[Senate Hearing 117-655]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 117-655


  THE FINANCIAL STABILITY OVERSIGHT COUNCIL ANNUAL REPORT TO CONGRESS

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

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             SECOND SESSION

                                   ON

EXAMINING THE FINANCIAL STABILITY OVERSIGHT COUNCIL'S ANNUAL REPORT TO 
                                CONGRESS
                               __________

                              MAY 10, 2022
                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
                  [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                                


                Available at: https://www.govinfo.gov/

                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE
                    
55-754 PDF                WASHINGTON : 2024   


            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                     SHERROD BROWN, Ohio, Chairman

JACK REED, Rhode Island              PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey          RICHARD C. SHELBY, Alabama
JON TESTER, Montana                  MIKE CRAPO, Idaho
MARK R. WARNER, Virginia             TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts      MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland           THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada       JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota                BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona              CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia                  JERRY MORAN, Kansas
RAPHAEL G. WARNOCK, Georgia          KEVIN CRAMER, North Dakota
                                     STEVE DAINES, Montana

                     Laura Swanson, Staff Director

                 Brad Grantz, Republican Staff Director

                       Elisha Tuku, Chief Counsel

                 Dan Sullivan, Republican Chief Counsel

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                        Pat Lally, Hearing Clerk

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, MAY 10, 2022

                                                                   Page

Opening statement of Chairman Brown..............................     1
        Prepared statement.......................................    41

Opening statements, comments, or prepared statements of:
    Senator Toomey...............................................     3
        Prepared statement.......................................    42

                                WITNESS

Janet L. Yellen, Secretary, Department of the Treasury...........     5
    Prepared statement...........................................    43
    Responses to written questions of:
        Senator Toomey...........................................    45
        Senator Warnock..........................................    51

                                 (iii)

 
  THE FINANCIAL STABILITY OVERSIGHT COUNCIL ANNUAL REPORT TO CONGRESS

                              ----------                              


                         TUESDAY, MAY 10, 2022

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9:45 a.m., via Webex and in room 538, 
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of 
the Committee, presiding.

          OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

    Chairman Brown. The Senate Committee on Banking, Housing, 
and Urban Affairs will come to order. Today's hearing is in a 
hybrid format. Our witness is in person, obviously.
    We will hear testimony from the Secretary of the Treasury 
on FSOC's annual report for the first time in 4 years.
    This is the first time Secretary Yellen has been before 
this Committee since Putin's invasion of Ukraine. I want to 
commend you, Madam Secretary, for Treasury's work helping 
implement our massive, historic multilateral sanctions and 
export control effort against Russia, punishing them 
economically and isolating them diplomatically and politically.
    Putin has been shocked by two things. He was shocked by the 
courage of the Ukrainian people and the tenacity of their 
resistance, and he was shocked by how effectively President 
Biden and you and this Administration put together this broad 
international coalition--Germany, Switzerland, Finland, Sweden.
    This past weekend's announcements by the G7 to further 
limit dependence on Russian energy will bite even harder. In 
the months to come we must sustain and expand our efforts to 
help Ukraine, including intensified sanctions, export controls, 
and other means of ratcheting up economic pressure on Russia.
    Financial stability allows Americans to trust their money 
is safe in the bank. It means they can get an affordable 
mortgage without fear that they will lose their home. It means 
they can count on their retirement savings, knowing their 
investments will not be gambled away by reckless speculators. 
And it means taxpayers are not forced to shell out billions to 
bail out the banks that gambled with our whole economy. That is 
why Congress created FSOC in the Dodd-Frank Wall Street Reform 
bill.
    Americans are still living with the consequences from the 
last time Wall Street took too many risks. Families who lost 
their homes after 2008 still have not recovered all the wealth 
the crisis took from them.
    Whenever big banks or hedge funds come up with some new 
scheme that goes wrong, they are never the ones that pay the 
price. It is ordinary Americans whose homes, retirement 
savings, and livelihoods are at risk. And it is taxpayers. 
People in this town act like they have forgotten the bailouts. 
In too many cases, they probably have.
    Americans have not forgotten. When families who are already 
struggling with lost jobs, lost homes, lost savings are forced 
to use their tax money to bail out some of the richest elites 
in this country, that stays with most people.
    We created this watchdog to make sure it never happens 
again. Under the Biden administration and with Secretary 
Yellen's leadership, we once again have an FSOC that looks out 
for those risks to our financial system. They have turned the 
page on the prior Administration's Wall Street-first mentality.
    The last White House, always looking out for its corporate 
allies, did everything in its power to stop this agency from 
doing its job. They ignored shadow banks that grew in size and 
created risks to the system. They gutted the agency from the 
inside out, diminishing career public servants dedicated to 
protecting our economy. They abandoned their responsibilities. 
They did nothing to identify and nothing to address risks to 
financial stability.
    So when the global coronavirus pandemic froze our financial 
markets, big and small companies were not prepared to withstand 
the shock, and our Government had to step in to prevent a 
market meltdown and stabilize the economy. What we have seen 
over the past 2 years is that risks can come at any time, in 
any form.
    Today, FSOC is keeping watch on all the potential risks to 
our economy, so working families do not have to. These public 
servants are looking at ways to improve financial system 
resilience in the face of climate-related financial risks.
    Their job is to make sure our financial markets are 
efficient and fair. We have seen frenzies like GameStop and 
hedge fund blowups like Archegos. Those have the potential to 
cause dangerous volatility. And FSOC is watching out for asset 
bubbles, so that risky bets that go bad do not actually hurt 
the real economy.
    This watchdog works with financial institutions to shore up 
cyberdefenses and protect our financial system from 
cyberattacks. And they are tackling risks posed by 
cryptocurrency and digital assets. So many Americans are 
searching for an alternative to the Wall Street system that has 
burned them time and again, but we cannot allow them to be left 
holding the bag when an inevitable crash or hack comes.
    FSOC monitors international risk. They are clear-eyed about 
the threats to U.S. and global economy--a pandemic, a broken 
global supply chain, Putin's attack on Ukraine.
    Finally, the agency is doing its job again, working to 
prevent corporate greed, overleveraged deals, and risky bets on 
Wall Street from crashing our financial system as interest 
rates rise.
    For the first time in decades, workers are seeing real wage 
gains and more bargaining power. Median wages for the lowest-
income workers increased last year an average of 6 percent. The 
unemployment rate is 3.6 percent, the lowest in five decades.
    For many Americans, those gains do not go as far when you 
are paying more at the gas pump and grocery store. Corporations 
blame workers and claim they just have to raise prices to keep 
up with costs. Of course they do not have to raise prices to 
keep making a profit. They could cut their own executive 
bonuses or do fewer stock buybacks and still enjoy healthy 
profits. But instead they would rather price-gouge working 
families.
    Do not take it from me. Listen to the CEOs who brag, at 
stockholder meetings, they brag about their enormous pricing 
power every quarter on investor calls. When big corporations 
have concentrated power and no competition, the usual rules of 
capitalism do not rein them in.
    This Wall Street business model incentivizes anything that 
juices stock prices, including excessive risk-taking, at the 
expense of long-term stability and broad economic growth. We 
need to build and maintain a resilient financial system with 
strong safeguards in place at the biggest Wall Street firms, so 
that they can withstand economic shocks without wrecking the 
real economy.
    That is FSOC's job, to serve as the Wall Street watchdog 
looking out for working Americans on Main Street. At this 
critical moment, FSOC's job is more important than ever.
    Secretary Yellen, I look forward to your testimony.
    Senator Toomey.

         OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

    Senator Toomey. Thank you, Mr. Chairman, and Secretary 
Yellen, welcome back to the Committee. Today's hearing is an 
important opportunity to discuss FSOC's 2021 annual report and 
other matters.
    I have long been skeptical about FSOC's process for 
designating nonbank financial institutions as systemically 
important, or SIFIs. FSOC's process has been opaque, and 
previous designations have lacked sufficient cost-benefit 
analysis. This approach also needlessly imposed bank-like 
regulations on nonbank financial institutions, such as 
insurance companies and asset managers.
    But more fundamentally, the act of designating a firm as a 
nonbank SIFI signals to the market that the firm is too big to 
fail and would be bailed out if it became insolvent, thereby 
introducing moral hazard.
    For these reasons I was glad to see FSOC, in 2019, 
unanimously approved an activities-based approach to 
identifying potential risk as well as an enhanced cost-benefit 
analysis for potential designations. These changes marked 
significant improvements over the previous approach with 
respect to both process and substance. I have been encouraged 
that you have recognized the value of this approach and I urge 
FSOC to retain it going forward.
    I have also been concerned that FSOC, like other financial 
regulators, is becoming politicized. Consider global warming. 
FSOC has held 10 meetings under your leadership and 7 of those 
meetings have focused on global warming, according to the 
public readouts. By contrast, not a single one of those 
meetings included a meeting of cybersecurity, which clearly 
presents a much more imminent and significant threat to the 
financial system.
    In October of last year, FSOC issued a lengthy report that 
audaciously claimed global warming is, quote, ``an emerging 
threat to the financial stability of the United States,'' end 
quote, and FSOC uses this supposed risk to justify its 
recommendation that financial regulators consider sweeping 
changes to their rules.
    But the actual data shows that physical risks associated 
with global warming--that is to say severe weather events--do 
not threaten financial stability. Economic damage from weather-
related events as a percentage of GDP has actually trended 
down, steadily, over the last 30 years, and we are not aware of 
a single bank failure in the modern era caused by any weather 
event.
    As I have previously warned, the real risk is political. 
Some unelected financial regulators want to accelerate our 
transition to a lower-carbon economy and they want to misuse 
their powers to allocate capital away from traditional energy 
companies to do it. At a time of skyrocketing energy prices we 
certainly do not need financial regulators making it even more 
expensive for Americans to fill up their gas tanks or heat 
their homes.
    Addressing global warming requires difficult political 
decisions that involve tradeoffs, and in a democratic society 
these tradeoffs must be made by elected representatives 
accountable to the American people through a transparent and 
deliberative legislative process. Instead of pursuing political 
issues that are outside the mandate and expertise of financial 
regulators, the FSOC should enhance coordination across 
regulators on existing threats to the financial system.
    To this end I was encouraged that the FSOC annual report 
identified certain issues that are worthy of regulatory 
attention, such as enhancing the resilience of the U.S. 
Treasury market and improving the community resilience of the 
financial sector. But I do worry that progress on addressing 
these challenges could be stalled because of FSOC's focus on 
political issues.
    Finally, in your role as Chair of the President's Working 
Group of Financial Markets, or PWG, you released a report last 
November on stablecoins. Although I disagree with the report's 
recommendation that all stablecoin issuers must be insured 
depository institutions, I was glad to see it acknowledge that 
it is the responsibility of Congress to create new rules for 
stablecoins.
    Last month I released a discussion draft of a bill, the 
Stablecoin Trust Act, to establish a regulatory framework for 
stablecoins. There are tremendous potential benefits of 
stablecoins in our society. Today stablecoins primarily 
facilitate trading of digital assets, but tomorrow stablecoins 
could be widely used in the physical economy, for payments and 
automating transactions. Because of the dollar price stability 
of stablecoins they have the potential to serve all the 
traditional functions of money, including acting as a medium of 
exchange. Stablecoins could also improve upon traditional forms 
of money by increasing payment speed, reducing transaction 
costs, helping to combat illicit finance, and enabling 
programmable contracts.
    The proposed regulatory framework I have released will 
allow stablecoins to continue flourishing while protecting 
consumers and minimizing potential risks from stablecoins to 
the financial system. It is critical that Congress provide 
clarity in this area as soon as possible. Congress needs to 
enact a sensible regulatory framework before something bad 
happens with the stablecoin that harms consumers. If that were 
to happen, Congress will rightfully share some of the blame.
    Thankfully, I am optimistic that the Administration is 
working with Members of Congress and that we can find common 
ground on bipartisan legislation that addresses the risks of 
stablecoins while also encouraging innovation and competition.
    Secretary Yellen, I look forward to hearing your testimony 
and discussing these and other important issues with you today.
    Chairman Brown. Thank you, Ranking Member Toomey.
    We will hear from the Chair of FSOC today, Treasury 
Secretary Yellen. Thanks for your service and your testimony. 
Please begin, Madam Secretary.

