 
supervision across all of their activities. And so, of course, 
for institutions that had a lot of derivatives exposures that 
were not well risk-managed, and that the company was not 
prepared to make good on in periods of stress, that kind of 
designation authority would have shown the full scope of 
activity to the supervisors and put in place resolution 
planning, liquidity requirements, and capital buffers against 
the full scope of activities, as opposed to the more narrow 
pieces that were under regulation.
    But again, I am currently not on the FSOC so I can't speak 
to the current system.
    Mr. Posey. Thank you. Director Falaschetti?
    Mr. Falaschetti. Sure, and thank you for your question. The 
Council is pursuing an activities-based approach to 
designations for non-bank financial determinations, and what 
this will do, the benefits that this brings is it will enhance 
analytical rigor and transparency in the process that the 
Council pursues. Some of the activities, or the 
characterizations of these activities are complex or opaque 
activities, those conducted without effective risk management 
practices, those that are significantly correlated with other 
financial products, or either highly correlated or significant 
and widespread.
    Mr. Posey. I guess, more specifically, how would they have 
identified AIG's threat to systemic stability? What metrics 
would have disclosed this threat? How would it be different 
today?
    Mr. Falaschetti. The activities that I outlined here, we 
would work through each of those and size up any particular 
firm that might be subject to this consideration.
    Mr. Posey. So, you think now that FSOC would do the job 
that the regulators did not do before?
    Mr. Falaschetti. Yes. And again, the transparency and the 
accountability of this proposal is what is attractive.
    Mr. Posey. Give me an example of how they would identify 
derivatives as being dangerous.
    Mr. Falaschetti. With this list of the proposed guidance 
you have, measure it out. Is it complex? What is the degree of 
opaqueness in this market? Is there effective risk management? 
Each of these considerations would guide the FSOC.
    Mr. Posey. But they should have had those same 
considerations before, shouldn't they?
    Mr. Falaschetti. They should have, but this wasn't the way 
that it used to be implemented, that the conversation went. And 
when you designate a firm, one firm, and you have some other 
firms in the same sector that--
    Chairman Meeks. The gentleman's time has expired. I now 
recognize the gentlewoman from New York, Ms. Velazquez, for 5 
minutes.
    Ms. Velazquez. Thank you, Mr. Chairman. Governor Brainard, 
as you know, earlier this summer there was a cybersecurity 
breach at Capital One. At the time of the event, Capital One 
relied on Amazon Web Services (AWS) for its cloud storage needs 
and has continued to rely on AWS, even following the incident.
    In its 2018 annual report, the FSOC specifically highlights 
the growing reliance of financial institutions on third-party 
service providers, like Amazon, as creating risks to the 
financial system. Can you explain the risks that are created by 
banks' increasing dependence on third-party service providers 
for their data storage needs?
    Ms. Brainard. Thank you for the question. A lot of 
financial institutions, like large institutions that have 
tremendous needs for processing data, across the economy, 
including government entities, are looking at questions about 
how much of their infrastructure, how much of their core 
systems versus their software services should they hold in-
house, on-premise, or move to cloud providers? So, this is the 
beginning, or the middle of a trend that I think will continue.
    What authorities we have, as bank supervisors and 
examiners, come to us through the Bank Service Company Act, 
which does provide the Federal Financial Institutions 
Examination Council (FFIEC), the bank regulators, some ability, 
under circumstances where providers are significant providers, 
to examine some of the third-party providers.
    There is also a lot of work on this issue because of the 
concentration of some of the cloud provisions in international 
force. So this is also an area that we are looking at in the 
Financial Stability Board internationally, but it is certainly 
something that we are very focused on.
    Ms. Velazquez. So is it fair to say that an event like the 
one that occurred at Capital One earlier this summer has the 
potential to pose a serious threat to the financial system?
    Ms. Brainard. The particulars of that breach have to do 
with both the institution as well as its cloud migration. I 
think we do recognize that migrating to the cloud mitigates 
some risks, and adds other risks, and so we need to hold our 
institutions accountable for making that risk assessment in a 
very well-informed way, and taking that migration very 
seriously.
    Ms. Velazquez. Thank you. Director Falaschetti, the OFR's 
2018 report identifies cybersecurity as a continuing concern. 
Can you explain how the potential impacts of cyber risks are 
compounded by banks' own operational practices?
    Mr. Falaschetti. Thank you for that question. I would put 
the cloud question with cyber risk. What we are really worried 
about here are the interconnections. If we have a cyber-attack 
on a particular organization, that organization has channels of 
transmission of that risk to other organizations. And our 
researchers are developing a network analysis that would help 
bring transparency to understand, okay, well, if this 
particular organization finds itself in difficulty from a cyber 
attack, who else is downstream, and share that information with 
FSOC to take appropriate action.
    Ms. Velazquez. Thank you. This question is for both of you. 
While crypto assets remain relatively small, they are growing 
fast in size, numbers, adoption, and applications. As you are 
both aware, earlier this year we held a hearing on Libra, which 
is the cryptocurrency being developed by Facebook and its 
association members. What risks to financial stability does the 
Libra cryptocurrency pose? Governor, let's start with you.
    Ms. Brainard. Thank you. I think the advent of Libra really 
sharpened the set of questions that regulators, officials need 
to think about in terms of stable coins, their potential 
adoption for payments, what does this mean in terms of, if you 
are a consumer, your social media platform having information 
on payments? Will they keep your data private? Will they keep 
it secure?
    For regulators such as the Fed, the potential for this to 
be across many jurisdictions, and the potential to have very 
incomplete regulatory authorities.
    Ms. Velazquez. Yes-or-no answer, do you have the regulatory 
authority that you need to monitor this?
    Chairman Meeks. The gentlelady's time has expired.
    Ms. Velazquez. It was to you, Governor.
    Chairman Meeks. I now recognize the gentleman from North 
Carolina, the ranking member of the full Financial Services 
Committee, Mr. McHenry, for 5 minutes.
    Mr. McHenry. I appreciate the chairman for yielding.
    So, Governor, let's go to this question of cybersecurity. 
On balance, a well-regulated migration to the cloud can be a 
better decision for financial institutions. Is that correct, in 
your view, in the Fed's view?
    Ms. Brainard. I think each individual institution is going 
to make that assessment. They just need to do it--
    Mr. McHenry. No, I am asking for your assessment on it.
    Ms. Brainard. It can be.
    Mr. McHenry. It can be. Director, is that your view, in 
terms of research?
    Mr. Falaschetti. I'm sorry. Can you repeat the question?
    Mr. McHenry. Never mind. We will just keep moving.
    So, Governor, about cyber, currently we don't have any 
reportage from the Fed to this committee and policymakers on 
the Hill about what your institution is doing to protect itself 
from cyber threats. Do you see any reason why the Fed shouldn't 
report this information to policymakers on the Hill?
    Ms. Brainard. I think this is a critically important issue. 
We do, of course, get assessed at the Federal level, like any 
other Federal agency. But, of course, we agree this is 
critically important.
    Mr. McHenry. And you have a strong IG that reviews this 
too, so we do get independent reporting.
    So about the repo market, back to the chairman's question, 
I think there is real interest on both sides of the aisle about 
what happened in the repo market. And what you report is very 
similar to what I have read in the Financial Times, and in the 
Wall Street Journal, so in terms of your outline, it is very 
clear.
    The question is, what does it mean, and what does it mean 
for average, everyday investors? Just distill that.