  STATEMENT OF JANET L. YELLEN, SECRETARY, DEPARTMENT OF THE 
                            TREASURY

    Secretary Yellen. Thank you so much, Chairman Brown, 
Ranking Member Toomey, and Members of the Committee. I am 
pleased to speak with you today about the Financial Stability 
Oversight Council's 2021 annual report. The report is a 
collaborative effort of the Council member agencies, and it is 
a vehicle for providing Congress and the public with the 
Council's collective assessments of potential risks to U.S. 
financial stability. Today, I will highlight a few topics in 
the report and provide an update on the Council's activities 
since the report's publication.
    First, the report discusses vulnerabilities in the nonbank 
financial sector which were highlighted by the turmoil in 
financial markets in March 2020. While the Dodd-Frank act 
reforms increased the resiliency of the U.S. financial system, 
the market turmoil in March 2020 demonstrated that the 
liquidity mismatch and use of leverage by some nonbank 
financial institutions can make them vulnerable to acute 
financial stresses, and these stresses can be transmitted and 
amplified to the broader financial system. The Council has 
taken steps to examine these risks, including re-establishing 
its Hedge Fund Working Group to develop an interagency risk-
monitoring system and to propose options to mitigate identified 
risks. And earlier this year, the Council issued a statement to 
express support for the Securities and Exchange Commission's 
efforts to reform money market funds and their work to consider 
potential reforms open-end funds.
    The Council is also working to support improving the 
resilience of the Treasury market and is coordinating with the 
Interagency Working Group on Treasury Market Surveillance. 
Potential steps to be taken include improving data quality and 
availability, evaluating expanded central clearing, and 
enhancing trading venue transparency and oversight.
    The SEC has proposed certain reforms to enhance 
transparency and oversight over alternative trading systems 
that trade Government securities. The SEC has also proposed 
updating the definition of a Government securities dealer to 
include market participants that plan an increasingly 
significant liquidity-providing role in overall trading and 
market activity. Additionally, the Office of Financial Research 
is working to fill identified data gaps for uncleared, 
bilateral repurchase agreements trough a pilot data collection, 
which should improve visibility into a major source of 
financing for nonbank financial institutions in treasury 
markets.
    Additionally, the Council is working to ensure that 
financial institutions better understand their climate-related 
financial risks. In its October 2021 Report on Climate-Related 
Financial Risk, the Council outlined how climate change can be 
a source of shocks to the financial system and increase risks 
to financial stability.
    To address these risks, the Council recommended that 
regulators build their capacity and expand their efforts to 
address climate-related risks, improve the availability of 
data, enhance and standardize disclosures, and assess and 
mitigate risk to financial stability. The Council has also 
formed its staff-level Climate-Related Financial Risk 
Committee, which will serve as coordinating body to the Council 
to share information, facilitate the development of common 
approaches and standards, and foster communication across FSOC 
members.
    In addition, the Council is establishing the Climate-
Related Financial Risk Advisory Committee. This advisory body, 
which will include a broad array of external stakeholders, will 
help the Council gather information and analysis on climate-
related financial risks.
    With respect to digital assets, new products and 
technologies may present opportunities to promote innovation 
and increase efficiencies. However, digital assets may pose 
risks to the financial system and increased and coordinated 
regulatory attention is necessary.
    On March 9th, President Biden signed an Executive order 
calling for a comprehensive approach to digital asset policy. 
The Council is drafting a report that will identify financial 
stability risks and regulatory gaps. I look forward to working 
with you on the issues and opportunities posed by digital 
assets. We are also eager to work with you to ensure that 
payment stablecoins and their arrangements are subject to a 
Federal prudential framework on a consistent and comprehensive 
basis.
    Finally, there is the potential for continued volatility 
and unevenness of global growth as countries continue to 
grapple with the pandemic. Russia's unprovoked invasion of 
Ukraine has further increased economic uncertainty. The U.S. 
financial system has continued to function in an orderly 
manner, though valuations of some assets remain high compared 
with historical values. We stand firmly with the people of 
Ukraine and have implemented an unprecedented suite of 
sanctions on Russia that have been implemented by financial 
institutions.
    On February 28th, I convened the Council in the wake of the 
invasion, and we will continue to monitor developments and 
coordinate actions as the risks and threats evolve.
    The Council's report also discussed other potential 
emerging threats and vulnerabilities that the Council continues 
to monitor, including short-term wholesale funding markets, 
central counterparties, alternative reference rates, 
cybersecurity, corporate credit markets, and real estate 
markets.
    The Council remains committed to its mission of identifying 
and responding to risks to U.S. financial stability, and I look 
forward to working with this Committee to promote a more robust 
and resilient financial system. Thank you.
    Chairman Brown. Thank you, Madam Secretary. I have to step 
out to introduce an Ohioan at the Health Committee. Senator 
Menendez will begin the questioning, followed by Senator 
Toomey.
    Senator Menendez. Well thank you, Mr. Chairman. Madam 
Secretary, welcome. I want to talk to you about some things 
that also can affect our economy. The ability to have full 
control over one's reproductive health has real-world economic 
consequences. According to the Institute for Women's Policy 
Research, current State-level abortion restrictions already 
cost the United States about $105 billion annually due to 
reduced earnings levels, increased job turnover, and time off 
for women.
    So Secretary Yellen, if the draft of the Court's majority 
holding in Roe v. Wade is the actual decision, what impact will 
the loss of abortion access mean economically for women?
    Secretary Yellen. Well I believe that eliminating the right 
of women to make decisions about when and whether to have 
children would have very damaging effects on the economy and 
would set women back decades. Roe v. Wade and access to 
reproductive health care, including abortion, help lead to 
increased labor force participation. It enabled many women to 
finish school. That increased their earning potential. It 
allowed women to plan and balance their families and careers. 
And research also shows that it had a favorable impact on the 
well-being and earnings of children.
    There are many research studies that have been done over 
the years looking at the economic impacts of access, or lack 
thereof, to abortion, and it makes clear that denying women 
access to abortion increased their odds of living in poverty or 
need for public assistance.
    Senator Menendez. For half of the population of America, 
eliminating a right that has existed for half a century, 
particularly for low-income and minority women who have already 
shouldered much of the burden from the public pandemic would be 
a disaster.
    Let me turn to something else. The Federal Reserve Chair, 
Chairman Powell, has acknowledged that part of the labor 
shortage is being fueled by an inordinately high number of 
retirements. According to the most recent figures from the 
Bureau of Labor Statistics there are now two job openings per 
unemployed worker in the country. There are about 11 million 
jobs that are going unfilled, which has an economic consequence 
by virtue of them going unfilled. In short, we just do not have 
enough people to replace those who are leaving the labor force.
    Now what we do have is thousands of hard-working immigrants 
who are willing to work if Congress would simply allow them to 
do so. Would addressing the immigration visa backlog help shore 
up the labor supply, therefore the supply chain as a whole?
    Secretary Yellen. Senator, I agree with you. I think that 
it would be very helpful, especially under the conditions that 
you described. The labor market arguably is tight with about as 
large a supply demand imbalance as we have seen in U.S. postwar 
history. We have had a decline in legal immigration, and I 
think that taking steps to shore up our workforce--for example, 
you referred to the enormous backlog of applications. I believe 
that immigrants who have had legal work permits and need to 
have them renewed have faced very substantial backlogs. And I 
think the White House recently announced that it is taking 
steps to make sure that those individuals will be able to work 
in spite of the backlog.
    Senator Menendez. Well I hope we can get there, because 
even leading business groups agree that robust immigration 
reform is urgently needed to address our labor shortage, and 
they are not necessarily a voice in this regard but they are 
because they have come to that conclusion themselves.
    Finally, talking about the labor market shortage playing a 
major role in the slowed economic recovery, according to the 
Peterson Institute for Economics the employment rates of 
parents with young children have declined by 4.5 percent over 
the pandemic with concentration impacts among women, especially 
women of color. This is even more troubling as women with young 
children account for 12 percent of the U.S. workforce.
    How would investing in childcare strengthen our Nation's 
labor market and unleash our capacity for economic growth?
    Secretary Yellen. Well I think the ability of a family to 
access affordable childcare is a critical prerequisite for 
women to be able to participate in the labor force. The United 
States does less than many countries in making sure that women 
do have affordable childcare, and the President has made 
proposals that would serve to make childcare more affordable. I 
think he has made proposals for universal access to 2 years of 
pre-K, and I think these proposals would certainly boost labor 
force participation.
    Senator Menendez. Thirteen thousand dollars, on average, 
cost a year for childcare. It is, for many families, 
prohibitive and if not it takes a significant part, so I agree 
with you.
    Finally, we had spoken in the past about my efforts and 
legislation to create a capital increase for the Inter-American 
Development Bank. We are facing China's challenge throughout 
the hemisphere. The one entity that can be helpful to use in 
meeting that challenge is the Inter-American Development Bank. 
And while I see that Treasury has taken some steps to move 
forward with an increase I do not believe that we are working 
together as I had envisioned. So I would ask you to have some 
personal attention to it. Thank you.
    Senator Toomey.
    Senator Toomey. Thank you, Senator Menendez.
    Secretary Yellen, as I mentioned during my opening remarks 
I have been encouraged that the Administration has recognized 
the importance of stablecoin regulation and the fact that it is 
the responsibility of Congress to define the broad parameters 
of that. As you know, I released a discussion draft of a bill 
that would, in fact, regulate stablecoins. It would protect 
consumers by establishing new, standardized Federal disclosure 
requirements. Among other things it would also establish a new 
Federal license.
    So I would like to ask if you can confirm for the record 
here that it is still your view that it is important--I would 
argue even urgent--for Congress to pass legislation governing 
the regulation of payment stablecoins.
    Secretary Yellen. Yes, I am happy to confirm that, Senator 
Toomey. The President's working group issued a report 
concluding that current statutory and regulatory frameworks do 
not provide consistent and comprehensive standards for the 
risks of stablecoins as a new type of payment product and urges 
Congress to enact legislation to ensure that stablecoins and 
such arrangements have a Federal prudential framework. I would 
urge bipartisan action to create such a framework. We would 
look forward to working with you.
    I would note that there was a report just this morning in 
the Wall Street Journal that a stablecoin known as TerraUSD 
experienced a run and had declined in value.
    So I think that simply illustrates that this is a rapidly 
growing product and that there are risks to financial stability 
and we need a framework that is appropriate.
    Senator Toomey. I appreciate that. I do think it is 
important to note that the stablecoin to which you refer I 
believe is an algorithmic stablecoin.
    Secretary Yellen. I believe that is correct.
    Senator Toomey. And so that means, by definition, it is not 
backed by cash or securities as the, if you can call them, more 
conventional stablecoins. So I think that is an important 
distinction.
    But I am grateful for your point. I hope you will agree to 
work with me and my colleagues who are interested in getting 
something done. Do you think we could shoot for a goal of 
getting legislation done this year?
    Secretary Yellen. I think it would be highly appropriate. 
The outstanding stock of stablecoins is growing at a very rapid 
rate and we really need a consistent Federal framework. I 
really look forward to working with you and Members of Congress 
to devise legislation that would accomplish that.
    Senator Toomey. Great. Thank you.
    Let me move on to the FSOC's focus on climate change. You 
spoke at some length about climate change during your opening 
remarks and I have observed that I think 7 of the recent 10 
meetings have been about climate change.
    So do you subscribe to what I think is the 
Administration's, a general paradigm for this that the risk to 
the financial system comes in two categories, one physical risk 
associated with severe weather events and the other transition 
risk that is associated with an evolution away from fossil 
fuels. Do you subscribe to that paradigm or do you think there 
is another category of risks?
    Secretary Yellen. I would agree with you that those are the 
main risks.
    Senator Toomey. OK. So can you name a single financial 
institution in America that has failed as a result of a severe 
weather event in the last 50 years?
    Secretary Yellen. I am not aware of----
    Senator Toomey. So I do not think there has been one, and 
every single year we have blizzards, we have hurricanes, we 
have wildfires, and sometimes they are horrendous, and some of 