    Ms. Brainard. Because we do have the ability to provide 
that liquidity, at moments like this it is a very standard set 
of procedures. At the moment, it really doesn't have 
implications. But going forward, it does pose questions about 
whether reserves in the system do need to be allowed to grow 
again, and whether there is that demand for reserves, to make 
sure that we don't see this kind of volatility, because it is 
very disruptive.
    Mr. McHenry. What does it mean, reserves? What does that 
effectively mean?
    Ms. Brainard. My inclination is we are in an ample-reserve 
regime. That is the monetary framework that the committee 
adopted. Ample reserves means there are enough reserves in the 
system that you don't see this kind of short-term volatility. 
So, one of the things it may mean--
    Mr. McHenry. So the assumption is, because of ample 
reserves, that this shouldn't happen. Okay. This is then the 
question for the Fed: How long are we going to continue open-
market operations?
    Ms. Brainard. I think for the foreseeable future, the New 
York Fed has provided sufficient liquidity, and they have done 
it on a term basis, for anticipating needs at quarter ends, 
which tend to be periods of higher demand.
    Mr. McHenry. Or coming to a quarter end, as well, right? So 
this is a quirk that is happening outside of that tighter 
timeframe.
    Let's move on to China. The assessment here, what we know 
from public reporting is that reserve ratio was reduced by 50 
basis points. This basically injects $126 billion into Chinese 
institutions.
    What does that mean? What is your assessment? This 
signifies an economic slowdown in China, clearly, and there are 
ramifications for that. We are seeing outflows of capital to 
the United States in recent weeks, especially. Could such a 
slowdown affect the U.S. economy, and how?
    Ms. Brainard. China is a really important part of the 
global economy. We are in a global economy. Many of our firms 
are interacting on international markets. China affects the 
economies that it trades with, commodity producers. Exports 
from Germany have gone down. So yes, when China slows, it is a 
drag on the global economy and it can hurt our producers here.
    Mr. McHenry. What is your view on modern monetary theory?
    Ms. Brainard. Modern monetary theory really goes to the 
fiscal kind of framework that the country operates in, which is 
outside of our monetary policy frameworks. I will say--
    Mr. McHenry. But the intent with modern monetary theory is 
to control inflation through taxation rather than the Federal 
Reserve interest rate-setting. So what is your view of modern 
monetary theory?
    Ms. Brainard. My general sense is we are a well-tested, 
effective institutional framework for monetary policy, separate 
from fiscal policy. Currently, that has worked well for us over 
many decades. And my general assessment is that this is also an 
institutional framework that has worked pretty well around the 
world.
    Mr. McHenry. What is your view of the economy right now? Is 
the economy strong?
    Ms. Brainard. When you look at the economy, you see strong 
consumers. You see a continued, pretty strong labor market, 
with payrolls continuing to grow above the pace needed to 
absorb new entrants.
    Mr. McHenry. Wages growing.
    Ms. Brainard. You see wages growing above the rate of 
inflation. But you also see business sitting on the sidelines, 
CapEx is flattening out a lot of uncertainty out there. And, of 
course, you see a global environment, that you alluded to 
earlier, which could be a drag on our economy. So we are 
watching that very closely. In my own view, it poses downside 
risks, and that is why it made sense to soften the path of 
monetary policy.
    Mr. McHenry. Thank you, Mr. Chairman.
    Chairman Meeks. The gentleman's time has expired. I now 
recognize the gentleman from Illinois, Mr. Foster, for 5 
minutes.
    Mr. Foster. Thank you, Mr. Chairman, and thank you to our 
witnesses.
    Governor Brainard, the Capital One hack was essentially a 
failure by, I believe, the firm itself, what is called a server 
side request forgery, due to a misconfigured firewall, and not 
the cloud provider. And so, this is an example of something 
that I think will continue forever. If a company does something 
dumb, whether they are in the cloud or not, that is a problem.
    There is a second class of things having to do with, if you 
are completely dependent on one cloud provider and that cloud 
provider goes down. And so my question here is, has the Fed 
specifically looked at this risk, and is there a merit to 
potentially requiring major financial firms to connect to more 
than one cloud provider so they can fail over to the second 
one, in the case that one of them goes down? Has that been 
looked at, both from a cost point of view and a feasibility 
point of view?
    Ms. Brainard. Thank you for your question. I think the 
principle of resiliency through redundancy is well-established, 
particularly for systemic infrastructures. Certainly, there is 
work internationally that we are participating in, thinking 
about precisely this question that you raise about the ability 
to fail over, and I think there are some technologies that are 
out there, or developing, that would provide mechanisms for 
being able to do so, so that that lock-in is less of a risk.
    Mr. Foster. And there is also the possibility of a 
completely correlated risk. For example, last year's Spectre 
and Meltdown bugs that allowed processors to see into 
essentially arbitrary memory locations, called into question 
the whole concept of cloud computing and having multiple 
processes, potentially from other companies working on the same 
processor.
    Moreover, that bug, it is my understanding, was applied to 
a range of hardware, so that it worked--the bug was applied to 
Intel x86 and ARM processors and IBM POWER processors, and 
everything. So there was no--even using different hardware did 
not protect you from that bug.
    And what you saw there was a correlated risk, where one bug 
can be uncovered that applies to all cloud hardware as well as 
all non-cloud hardware. How do you evaluate that correlated 
risk and how do you defend the financial system against it?
    Ms. Brainard. I certainly believe there are a variety of 
different ways that we could see threats to the system of our 
financial institutions, whether they are in the cloud or 
whether they are on-premise, or whether they are in their 
private cloud. So, it is a constantly evolving, I think, set of 
dynamic challenges, and the best that we can do is seek to 
understand them ourselves, and--
    Mr. Foster. Well, do you believe that the Fed examiners 
have enough technical horsepower to identify this kind of risk? 
You are talking about very skilled people who could earn big 
paychecks elsewhere in industry.
    Ms. Brainard. My own perspective has been to fortify our 
own internal technical resources, and that is going to be a 
continued area of high priority for me.
    Mr. Foster. Okay. Let's see. Another completely unrelated 
question is, many of your positive comments about financial 
stability had to do with the relative quality of debt ratings, 
and all of these debt ratings still rely on the issuer-pays 
model, which was pointed to by many people as one of the core 
failings that led to the financial crisis. And to my belief, it 
has not really been solved.
    Are there solutions to this that are potentially workable, 
that maybe Congress should start thinking about?
    Ms. Brainard. It is a good question. I know there are a 
variety of initiatives that have been kind of looked at in this 
space. There is not one in particular that I would say I would 
put my strong support against. But as was true going into the 
crisis, we also wouldn't want institutions to be overly reliant 
on a set of ratings alone. We want institutions to be making 
risk assessments using additional mechanisms.
    Mr. Foster. Yes, but even in your comments on financial 
stability you were using implicitly the ratings of the debt 
instrument.
    Ms. Brainard. Obviously, when we do our aggregate 
assessments, to some degree we are looking at patterns in the 
overall data, so we need public sources of data to do that, but 
then we drill down. So to the extent that we have individual or 
multiplicity of balance sheets, we do some drilling down, and 
we describe that more qualitatively, particularly when it 
relies on data sources that are not public.
    Mr. Foster. And are you worried about the rebirth of 
mortgage-backed securities, which has been the subject of 
several--
    Chairman Meeks. The gentleman's time has expired.
    Mr. Foster. Thank you. I yield back.
    Chairman Meeks. I now recognize the gentleman from 
Kentucky, Mr. Barr, for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman. And Director Falaschetti 
and Governor Brainard, thank you for your service and for your 
valuable insights on financial stability today.