them have been recent. But we have never had a single financial 
institution fail, much less the entire financial system. So I 
think it is pretty clear, and actually I think Chairman Powell 
acknowledge, there is really no physical risk that is even 
remotely imminent.
    So then that brings us to the transition risk. Well, I 
suspect that over time we are going to have a transition away 
from fossil fuels to other forms of energy. It certainly looks 
like that is going to take quite a while. I do not see how that 
is much different from the fact that consumer preferences 
change in all kinds of products and services.
    So I would urge you to consider that risks like 
cybersecurity--I mean, I would think you would acknowledge 
cybersecurity poses a much more imminent risk to financial 
institutions and our financial system than either physical risk 
from severe weather or climate change, in general, right?
    Secretary Yellen. Well, I think both create risks.
    Senator Toomey. But I said more imminent. Is cybersecurity 
a more imminent risk?
    Secretary Yellen. Cybersecurity is certainly an imminent 
risk. It is one that the Council is very focused on. The 
Treasury Department has special responsibilities----
    Senator Toomey. I understand, but you are choosing not to 
acknowledge that cybersecurity is a more imminent risk than 
climate risk, and I think that is kind of surprising because it 
is so obvious to most people. Cybersecurity is a real-time, 
continuous risk to every single financial institution in 
America. There are constant bombardments of attacks, and if one 
major one gets through it could be devastating. Climate change 
does not pose that kind of imminent risk.
    Secretary Yellen. I think climate change is an existential 
threat to our globe and to our future. You can see that 
countries--it is a long-term risk but it is becoming notably 
more severe, and you see a growing number of countries take 
significant steps to address this risk. Financial institutions 
themselves have voluntarily decided that they need to align 
their portfolios with a framework of net zero by 2050, and that 
is really in the absence of any requirement that they do so.
    I do believe that transitions risks are very real as more 
and more countries adopt frameworks that are meaningful to 
address climate change. We could see significant changes in 
asset valuations that pose risks to financial institutions.
    Senator Toomey. Well, there is a lot we disagree on there 
but my time has expired. I think Senator Warner is with us 
remotely. Senator Warner?
    Senator Warner. I am, Senator Toomey, and let me follow up 
on a couple of items. One, I look forward to working with you 
and Secretary Yellen on a rational approach to regulation 
around not only stablecoins but crypto generally. I think we 
have seen, very recently, certain companies that were maybe 
companies in the software business that have gone out and way 
overleveraged themselves to buy Bitcoin, and unfortunately 
their value is disappearing real time as we see this transition 
go through in the market.
    I would point out two quick things. In terms of the 
physical risks of climate change beyond simply the transition, 
there are an awful lot of folks in New Mexico right now who are 
experiencing the fires that would say that is a visceral, real 
human risk. And I think on a broader basis--and I would hope 
our colleagues would want to look at this--literally in India 
at this point if they do not get appropriate rains you may have 
wide swaths of the Indian population not literally being able 
to live with the level of heat exposure. And if you have a 
dramatic meltdown in the economy I actually think that will be, 
unfortunately, maybe the first direct, immediate physical risk 
coming out from climate change. Again, I hope we prove to be 
wrong but that seems where we are headed.
    Secretary Yellen, I want to get to at least a couple of 
questions. One, I commend what you and all of FSOC entities 
have been doing in terms of tightening up sanctions on Vladimir 
Putin's aggressive actions. Two quick comments, and my first 
question, one, any kind of macro idea of how we are doing in 
terms of ratcheting down on the Russian economy, and two, I was 
really interested in seeing Treasury's announcements on Sunday 
to say we are going to go down to the services level, because I 
do fear that Putin, the oligarchs, and others are setting up 
other shell companies and entities where we could have leakage 
in terms of getting away from sanctions.
    Frankly, I go back to the crypto arena, where Senator 
Warren and I have said we need to make sure that those crypto 
exchanges not based in America, where there are some, at least, 
basic regulatory framework, but those based abroad, that they 
are not sources of leakage.
    So can you talk about, on a macro basis, and some of the 
things that drove you to your Sunday additional regulations?
    Secretary Yellen. Well on a macro basis I think that our 
sanctions are having a very severe impact on Russia, and Russia 
itself has acknowledged that. Their economy is clearly in a 
recession. It is forecast that it will contract at least in the 
10 to 15 percent range this year. Inflation has been running 
probably around 20 percent this year.
    And Russian firms that have been sanctioned are finding it 
almost impossible to gain access to goods and services that 
they need in global markets. This includes major defense firms 
that are unable to buy semiconductors and other components that 
they need to restock their defense arsenals as they use up 
equipment in Ukraine.
    Senator Warner. Could you speak to the question on--because 
I do want to get one more question in here.
    Secretary Yellen. On sanctions?
    Senator Warner. What you meant on the accounting services 
and others. Frankly, I am still concerned about leakage through 
unregulated, non-American crypto exchanges in terms of 
oligarchs trying to get some of their money out.
    Secretary Yellen. Yes. We took the actions we did last 
Sunday for service providers to make sure--I think some of the 
oligarchs use these services to figure out ways to shield their 
money from sanctions, and we wanted to clamp down on that and 
put an end to it, along with all the other things that we are 
doing through the Repo Task Force, DOJ, and Treasury, 
exchanging information globally with our partners that have 
greatly enhanced our ability to seize oligarch assets.
    Senator Warner. Let me just interrupt because I know my 
colleagues have gone a couple of minutes over, but Chairman 
Brown may be coming back and may cut me off so I want to get my 
last piece in here.
    One of the things we have been doing on the Intel 
Committee, on a bipartisan basis, is bringing in different 
industry sectors and talking about the real challenge that 
China poses in terms of economic policy, in terms of 
technology, in terms of intellectual property theft. We 
recently had, in some of the finance industry, and while they 
were concerned about Russia it was like the light went off and 
then suddenly saying, oh my gosh, we could have this same kind 
of potential decoupling with China should President Xi increase 
his belligerent and aggressive actions and try to follow the 
Putin game plan if he attacks Taiwan.
    Do you think the financial sector is appropriately building 
in the potential risks of China taking aggressive action and 
what might be our and the West's reaction to that?
    Secretary Yellen. That is a really difficult question I 
probably cannot answer in the time that I have. I think you are 
raising a very important issue. What I see, the businesses and 
the financial community are becoming much more aware of the 
risks that they face in investing in China, and I think this is 
something that really demands our intense focus, going forward.
    Senator Warner. I hope we can work with my colleagues on 
that. Thank you.
    Chairman Brown. Thank you, Senator Warner.
    Senator Scott, from South Carolina, is recognized.
    Senator Scott. Thank you, Chairman, and thank you, Ranking 
Member, for holding this hearing. Secretary Yellen, thank you 
for being here this morning.
    Some of your comments in response to Bob's question I found 
troubling, and just for clarity sake, did you say that ending 
the life of a child is good for the labor force participation 
rate? Let me just quote what you said, that ultimately 
increasing access to abortion and reproductive health care 
allows for our labor force participation to continue to 
increase, that denying women access to abortion increases their 
odds of living in poverty or need for public assistance.
    As a guy who was raised by a single mom who worked long 
hours to keep us out of poverty, I think people can disagree on 
the issue of being pro-life or pro-abortion, but I think in the 
end framing it in the context of labor force participation just 
feels callous to me. I think finding a way to have a debate 
around abortion in a meeting for the economic stability of our 
country is harsh. I am just surprised that we find ways to 
weave into every facet of lives such an important and painful 
reality for so many people. To make it sound like it is just 
another 0.4 percent added to our labor force participation as a 
result of the issue of abortion just, to me, seems harsh.
    Secretary Yellen. Well, I certainly do not mean to say what 
I think the effects are in a manner that is harsh. What we are 
talking about is whether or not women will have the ability to 
regulate their reproductive situation in ways that will enable 
them to plan lives that are fulfilling and satisfying for them. 
And one aspect of a satisfying life is being able to feel that 
you have the financial resources to raise a child, that the 
children you bring into the world are wanted, and that you have 
the ability to take care of them. In many cases abortions are 
of teenage women, particularly low-income and often Black, who 
are not in a position to be able to care for children, have 
unexpected pregnancies, and it deprives them of the ability 
often to continue their education, to later participate in the 
workforce.
    So there is a spillover into labor force participation, and 
it means that children will grow up in poverty and do worse 
themselves. This is not----
    Senator Scott. Let me just--regaining my time on the topic.
    Secretary Yellen. Harsh. This is the truth.
    Senator Scott. I will just simply say that as a guy raised 
by a Black woman in abject poverty I am thankful to be here, as 
a United States Senator, first. The second thing I would say is 
that we can, at the same time, have a real conversation about 
increasing child tax credits that are refundable. We can, at 
the same time, have a conversation about the opportunity to 
have a more robust system around the issue of childcare, of 
early childhood education. We could have the conversation about 
financial literacy. There are a lot of ways for us to address 
the issue about the child that is here. So that just, to me, 
was unusually piercing comments that you made.
    I will say, on my prepared question, that in the face of 
persistent inflation, I think caused, in many ways, by the $2 
trillion package that was approved in early 2021, that was 
followed by a $1.2 trillion package that both combined led to 
an overheating of our economy, slowing growth caused by a 
backlog pipeline driven too much demand with too little supply, 
followed by a lagging labor force participate rate. People are 
not coming back to work so we have millions of jobs that are 
open. The atrophying of the muscle for work seems to be endemic 
in this current Biden administration's approach, coupled with 
Government debt that is now well over $30 trillion and growing 
very fast.
    How do we justify looking at the Build Back Broker plan or 
the Build Back Better plan and saying to ourselves that more 
money in the economy is going to help us to reduce the 
inflationary effect where the average person today is paying 
$4.37 for the average 87 unleaded gas?
    Secretary Yellen. Well, the American Rescue Plan--it is not 
Build Back Better--was designed to mitigate what, at the time, 
seemed to be the most significant and worrisome risk facing the 
economy, which was that unemployment would stay high, the labor 
market would remain weak, and especially low-income households 
would lose the roofs over their heads and be unable to put food 
on the table and be permanently scarred by the pandemic. And at 
the time forecasts were really quite dire, including those of 
the Congressional Budget Office and outsiders, and no one 
really knew just how significant the risks were.
    The American Rescue Plan was a large package. It was 
targeted at the needs particularly of those who were most 
severely affected by the pandemic. And when you look at the 
state of the labor market as you describe the fact that it is 
so strong, maybe overly strong, overly hot, is, in a way, a 
sign of the success of that program and mitigating what could 
have been another Great Depression, a risk that we should not 
have been willing to take.
    Inflation is clearly a problem----
    Senator Scott. I think Chairman Brown is going to tell us 
both we are out of time, so let me just finish with this, just 
perhaps----
    Chairman Brown. Make it a statement, not a question.
    Senator Scott. ----perhaps--yes, of course--perhaps better 
say what I said, which is, number one, the $1.9 trillion Rescue 
Plan, followed by the $1.2 Infrastructure Plan, with another 
BBB on the table for more spending was a delineation between 
the three categories of spending that I believe two already 
passed and overheated the economy and then having a third 
package on the table to once again continue to provide more 
stimulus to an economy that cannot take the stimulus that has 
already been provided.
    Secretary Yellen. If you look at the President's budget you 
will see that it is fully paid for through higher tax 
collections and that the budget also incorporates substantial 
deficit reduction.
    Chairman Brown. Thank you, Senator Scott.
    Senator Smith, from Minnesota, from her office.
    If not, Senator Cortez Masto is next from her office, 
Senator Cortez Masto from Nevada.
    Senator Cortez Masto. Thank you, Mr. Chairman, and 
Secretary, thank you for being here. Let me just couch a couple 
of things in response to Senator Scott. One, let us not forget 
we started down this path with $1.9 trillion tax cuts for the 
very wealthy that have not been paid for. My colleague seems to 
forget that is kind of where we started here. The rest are 
bipartisan, and the Bipartisan Infrastructure package not only 
is it paid for, it is a benefit to the State of Nevada, and it 
is long-term investments over the years. So that is one.
    Two, I want to associate myself with Senator Menendez's 
comments both about abortion restriction and its economic 
impact on women. It is true. There are studies that show that. 