    I want to drill down a little bit on this issue of 
leveraged lending, and I want to draw an important distinction 
between credit risk and systemic risk. Credit risk, of course, 
is the cost of doing business for investors. There is a 
possibility, of course, that a borrower might default. That 
possibility is priced into the product, and investors are aware 
of potential downsides.
    But just because a product is risky does not mean that it 
is a contagion that will spread to other parts of the financial 
system and bring down our economy. That is what systemic risk. 
Leveraged loans are, of course, not without risk, but that is 
the idea. Risk is how investors earn returns and how businesses 
access credit to finance their operations.
    During yesterday's Full Committee hearing, SEC Chairman 
Clayton testified that he believes leveraged lending does not 
pose a systemic threat. Other regulators, including the 
Chairman of the Fed and the Vice Chairman of Supervision, have 
made similar statements. However, many of my Democratic 
colleagues maintain that leveraged lending poses a systemic 
threat to our financial system.
    At approximately $1.2 trillion, leveraged loans represent 
only about 4 percent of the entire U.S. fixed income market. 
That is compared to $15.2 trillion in non-financial business 
debt like commercial loans and bonds, $10.3 trillion in 
household mortgage debt, $4 trillion in consumer debt, and $1.6 
trillion in student loan debt.
    Director Falaschetti, can you speak to this distinction 
between credit risk and systemic risk, in reference to 
leveraged lending, and can you also talk about the features of 
CLOs (collateralized loan obligations), namely that these are 
long-only, non-mark-to-market, term-financed, actively managed 
funds in senior-secured commercial and industrial loans, and 
can you speak to whether or not those features of CLOs enhance 
financial stability or undermine it?
    Mr. Falaschetti. Thank you for the question, and I know you 
have done a lot of good work on this particular issue.
    Before I was confirmed, the FSOC had this issue before 
then. This was in March of 2019, and there was a really nice 
presentation during that FSOC meeting. On one side, we had an 
OFR economist, and we also had an economist from the Federal 
Reserve, and each one of them took different sides of the 
balance sheet, which I think is where you are going with this.
    On the other side, you are looking at really risky assets, 
and if that is the only thing that you are looking at, you are 
going to say, ``Hey, you know what? This is a lot of trouble.'' 
But on the right-hand side, what you heard from this brief to 
the FSOC, is exactly what you are alluding to, is that there is 
patient capital on the right-hand side, and so patient capital 
doesn't run at a sign of smoke and the tiering of the losses 
locks people in to mitigate that risk.
    Mr. Barr. Governor Brainard, a question for you on this. 
With a collateralized loan obligation, the risk of loss is held 
mostly by insurance companies, asset management firms, hedge 
funds, and other similar non-banks that are better able to 
absorb it. If there are larger than expected losses they won't 
impair the banking system or banks' critical role in managing 
the payment system and credit availability that is crucial for 
a healthy economy.
    AAA CLOs are empirically risk-free--not low-risk but risk-
free--based on their structure and absence of defaults in the 
30-year history of the market. Now, I am just talking about the 
AAA tranche here--zero defaults, zero impairments in the 30-
year history of the market. So, it does seem a bit misplaced to 
point to AAA CLOs as a source of concern.
    Does the Fed agree or disagree that having banks fund loans 
indirectly through owning AAA CLO bonds, which have a 35 to 45 
percent loss of absorption cushion below them, and have never 
been impaired in the 30-year history of the market, is better 
and safer for the banking system than having banks fund loans 
directly and taking 100 percent of that credit risk?
    Ms. Brainard. Thank you. I think you are making very 
important distinctions, and, of courses, we do think very much 
about individual assets and the credit risk embodied in them 
quite differently than we try to track what might happen if a 
number of investors behaved the same way under stress 
circumstances. And so that is really kind of the spirit of our 
financial stability work, to think about what might happen 
during very stressed conditions that might lead what looks like 
a set of very secure investments, investors to behave in a kind 
of run dynamic, in a fire sale dynamic.
    For instance, there are a large amount of leveraged loans 
sitting in loan funds, and we had a little mini stress test 
event back in the fourth quarter of last year. And what we saw 
is that there was a lot of redemptions in those funds, which 
worked out pretty well. On the other side of that we had a lot 
of CLOs picking up those leveraged loans that were coming out 
of those structures.
    Chairman Meeks. The gentleman's time has expired. I now 
recognize the gentleman from Florida, Mr. Lawson, for 5 
minutes.
    Mr. Lawson. Thank you, good morning, and welcome to the 
committee. Thank you, Mr. Chairman, and I thank the ranking 
member as well for today's hearing.
    My question to both of you is centered around--and it is 
important--what impact does a trade war have on the health of 
our economy, and what would the long-term effects be on our 
financial market?
    Mr. Falaschetti. As noted, we addressed this in our 2018, 
our most annual report. And there is some uncertainty 
surrounding trade policy. That said, our economy continues to 
be strong, and our job is really to monitor these kinds of 
events on the stability of our financial sector, and that is 
continually ongoing in our shop.
    Ms. Brainard. Thank you for the question. We, in terms of 
our monetary policy assessments of the economy, one of the 
factors that I think you will see cropping up most frequently 
in the minutes of our meetings, for instance, is that we are 
hearing from business contacts all over the country, in all of 
our districts, from businesses who are saying that the 
uncertainty about the rules of the game on trade are really 
leading them to sit by the sidelines. They are rethinking 
supply chains, global supply chains, but they are not quite 
sure how to reconfigure them. And so we do see it in the 
business investment numbers. We do see it in CapEx, in 
particular, which has flatlined and looks like it is softening 
further.
    We have some of our independent research that was recently 
released suggesting that trade policy uncertainty itself, just 
the uncertainty about what trade policy will look like, does 
actually have a material negative impact on the health of the 
economy.
    And so it is something that I think has been one of those 
prominent downside risks that has led the committee to reassess 
the path of the economy.
    Mr. Lawson. And one of the reasons why I asked that 
question is I also sit on the Agriculture Committee, and we 
realize all of the problems that we have with a lot of our 
farmers, what is going on with China and so forth. And from a 
budgetary standpoint, we have been subsidizing the farmers in 
this country on a regular basis, either because of natural 
disasters or because of the downturn in the economy.
    And so I wanted you all to--and I know you probably 
confront this from time to time in your deliberation--comment 
on what effects this is having on the economy with our 
agricultural industry in the United States?
    Ms. Brainard. We talk a lot about the pain that is being 
felt in the farm economy in the FOMC. Of course, we have a lot 
of agricultural represented on our boards of directors at our 
reserve banks, and I certainly hear a lot as I travel around 
the country, about just how difficult conditions have been. 
Trade is clearly a big piece of that picture, but as you know, 
for some parts of the country, weather has been a huge factor 
as well. So it is something that I think has been prominent in 
our discussions.
    Mr. Lawson. Are you going to comment, Director?
    Mr. Falaschetti. Sure. The OFR has a very narrow remit, and 
so with trade, you look at--we have a monitor for market risk, 
and that would fall under that market risk monitor. And our 
researchers would dig down and consider, okay, well, what are 
the growth effects of this issue and how might that impact our 
financial sector, and we would communicate that to the FSOC 
principals.
    Mr. Lawson. Okay. Thank you. Mr. Chairman, I yield back.
    Chairman Meeks. The gentleman yields back. I now recognize 
the gentleman from Colorado, Mr. Tipton, for 5 minutes.