I would ask Senator Scott this question. You cannot know 
everyone's circumstances. I appreciate his circumstances and he 
is very proud of it. I think that is fantastic. But why impose 
your experience and your circumstances on others until you walk 
in their shoes? That is all we are asking.
    And then let me start with, Secretary, the cryptocurrency, 
because I do believe--and I want to be a part of this 
discussion--we do need a regulatory framework for stablecoins. 
Last week, Fabio Panetta, one of the European Central Bank's 
six executive board members, noted that the cryptocurrency 
market is now larger than the subprime mortgage market, which 
triggered a global financial crisis. Nobody knows that better 
than us in the State of Nevada. And he says this: ``The $1.3-
trillion-dollar market shows strikingly similar dynamics.'' 
There are about 10,000 crypto assets now.
    So my question, Madam Secretary, is one financial risk 
posed by cryptocurrencies is the concentration of ownership. Do 
you see any financial risk because professional investors and 
high-net-worth individuals hold almost two-thirds of the 
Bitcoin supply?
    Secretary Yellen. So I am not sure if the concentration of 
holdings among high-wealth investors, if that is true, poses, 
in and of itself, a financial risk unless those investors 
happened to be leveraged so that a decline in the value of the 
assets can trigger financial distress, which spills over to 
others.
    But certainly I think there are many risks associated with 
cryptocurrencies, and the President has asked the Treasury and 
FSOC to look at those risks. We will issue a comprehensive 
report shortly. The President's working group has already 
described the risks we see in connection with one form of 
crypto assets, which is stablecoins, and there we see run risks 
which could threaten financial stability, risks associated with 
the payment system and its integrity, and risks associated with 
increased concentration if stablecoins are issued by firms that 
already have substantial market power. So we definitely see 
significant risks here.
    Senator Cortez Masto. Thank you. Let me jump to something 
else that is impacting us in the State of Nevada, which is 
affordable housing and the lack of housing supply. Our Nation 
is short 5 million homes. Building homes, especially those 
affordable for working families and seniors and so many others 
should be our top priority. Can you address the financial 
stability risks to our economy posed by the increase in nonbank 
mortgage companies providing residential home financing?
    Secretary Yellen. Well, it is certainly true that nonbank 
mortgage companies are playing a very large role. They tend to 
be quite dependent on short-run financing, and if there is 
volatility in the markets and a loss of that access I do see 
some risks relating to the role of nonbanks in the mortgage 
market.
    Senator Cortez Masto. Thank you. And then finally, and you 
talked about this, the Administration has taken a leading role 
in assessing climate-related risks to financial stability, 
through some scenario analysis and disclosures. Can you talk a 
little bit about what have financial regulatory agencies 
learned from those scenario analysis and disclosure 
requirements? Is that what you are referring to in some of the 
reporting that has been done?
    Secretary Yellen. A number of central banks around the 
world, I think the Bank of England is most advanced, have been 
evaluating the risks to key financial institutions by looking 
at how they would fare, what their losses and financial 
position would be if particular climate scenarios were to play 
out, and looking at different scenarios, one where there is a 
gradual imposition of policies to address climate change, 
others where there is very little action and then a great deal 
of action. They designed these scenarios and then use them to 
assess risks to financial institutions.
    And many of our supervisors are looking to do similar 
exercises, and it makes sense for FSOC to work jointly on 
trying to design such scenarios and collect the data that would 
be necessary to translate those scenarios into concrete 
assessments of risks to the particular financial institutions.
    Senator Cortez Masto. Thank you.
    Chairman Brown. Thank you, Senator Cortez Masto.
    Senator Rounds, from South Dakota, is recognized.
    Senator Rounds. Thank you, Mr. Chairman. Madam Secretary, 
first of all thanks for coming and sharing with us in front of 
this Committee today.
    The Federal Reserve wrote in its most recent supervision 
and regulation report, released Friday, and I quote, ``The 
banking systems remains strong overall with robust capital and 
liquidity and improved asset quality,'' unquote.
    Would you agree with their statement?
    Secretary Yellen. Yes, to the best of my knowledge, 
certainly.
    Senator Rounds. Thank you. With regard to what we are doing 
right now in Russia, I just want to discuss it with you for a 
little bit. Up until now bondholders have only been allowed to 
receive sovereign bond payments from Russia because of a 
special rule put in place by your department in late February. 
The General License 9A exemption authorizes U.S. persons to 
receive interest, dividend, or maturity payments on debt or 
equity of the Russian Government.
    Despite the extremely strong sanctions place on their 
financial system this has allowed money to flow out of Russia, 
depleting their stockpile of U.S. dollars. That exemption is 
poised to expire on May 25th. Their next payments are due on 
May 27th for bonds maturing in 2026 and 2036, 2 days after the 
OFAC exemption is set to expire.
    Will Treasury allow this exemption to expire and allow 
Russia to default or would you make other accommodations?
    Secretary Yellen. So this is something we are actively 
examining right now. We want to make sure that we understand 
what the potential consequences and spillovers would be of 
allowing the license to expire, and we have not yet made a 
decision.
    Senator Rounds. When would you expect that decision to be 
made? I mean, right now we are talking just a little over 2 
weeks.
    Secretary Yellen. Shortly. We are actively involved in 
evaluation of the risks and impact of not renewing the license.
    Senator Rounds. There would be some sort of a report from 
your department prior to this point. It simply would not be 
ignored at this stage of the game.
    Secretary Yellen. I sorry?
    Senator Rounds. Well, we would not expect that you would 
simply allow it to expire without further announcements of what 
your plan is.
    Secretary Yellen. We would certainly announce if we intend 
to allow it to expire.
    Senator Rounds. Or other options available.
    Secretary Yellen. Yes. Yes.
    Senator Rounds. Thank you. Madam Secretary, our debt has a 
share of GDP. The most economically and meaningful measure of 
debt has climbed above 120 percent. In September and November I 
asked you when we should say enough is enough when it comes to 
our debt and deficit. You felt that since the cost of servicing 
our debt had been negative due to a long stretch of low rates 
our debt has been less burdensome. However, due to skyrocketing 
inflation the Fed just raised rates by 50 basis points for the 
first time since 2000, and we could see five more hikes before 
the end of the year.
    Do you think it is finally time to start sounding the alarm 
bells, and if not now what level of interest rates would alarm 
you?