    Mr. Tipton. Thank you, Mr. Chairman. Director Falaschetti, 
I wanted to give you an opportunity to talk about some of the 
LIBOR transition that has been going on. What is OFR looking 
at? What type of plans do you have in terms of some of that 
transition to SOFR?
    Mr. Falaschetti. Thank you for the question. The LIBOR 
transition is, in a lot of people's eyes, a critical risk. I 
would put it under contracting risk. You can think of Brexit as 
a contracting risk issue as well. If everything works smoothly, 
great, but recontracting at such large scales is very 
difficult. And if I recall my figures correctly, the notional 
value of contracts that are now indexed to LIBOR are an order 
of magnitude higher than for SOFR.
    So, we have 2 years to pull the switch on this, and people 
are developing fallback language, but, as you and I discussed 
in your office, my fallback language might not jive with your 
fallback language, and so, how long does that process take 
place and where does that settle? There is a lot of work to be 
done there, and we are monitoring the potential implications 
for systemic risk from that issue.
    Mr. Tipton. It does create somewhat of a challenge because 
some of the LIBOR securities cannot be amended without 100 
percent investor consent. That has to be creating some real 
challenges for transition.
    Mr. Falaschetti. Oh, absolutely.
    Mr. Tipton. Did you have a comment on that, Governor?
    Ms. Brainard. No. I entirely agree with Director 
Falaschetti's comments there. It is a very big issue. The 
International Swaps and Derivatives Association (ISDA) 
obviously has put out some protocols. The more sophisticated 
players in this space are recontracting, but there are a lot of 
frictions in doing that, as you say, which creates risk.
    Mr. Tipton. Governor Brainard, while I have you there, you 
mentioned earlier in your testimony regarding LIBOR, that 
financial institutions should be paying attention. Of 
particular interest to me are some of our smaller banks, our 
regional banks, as well. I am concerned whether or not they are 
going to be less prepared, potentially, for that transition. Do 
you have any comments?
    Ms. Brainard. We always try to provide as much technical 
assistance and education as we can through our examiner kind of 
interactions with our smaller institutions, recognizing that 
they don't have the same kind of resources. And in many cases, 
they may not have the same kinds of exposures. But we want to 
make sure that they are well-equipped to deal with these 
transitions. So, we try to do that through our educational 
materials, through examinations, discussions, and, of course, 
we do that in conjunction with the other banking agencies, 
through the FFIEC.
    Mr. Tipton. Great. I appreciate you talking about some of 
the collaborative efforts through the other agencies. Another 
issue that we have with a lot of our regional banks, and 
community banks as well, is the Community Reinvestment Act 
(CRA). It is being substantially updated. Do you believe that 
modernizing the CRA--do you foresee the Federal Reserve joining 
your fellow regulators in terms of that pursuit?
    Ms. Brainard. We have been working really diligently with 
the OCC and the FDIC, and it would be my preferred outcome that 
we all find an approach that is responsive to the comments that 
we received on the OCC's ANPR and really does strengthen the 
ecosystem around CRA. I wouldn't want to do anything that would 
harm that ecosystem, because I think our community banks, our 
community development organizations, our large banks, they all 
generally are really committed to the CRA and want to see it 
improved, but not disrupted in a kind of way that might lead to 
uncertainty about their ratings.
    Mr. Tipton. I think we can certainly agree, though, that 
uncertainty can create some real problems in terms of that 
compliance, in terms of some of the reviews that are going to 
be going on. Would you agree?
    Ms. Brainard. Yes.
    Mr. Tipton. Great. I wanted to also follow up just a little 
bit, Governor Brainard, if we can, just in terms of the ability 
of some of our banks to be well-capitalized. Do you agree with 
the Fed report that came out, substantially, at least, the 
Federal Reserve Report stating that banks appear well-
positioned to exposures related to leveraged banking?
    Ms. Brainard. Are you talking about the supervision report?
    Mr. Tipton. Yes.
    Chairman Meeks. The gentleman's time has expired. I now 
recognize the gentlelady from California, the Chair of the full 
Financial Services Committee, Chairwoman Maxine Waters, for 5 
minutes.
    Chairwoman Waters. Thank you very much, Mr. Chairman. This 
is a very, very important hearing that you have organized.
    Under the Trump Administration, financial regulators have 
been advancing a number of deregulatory proposals rather than 
addressing financial stability concerns. For example, the 
Financial Stability Oversight Council (FSOC) plans to make it 
harder to designate large, non-bank financial companies like 
AIG for enhanced oversight. In response, former Fed Chairs 
Bernanke and Yellen, along with former Treasury Secretaries 
Geithner and Lew warned, ``Though framed as procedural changes, 
these amendments amount to a substantial weakening of the post-
crisis reforms. These changes would make it impossible to 
prevent the build-up of risk in financial institutions whose 
failure would threaten the stability of the system as a 
whole.''
    Furthermore, additional concerns have been raised about 
weakening rules regarding capital, leverage, stress testing, 
and living wills for banks. These efforts, in the words of 
former Federal Reserve Governor Dan Tarullo, were ``a kind of 
low-intensity deregulation consisting of an accumulation of 
nine headline-grabbing changes and an opaque relaxation of 
supervisory rigor.''
    Mr. Chairman, as you know, I have said to some of our 
biggest banks and financial institutions that they had a big 
win with, I believe it was H.R. 2155. There was gross 
deregulation. I asked them, and even warned them, not to come 
to the Financial Services Committee seeking other deregulatory 
efforts. And what has happened is there has been an end run 
around this committee, going straight to the regulators to do 
the bidding of those who are all focused on continuing to get 
deregulation in any shape or form.
    And I am concerned about stress testing and living wills 
and capital and all of that. So, this is an opportunity, rather 
than ask a question, to say to regulators, don't keep doing 
that. Don't keep being used to promote deregulation based on 
the fact that this committee has decided that we are going to 
do everything that we can to protect consumers, we are going to 
do everything that we can to stop the deregulation efforts of 
our major institutions in this country that has been a 
detriment to the people that we are serving.
    So, no matter how they frame it, the Chair is not happy 
with what has been going on, and, of course, in the event that 
this keeps up, we are going to have to deal with some 
legislation that would limit the ability of our deregulatory 
agencies to do that.
    With that, I yield back the balance of my time.
    Chairman Meeks. The gentlelady yields back the balance of 
her time. I now recognize the gentleman from Texas, Mr. 
Williams, for 5 minutes.
    Mr. Williams. Thank you, Mr. Chairman, and before I go into 
my questions, I just wanted to confirm something with both of 
you. This will be the 20th hearing that I have asked this 
question, and so far I have gotten the same answer from every 
single witness.
    Given both of your positions I assume I know the answer, 
but I still must ask, starting with you, Governor Brainard, are 
you a capitalist or are you a socialist?
    Ms. Brainard. Thank you for your question. I certainly have 
viewed markets that are well-regulated, that are competitive, 
as providing really important benefits in terms of innovation 
and dynamism.
    Mr. Williams. Well, are you a capitalist or a socialist?
    Ms. Brainard. Again, I would say that markets that are 
well-regulated--
    Mr. Williams. It is 20 to nothing right now--
    Ms. Brainard. --where we have seen strong competition--
    Mr. Williams. Okay.
    Ms. Brainard. --I certainly have seen important benefits.
    Mr. Williams. Are you a capitalist or a socialist?
    Ms. Brainard. And--
    Mr. Williams. Okay.
    Ms. Brainard. --I don't really think--
    Mr. Williams. Okay. All right.
    Ms. Brainard. --about it in those terms.
    Mr. Williams. All right. Director Falaschetti, are you a 
capitalist or are you a socialist?
    Mr. Falaschetti. Capitalist.
    Mr. Williams. Okay. Thank you.
    When Dodd-Frank was signed into law it created new agencies 
and departments that greatly expanded the reach of the Federal 
Government. During the previous Administration, some of these 
entities drifted away from their core missions that were 
granted to them in Dodd-Frank. While some of the most serious 
examples of government overreach have come out of the Consumer 
Financial Protection Bureau (CFPB), I am still concerned about 
this practice in other areas of the government.
    So, Director Falaschetti, can you please tell us the core 
mission that was granted to the Office of Financial Research in 
Dodd-Frank, and will you commit to working within these granted 
perimeters while you are the Director?
    Mr. Falaschetti. Absolutely, sir. We have a narrow remit, 
and that narrow remit allows us to do very good work. We 
collect data to inform the FSOC, and we create research 
products to inform FSOC, period. And that narrow remit lets us 
be a trusted advisor to the FSOC. We don't have people pulling 
us one way and the other way. It is data and research.
    Mr. Williams. I know we have touched on this briefly in the 
hearing already, but I think it is important to reiterate. 
There has been instability in the repo markets for over a week 
now. The Fed has injected $278 billion to meet the liquidity 
needs of Wall Street. This is the first time that the Fed has 
had to intervene in the repo market since 2008.
    So, Governor Brainard, what is causing this cash crush in 
the short-term interest rate markets, and do you believe this 
to be an indicator of future financial instability?
    Ms. Brainard. Thanks for the question. I think we are still 
making sure that we fully understand whether, in fact, there 
are some factors that we have not yet heard about. What we have 
heard about is an unexpected mismatch between the supply and 
demand, which would suggest that maybe we are in a period where 
reserves are more scarce than we intended with our monetary 
policy framework being one of ample reserves. And so, among 
other things, it may simply suggest that it is time to allow 
the balance sheet to start growing again, to supply the amount 
of reserves that the short-term funding markets are demanding.
    Mr. Williams. In OFR's 2018 annual report, it states that 
the migration of IT systems from local servers to the cloud 
should be completed by 2019, which will ultimately save $2 
million annually, moving forward. I am happy to see these 
modernization and cost-saving efforts take place, but I am 
always concerned about the cybersecurity implications.
    So, Director Falaschetti, can you give us a status update 
on this initiative, the benefits you see from the transition, 
and how OFR will ensure that the data stored in this new system 
is protected from bad actors?
    Mr. Falaschetti. Yes, sir. We take cybersecurity very 
seriously, and the protection of our data very seriously. We 
collect data from our regulators, and we do so, again, with the 
goal of providing good research insights to the FSOC. And we 
take that data and we provide it to the FSOC.
    Every time that we collect a dataset from one of the 
regulators, we have to protect that data at the level or higher 
than the protection that they give those data.
    Mr. Williams. Okay. Thank you, and I yield back.
    Chairman Meeks. The gentleman yields back. I now recognize 
Chairwoman Waters for a unanimous request.
    Chairwoman Waters. Thank you very much, Mr. Chairman. I 
would like to enter into the record a letter from myself and 
Sherrod Brown, relative to swaps margins, and then a press 
statement regarding the FDIC's proposal to eliminate inter-
affiliate swaps. I would appreciate entering these into the 
record.
    Chairman Meeks. Without objection, it is so ordered.
    Chairwoman Waters. Thank you.
    Chairman Meeks. I now recognize the gentlewoman from 
Virginia, Ms. Wexton, for 5 minutes.
    Ms. Wexton. Thank you, Mr. Chairman. Director Falaschetti, 
you spoke in your remarks a little bit about the history of the 
creation of the OFR. In particular, you said that ``a prominent 
economist and former central banker issued calls for increased 
regulation of an already heavily regulated sector. Instead, he 
focused on opportunities for data analysis and monitors to 
increase transparency for inter-institution exposures and 
concentrations of risk in the financial system.''
    Is that correct?
    Mr. Falaschetti. That is correct.
    Ms. Wexton. And, thus, OFR was kind of created to advise 
the regulators about those risks. Is that correct?
    Mr. Falaschetti. That is correct. It was sort of a 
prescient call for the services that OFR actually delivers 
today.
    Ms. Wexton. Okay. And you speak a lot, or some, in your 
remarks about personnel and workforce issues, and I appreciate 
that, especially at a time when so many in the Administration 
are targeting our civil servants. So, I want to dig in a little 
bit more on this.
    Mr. Falaschetti. Sure.
    Ms. Wexton. Under Treasury Secretary Mnuchin, the Office of 
Financial Research was downsized significantly. Is that 
correct?
    Mr. Falaschetti. It was.
    Ms. Wexton. Okay. The 2017 budget estimated that OFR would 
employ a full-time staff of 255 full-time employees. Is that 
correct?
    Mr. Falaschetti. I believe--I mean, that sounds right. I 
don't know the exact number.
    Ms. Wexton. And the 2020 budget estimates OFR will only 
employ 145 full-time employees. Does that sound right to you?
    Mr. Falaschetti. That is correct.
    Ms. Wexton. Okay. So how many current full-time employees 
does OFR have at this time?
    Mr. Falaschetti. We have about 100 right now, and again, 
earlier--I am not sure if you were on the dais yet--I said that 
we are vigorously recruiting. As we sit here today, the folks 
over at OFR right now are looking for our new IT director.
    Ms. Wexton. So that is about a 60 percent reduction from 
255 to 100. Is that correct? Doing the math.
    Mr. Falaschetti. Okay. I will trust--
    Ms. Wexton. It is less than half.
    Mr. Falaschetti. It sounds right.
    Ms. Wexton. Okay. And I know that this report precedes you, 
but I took a look at it and there doesn't seem to be any 
justification in here, or any sort of footnoting of why such a 
drastic cut was necessary, even from 255 to 145. Can you 
explain the rationale behind gutting the OFR in this way, or 
reducing the workforce in this way?
    Mr. Falaschetti. I cannot; I wasn't there. It was well 
before I was confirmed. But I can make this commitment to this 
chamber today, is that the way Dodd-Frank works is that the 
Director consults with the Treasury Secretary at the end of 
each year to re-evaluate what resources we need, how is the 
office working, and, you can see in my opening statement that I 
am very serious about the good work that our people do in that 
building, in making sure that they have everything they need.
    I strongly agree with Mr. Meeks. I don't want to see 2008 
again. I grew up on the south side of Chicago. The S&L crisis--
I thought that was the worst thing in the world. I don't want 
to go through that again. I taught money and banking, and the 
S&L crisis blew our undergraduates' heads open on how bad that 
was. We don't want to do that again. So I promise that I will 
ask for the resources that we need going forward.
    Ms. Wexton. OFR is not taxpayer-funded, though, is it?
    Mr. Falaschetti. It is not taxpayer-funded. It is funded by 
an appropriation, or from the large banks.
    Ms. Wexton. So are you committing to this committee--are 
you telling us here today that if you anticipate that you will 
need additional resources, you will go to the Administration 
and advocate vociferously for those resources?
    Mr. Falaschetti. Absolutely. We are about 100 strong, as we 
sit here today. We are looking to expand to 150. When we get to 
150, or when we start approaching 150, I should say--I mean, 
145, 150--we will re-evaluate, see where we are, and make that 
determination then.
    Ms. Wexton. Okay. But as far as the reductions that you 
have seen so far, you don't have any analysis or study or 
anything like that which would justify the current staffing 
level. Is that correct?
    Mr. Falaschetti. I am unaware of how the one--again, it was 
well before I was confirmed that the 145 number--I wasn't part 
of those conversations.
    Ms. Wexton. Okay. Thank you very much. I have no further 
questions. I will yield back the remainder of my time.
    Chairman Meeks. The gentlelady yields back the balance of 
her time. I now recognize the gentleman from Georgia, Mr. 
Loudermilk, for 5 minutes.
    Mr. Loudermilk. Thank you, Mr. Chairman. I do have some 
questions I would like to ask, but first of all I want to 
follow up on something that my good friend, Mr. Luetkemeyer, 
brought up regarding CECL and moving forward with an untested 
rule or regulation that could have a significant impact on our 
nation, on our banking system, and on our economy. I think it 
is imperative that we do some research and studies, and it 
seems like, with several that we bring in, it is like banging 
your head against a brick wall. I don't understand what is the 
problem with looking into this before we launch it, and it 
seems like there is a lot of hesitation on that.
    Since we have covered CECL, I don't want to go down that 
path anymore, but I would hope, Governor Brainard, that you 
will encourage Chairman Powell and the FSOC to do exactly what 
we are talking about. For some reason, I don't know why, we 
want to rush forward with something that is unproven. All we 
are asking is, let's do a little bit more research on the 
economic impacts of CECL.
    With that, I will move on to something that, even though 
CECL is important, I still believe that the most dangerous, the 
most important issue facing our nation's economic system is 
cybersecurity, and it seems to be something that doesn't always 
rise to the top of the list of concerns. And because it is a 
significant impact on our financial system, or a threat to our 
economy, it is a significant threat to every American business, 
to our government, to our military, and to every individual.
    Mr. Falaschetti, you and I have had a recent conversation, 
and you told me that you thought that this is the biggest 
threat to our nation's financial system. So could I get your 
thoughts on what you think needs to be done to address this 
growing cybersecurity risk that we have?
    Mr. Falaschetti. Sure, and thank you for the question. I 
enjoyed our conversation. You noted that the long history that 
we have been studying this issue at the OFR, the first annual 
report that we published in 2012, evaluated this risk and put 
it at top of mind. Going forward, we are making progress. We 
have some really good researchers that look at network 
analysis. And so to bring some transparency to, if your 
organization is subject to an attack, what other firms are 
connected to your organization, and how could that metastasize 
into something that could potentially be a systemic risk?
    This is a new monitoring tool that we are developing as we 
sit here today, and it will really give us a lot more 
transparency on the nature and the magnitude of this risk.
    Mr. Loudermilk. There are two other elements that I think 
are important that don't seem to get a whole lot of attention. 
One, as I brought up to the Securities and Exchange Commission 
yesterday, in discussing my grave concerns with the 
consolidated audit trail, is--basically, I have spent 30 years 
in information technology, including Intelligence in the Air 
Force, where we closely guarded America's secrets--you don't 
have to secure what you don't have. So unless you absolutely 
need the data, don't collect it. Don't store it. That is a 
concern that I have.
    We are in this age where we just want to obtain more data, 
and then we are responsible for securing it. And my thought is, 
if the government wasn't immune from lawsuits against them for 
data breaches, maybe they would think a little differently 
about not only obtaining the data but requiring others to 
obtain it.
    The other part of that, which I would like for you to 
briefly comment on is the patchwork of conflicting State data 
security breach notifications. This is problematic. It leaves 
gaps in the system that those who are seeking to do harm can 
exploit. And I think that we need some type of uniform national 
standard that is flexible enough to keep up with technology.
    Mr. Falaschetti, could you comment briefly on that?
    Mr. Falaschetti. On the data security, we don't collect 
data to collect data. That is the wrong way to do financial, 
or, literally, any research. You have a question that you want 
to answer, and then you ask yourself, well, what data could 
help me address this question? So, we are very careful about 
that process.
    Mr. Loudermilk. Thank you.
    Chairman Meeks. The gentleman's time has expired. I now 
recognize the gentlewoman from Michigan, Ms. Tlaib, for 5 
minutes.
    Ms. Tlaib. Thank you so much. My district--and I am not 
sure what others talked about, but I do want to talk about 
specifically my district, which is probably the most polluted 
district in the State of Michigan.
    We have some of the highest levels of asthma and 
respiratory issues among some of our residents, and dozens of 
polluting facilities that are hurting residents, like Dr. 
Dolores Leonard in my district, and Emma Lockridge, who just 
recently testified at a field hearing in my district, just a 
couple of weeks ago. She constantly lives in fear that an 
explosion or toxic chemical could claim her life. She even went 
on to tell us, in committee, that she couldn't sleep without 
being interrupted with gagging and coughing, due to the toxic 
smell of fumes that enter her home.
    Emma is one of countless Americans fighting for their 
lives. So the financial institutions that continue to ignore 
the lives that they are putting at stake with their fossil fuel 
investments while just causing instability to our financial 
market is a concern of mine.
    Many energy analysts see a significantly negative 
performance outlook for the fossil fuel industry in the coming 
years, particularly given the past decade of bankruptcies in 
the coal industry, as the world transitions to clean energy 
sources. Yet, financial institutions continue to invest in 
unstable fossil fuel companies that continue to expand their 
dirty energy production.
    This question is for Dr. Falaschetti, if there was a sudden 
urgency to sell off stranded fossil fuel assets, what impact 
would that have on our financial system?
    Mr. Falaschetti. Taking your assumption, I suspect having 
to do something on such a large scale, and so quickly, could 
create some risks.
    Ms. Tlaib. How would such a sudden urgency impact the 
shareholders and clients of financial institutions, which 
include pension funds that everyday Americans rely on for their 
retirement savings?
    Mr. Falaschetti. Right. And again, I am taking your 
assumptions, and I haven't really--
    Ms. Tlaib. I am not making this stuff up. It is actually 
happening.
    Mr. Falaschetti. Right. But the assumption that you are 
going to have this quick break, if that were to happen, sitting 
here today I can't think about how that would not create some 
downstream effects.
    Ms. Tlaib. Looking for a moment at the coal industry, the 
recent example which went from King Coal to widespread 
bankruptcy in the span of just a few years as the world 
transitioned to alternative and cheaper forms of energy, which 
were the financial entities hardest hit? Who took the losses?
    Mr. Falaschetti. I'm sorry. Can you repeat that please?
    Ms. Tlaib. Looking, for a moment, you know, the King--so 
basically when the coal industry, as a recent example, as 
they--you saw bankruptcy, obviously, in the industry, who was 
hit the most?
    Mr. Falaschetti. Right now, I don't know. I would be happy 
to work with you and your staff to dig into this.
    Ms. Tlaib. Okay. Two questions for Governor Brainard. Most 
financial institutions continue to invest heavily in fossil 
fuels, as I talked about. Is your agency conducting stress 
testing for climate risk?
    Ms. Brainard. I think the kinds of valuation impacts that 
you are talking about are important ones for us to understand. 
I will say that we have a variety of research that is being 
undertaken by economists at the Federal Reserve, to think about 
what is the long-run impact on our economy from climate change, 
what could be the impact on our financial system. There is very 
interesting work that is being done internationally. I have 
certainly, in conversations with my colleagues at the Bank of 
England, who are undertaking a stress test over the next 2 
years of their financial systems, to look at climate exposures. 
It is something, certainly, that I want to learn about and see 
whether it is something that we might want to look at.
    And we are actually hosting a conference out at our San 
Francisco Federal Reserve Bank in a few weeks on this set of 
issue.
    Ms. Tlaib. I appreciate that. Thank you so much. This is my 
last question and we can follow up, but why are banks and 
insurers and other financial institutions in Europe taking more 
of an aggressive action on climate change than many of our U.S. 
counterparts?
    Mr. Falaschetti. In the annual report that I believe that 
you have from 2018, we do address the risk to financial systems 
from climate.
    Ms. Tlaib. Okay. Thank you, Mr. Chairman.
    Chairman Meeks. The gentlelady yields back. I now recognize 
the gentleman from Virginia, Mr. Riggleman, for 5 minutes.
    Mr. Riggleman. Thank you, Mr. Chairman. I appreciate it. 
Thank you for calling this hearing today and thank you to both 
of our witnesses for being here today.
    Dr. Falaschetti, thank you for your service. As the OFR 
Director, while it might not be as well-known of an agency as 
the Federal Reserve, it is certainly important in maintaining 
and improving our robust economy. Thank you for that.
    As you are charged with the data collection and analyses 
that FSOC uses to make designation decisions, I would say that 
it is a job that we in Congress are appreciative that you are 
doing. So, thank you for that.
    My first question for you is simple: Do you want to see 
United States go through another financial crisis?
    Mr. Falaschetti. Absolutely not, and I think I mentioned 
that before, that you and I are of a similar age. We both 
remember the S&L crisis. We thought that was the worst that it 
could get, and it got worse still.
    Mr. Riggleman. I think you look younger than I do. And 
thank you, and I am glad to hear that.
    Prior to your appointment, OFR had previously only had one 
Director. Is that correct?
    Mr. Falaschetti. That is correct. We had a confirmed 
Director, and then we had an acting Director in an interim 
period.
    Mr. Riggleman. Okay. And as I understand it, under previous 
leadership, OFR had been criticized for taking a unilateral or 
a one-dimensional approach to risk assessment that sometimes 
worked counterintuitive to your agency's mission. This was most 
explicit in OFR's 2013 Asset Management Report, which was 
widely criticized by individuals from varying political 
viewpoints as arbitrary, vague, and of little value. And, by 
the way, I thank you for the 2018 report you sent me. I started 
to read it and you are correct, it is a little bit easier. So, 
here we go.
    What changes do you think, can you make on your own, and 
what changes should Congress work on to ensure that you have 
the necessary but appropriate methods to execute your mission?
    Mr. Falaschetti. We are subject to the oversight of 
Congress. That is why we are sitting here today. In terms of--
I'm sorry--you had a little bit more there and I--
    Mr. Riggleman. Right, and what I am talking about is 
actually process. What do you think, as far as Congress, do you 
have the necessary but appropriate methods to execute your 
methods, when you were talking about your analysis, when we 
talked a little bit earlier about what you are looking at as 
far as oversight. What changes should Congress make for you to 
help with methods to execute your mission?
    Mr. Falaschetti. I am reluctant to opine on what Congress 
should do, having sat on the other side of this dais 
previously. I am dedicated, and I know our staff are, to follow 
the rules that we are given and the mandates that we are given 
here. We will dutifully execute on this.
    Mr. Riggleman. And as far as your background, I would like 
to just ask you a couple of the background questions, and I 
know we went through this before. What things have you done to 
make you qualified for this position right now, sir?
    Mr. Falaschetti. Sure. I mentioned in my opening statement 
the President's 2006 Economic Report. I was at the Council of 
Economic Advisors at that time. I co-authored a couple of 
chapters in that report, and we were thinking about how 
important the financial sector is to everyday Americans and how 
systemic risks could really put a big dent into those 
opportunities. We raised the flag, but as I mentioned in my 
opening statement, there were some really credible warnings 
about 2008, and for one reason or another those flags were not 
chased down.
    Mr. Riggleman. Thank you. And, Governor Brainard, I also 
want to thank you for your amazing transparency, coming to see 
me and talking to me. You know where I stand on some things, so 
I do appreciate everything that you are doing.
    I had some questions here and I want to talk about 
ubiquity. And there was something that I had read, and I do 
read a lot, talking about that the Board--and we are talking 
about the Fed Board--and we are going to talk about faster 
payments quickly, and the FedNow service, and as that were a 
private sector service.
    In the November 2018 FRB notice, you stated that it is 
possible that the Reserve Bank entry could add to market 
fragmentation and lower the prospects for ubiquitous, faster 
payments in the United States, especially in the short run. I 
know a lot of this is a conversation based on what we 
continued, and I know we only have 20 seconds. So right now, 
based on the Fed's own publication, ubiquity will be chilled, 
especially in the short run, and it means thousands of 
institutions considering signing on to the private sector 
platform, could be waiting to see how FedNow works, effectively 
cut off millions of consumers from real-time payments. That is 
something I would like to follow up with you on, and I am 
probably going to have to do questions for the record, so I 
apologize for that.
    So, anyhow, I guess my time has expired, so I yield back to 
the Chair.
    Chairman Meeks. The gentleman's time has expired. I now 
recognize the gentleman from Illinois, Mr. Garcia, for 5 
minutes.
    Mr. Garcia of Illinois. Thank you, Mr. Chairman, and I want 
to thank both of our witnesses here today. I would like to talk 
a little bit about FSOC and shadow banks in my comments and 
questions.
    The 2008 financial crisis was a painful reminder that it is 
not just commercial banks that can make risky choices, 
threatening the stability of our entire financial system. Hedge 
funds, insurance giants, and asset managers are all closely 
connected to basic financial stability.
    My constituents cannot afford another crash, for many of 
them are still recovering from the last one. Many people in my 
immediate neighborhood, throughout my congressional district, 
and throughout the City of Chicago lost the equity in their 
homes, they lost their jobs, many became underemployed, and 
many had to double up in apartments, and in homes throughout 
the area. Buildings became vacant throughout neighborhoods in 
Chicagoland. As a matter of fact, we had to establish a 
foreclosure mediation court in the County of Cook, in the metro 
area. People fell behind on utilities, car payments, and there 
were more repossessions. Retail business strips had higher 
vacancy rates. There were empty storefronts throughout the 
commercial areas in the district. The informal economy 
increased as people took to the streets to peddle food, fruits, 
and on and on. There was real, real pain.
    Yet, during Secretary Mnuchin's tenure, the FSOC has voted 
to remove systemic risk designation from AIG and Prudential. 
FSOC has also voted to drop the appeal of the district court's 
decision in the MetLife lawsuit. Taken together, these 
decisions remove protections from non-bank financial companies 
with a combined $2 trillion in assets.
    There are no longer any non-banks designated as 
systemically important. I am worried that we failed to learn 
the lessons of 2008 and are making the same mistakes. Large 
financial non-banks like Prudential and AIG were central to the 
last crisis. In fact, during the 2008 crash, AIG became the 
recipient of the largest government bailout in American 
history.
    Governor Brainard, do you think it is appropriate that 
Prudential, a company with over $800 billion in assets, has, as 
its chief regulator, the New Jersey Department of Banking and 
Insurance?
    Ms. Brainard. Thank you for your question. I certainly have 
traveled around your district and other places in the country 
where I think the effects of the foreclosure crisis are still 
evident.
    With regard to the designation authority under FSOC, 
personally I thought it was a very important authority. I am no 
longer close to it. I am not the Board's representative to the 
FSOC so I can't speak to any particular decisions, but I 
certainly believe that non-bank activities were important, and 
could be, in the future, important sources of systemic risk.
    Mr. Garcia of Illinois. The Fed's Financial Stability 
Report warned about leveraged loans to corporations, and noted 
that, ``the more risky tranches are primarily held by asset 
managers, insurance companies, hedge funds, and structured 
credit funds.'' In light of these findings, do you really 
believe that there is not a single insurance company, asset 
management firm, hedge fund, finance company, or standalone 
investment bank whose failure could threaten financial 
stability today?
    Ms. Brainard. I certainly would feel more confident if we 
had greater lines of sight into where some of those non-bank, 
non-supervised entity holdings are sitting, and that is why we 
supported work through the Financial Stability Board (FSB), 
because, of course, this is an international market, to better 
understand where those holdings are sitting.
    Mr. Garcia of Illinois. And on the subject of leveraged 
loans, I will skip my introduction to the question, and let me 
cut to the chase, if I may. Do you think that it makes sense 
for Congress to act and restore risk retention or arrangers of 
CLOs?
    Ms. Brainard. I think that issue is one for you in Congress 
to decide. I think risk retention has been shown to be an 
important risk mitigant.
    Mr. Garcia of Illinois. Thank you. I yield back, Mr. 
Chairman.
    Chairman Meeks. The gentleman's time has expired. I now 
recognize the gentleman from Missouri, Mr. Cleaver, who is also 
the Chair of our Subcommittee on National Security, 
International Development and Monetary Policy, for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. I would like to ask 
either of you, are you members of the Federalist party or the 
Whigs or the anti-Federalist party?
    Mr. Falaschetti. No.
    Ms. Brainard. No.
    Mr. Cleaver. It is critical to this hearing, but I just 
thought I needed to find out. We have found out, whether we 
have subversives, people with subversive opinions in here. So I 
will get to that non-subversive stuff.
    I am wondering if there is a policy, Mr. Falaschetti, that 
the OFR would--do you have a deadline for letters to be 
answered to Members of Congress, particular the committee of 
jurisdiction?
    Well, that is okay. I sent a letter on August 27th that I 
considered to be extremely important to me, asking for 
information I sought, and I just--I was actually mayor of a 
large city and we always said, I said get deadlines for the 
City Hall stuff in Kansas City to respond to members of the 
council.
    Mr. Falaschetti. Right, and we are. We have received your 
letter and it is being considered as we speak by our FSOC.
    Mr. Cleaver. I appreciate it. I appreciate you doing that.
    Here is the other issue. I am sure that you believe that 
your role at the OFR is critical. I was here--
    Mr. Falaschetti. I agree.
    Mr. Cleaver. --during the last financial crisis, sitting 
right over here, and it was a tough time. I don't ever want to 
see that again. And so with the value that I place in your 
department and the value that you do, I am trying to understand 
why we would cut staff from the monitoring of systemic risk.
    Mr. Falaschetti. Per my previous testimony, it was well 
before my confirmation.
    Mr. Cleaver. I didn't hear you make that comment.
    Mr. Falaschetti. I commit, going forward, to get the 
resources that we need to be effective. Your colleague just 
left. I grew up in south Chicago. I know what it is like to be 
underbanked. I take this job very seriously. We have a 
fantastic team of employees back at the OFR who are watching us 
right now. They are doing great work, and I am dedicated to 
fulfilling the letter of the law here.
    Mr. Cleaver. Well, I like your answer, sir, and I 
appreciate that. It would seem to me--and you didn't make the 
decision--but it would just seem to me that if there is any 
place we are going to have some economic leniency, it ought to 
be in the prevention of us repeating what happened in 2008. I 
was in here when Ben Bernanke, Christopher Cox, Sheila Bair, 
and Henry Paulson walked in to tell us that the financial 
system of this country was going down the drain by Monday. This 
was on a Friday. I don't want to do that again, so I appreciate 
your answer.
    To both of you, as my time runs down, do you believe that 
financial regulators should be aggressive in regulating? For 
example, Facebook, should we wait until they come to an agency 
or should we be aggressive and go and say, if you are getting 
ready to do something significant, run some kind of new 
program, some kind of product, do we wait until they do it? I 
have a letter from David Marcus, head of Calibra, and he 
doesn't want to launch this project until regulators have 
looked at it, and it appears that the regulators are saying, 
``Well, we will wait until Facebook comes to us.'' And it is 
just kind of confusing, Ms. Brainard, Mr. Falaschetti, either 
of you?
    Ms. Brainard. I--
    Chairman Meeks. The gentleman's time has expired. I thank 
the gentleman for his questions.
    [laughter]
    Chairman Meeks. And now, I am going to recognize the 
ranking member for a one-minute closing statement.
    Mr. Luetkemeyer. I just want to thank the chairman for 
having this hearing today. I think this is extremely important 
to our mission here, and for he and I, as the leaders of our 
parties, to be able to assess the threats to the system that we 
basically oversee, the financial services system, and the 
constituents that we serve and the customers and consumers who 
take advantage of those services.
    Today, we heard a lot of testimony with regards, and 
questions with regards to what is going on, different threats, 
and there are a lot of threats to our system. Our changing 
financial services environment is under a threat constantly, 
and we appreciate your direct responses to those questions. But 
obviously, you are going to have to continue to assess those 
threats in order to be able to thwart them.
    And there are two things that I hope you continue to do. 
Number one, listen to and watch what is going on in the 
industry that you oversee, and commit to do the work of finding 
the solutions, and get all the information and then act on it. 
Don't give me the ``Fed twostep.'' Act on what is going on. 
Don't give me a ``may,'' ``might,'' or ``could,'' because after 
each one of those words, I can say, ``may not,'' ``might not,'' 
or ``could not.'' I want you to be able to--don't couch those 
terms to defend your inaction, but I want you to take action 
when you need to.
    Recently, in the past 2 or 3 weeks here, you have taken 
quick action to solve the liquidity problem in the markets. I 
commend you for that. But I brought up an issue today that I 
think is extremely important that needs your action. I hope 
that you take those kinds of actions.
    I appreciate you being here today, and we will certainly 
follow up and watch what goes on.
    Thank you. I yield back.
    Chairman Meeks. Thank you. I now recognize myself for one 
minute for a closing statement.
    Governor and Director, I recognize that the work you do is 
especially complex, and the challenges faced in anticipating 
risk and crises that have yet to manifest. As you have heard 
today, Members of Congress from both sides of the aisle are 
genuinely concerned about repeating mistakes of the past. It is 
no exaggeration to say that our experience living through the 
financial crisis was traumatic, not only for us in government 
but for the American public.
    The Fed and the OFR are meant to rise about politics and 
partisanship, and focus truly on the financial stability and 
well-being of the American economy at large. Ultimately, every 
American family expects you and your organizations to take your 
responsibilities seriously, and I believe that you do, to 
approach them with intellectual honesty, rigor, and discipline, 
and to hold accountable those financial firms that have the 
potential to fundamentally disrupt our economy and those of our 
economic partners.
    So please, I implore you to staff your organizations to the 
level needed to fulfill your missions, fight for the necessary 
budgets required to do your job well, on behalf of the American 
families, and provide us with the data and information 
necessary to force a strong, resilient, stable economy going 
forward.
    Again, thank you for your work and your admirable careers 
of public service, and my colleagues and I look forward to 
continuing to work with the both of you.
    I would now like to thank, again, our witnesses for your 
testimony.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is now adjourned.
    [Whereupon, at 12:07 p.m. the hearing was adjourned.]

                            A P P E N D I X



                          September 25, 2019 
                          
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