    Secretary Yellen. Well I do feel we have to make sure that 
the United States is on a sound fiscal path, and that is an 
important priority, obviously, for Treasury and for the 
Administration.
    The projections that were made in the budget assume that 
interest rates will rise over time, that they were abnormally 
low. And so my statement that real interests costs were quite 
low, of course they would rise over time but still remain at 
quite low levels even if interest rates increase.
    But certainly longer term we have known for a long time 
that as we have an aging population that a larger share of U.S. 
GDP will go to Social Security, Medicare, Medicaid, and that we 
need to address issues in connection with financing those 
programs. If we fail to attend to them that most very long run 
analyses show debt growing in a manner that could be worrisome.
    At the moment, the debt-to-GDP ratio is not increasing. 
Revenues are coming in very strong. This year the deficit will 
decline by, we expect, over $1.5 trillion, and my guess is that 
CBO and others will be revising down somewhat their likely path 
for the debt-to-GDP ratio.
    Senator Rounds. Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Rounds.
    Senator Reed, from Rhode Island, is recognized.
    Senator Reed. Thank you very much, Mr. Chairman, and thank 
you, Madam Secretary, for your service.
    Last year our economy grew by 5.7 percent. Unemployment is 
down to 3.6 percent. We have added 8.3 million new jobs under 
President Biden, including over 2 million in the last year 
alone. In fact, when I go out and talk to any type of business 
their major complaint is they cannot find workers, and this is 
probably the best year to graduate from high school, college, 
or anyplace else, to find a job.
    What would our Nation's economy and job news look like if 
Congress and the Administration had not passed the American 
Rescue Plan last year?
    Secretary Yellen. When President Biden assumed office the 
unemployment rate was very high and there was a great deal of 
uncertainty as to how the pandemic would progress and a real 
possibility that unemployment would end up rising to Great 
Depression levels.
    We worried not only about mean outcomes but also the tail 
risk that we could see a very weak labor market, and the memory 
of 2008, the fact that it took a decade to recover from the 
financial crisis, that the consequence was many people 
graduated from college, went into the job market, could not 
find anything, and saw a permanent impact on their life 
chances. And, of course, so many people lost homes and jobs and 
encountered scarring.
    At the time we were seeing cars lined up in parking lots 
waiting to get food at food banks because they could not keep 
enough food on the table and were risking roofs over their 
heads. So the focus was on aiding those people and promoting a 
strong job market recovery.
    Now inflation is absolutely a problem, and it is critical 
to address it, but I think at the same time we should recognize 
how successful that plan was in leading to an economy where 
instead of having large number of workers utterly unable to 
find jobs, exactly the opposite is true.
    Senator Reed. Thank you very much. And as you point out, 
inflation is a difficult issue. My sense is it was triggered by 
supply interruptions caused by COVID, and it was exacerbated by 
the outbreak of war in Ukraine and the disruption of the world 
energy markets. Gasoline is something that is a fairly good 
barometer and it has reached historic levels, at least in the 
last decade or so.
    We have to deal with that, so what are you and President 
doing to deal with that?
    Secretary Yellen. So let me first say I agree with your 
diagnosis that the factors you mentioned have been extremely 
important. The President has taken actions in a wide array of 
areas. With respect to energy prices, he has announced historic 
release of 1 million barrels a day from the Strategic Petroleum 
Reserve to hold down gas prices, allowing domestic private 
suppliers time to ramp up production.
    I think many domestic oil producers expected the recovery 
to be weak and oil demand to diminish, and they did not invest 
in drilling and producing wells so supply diminished, and it is 
going to take a while for them to ramp up supply. And in the 
meantime we have these strategic petroleum releases.
    On the supply chain side, that has been a very important 
source of inflation. The President has worked tirelessly to 
deal with backlogs at the ports, to make sure that there is an 
adequate supply of truckers, to work to make sure that there is 
adequate room for storage of containers that are coming off 
ships.
    But, you know, the supply disruptions continue. There are 
many related to what is happening in Russia, Ukraine, that the 
war obviously has impacts on energy markets, and now we have 
COVID situation in China that is leading to further supply 
disruptions.
    So there is a broad program to address inflation. 
Obviously, the Federal Reserve has a role. They are recognized 
independent and charged with doing what they think necessary. 
But we are working on the things that we can as well.
    Senator Reed. Thank you very much, Madam Secretary.
    Chairman Brown. Thank you, Senator Reed.
    Senator Tillis, from North Carolina, is recognized from his 
office.
    Senator Tillis. Thank you, Mr. Chairman. Madam Secretary, 
thank you for being here. I was going to ask a question about 
energy but Senator Reed's question and your response to it, I 
feel like I have to drill down a little bit--no pun intended.
    Within hours of the President being endorsed he signed an 
order to pull the permit for the XL Pipeline. We talk about a 
shortage of truckers and transportation but this Administration 
sent a very clear message on day one that the infrastructure 
that energy production requires for those capital expenditures 
and expanded drilling in the United States to make sense from a 
business perspective, he sent a very clear message before the 
sunset on the first day of his presidency that that was not 
going to be a priority of this Administration.
    It seems to me that we can attribute some of the increase 
in energy to what is going on in Ukraine, but is it not 
rational to also say that the posture of this Administration 
and the message that they have sent for domestic energy 
production is also another factor in rising energy prices?
    Secretary Yellen. So Senator, I think with respect to the 
Keystone Pipeline this is something that does not really have 
anything to do with the supply of oil, and it is something that 
would be years----
    Senator Tillis. No. What it has to do is with the--excuse 
me, Madam Secretary, because I do want to get to some of the 
questions. But it has to do with the underlying cost and the 
long-term certainty than an industry needs before they are 
going to make capital expenditure investments.
    I do not expect you to answer this question but I do think 
it is something that we all have to be intellectually honest 
about. Not more than 9,000 permits that the Administration 
supposedly says opens the doors to energy exploration here, 
only about half of them are viable, and even those are in 
question because of other policies that the Administration has 
taken on actually authorizing the use of it. We know within a 
week of the Administration being in office we have seen the 
correspondence out to supervisors among the States saying that 
you cannot make decisions to move froward with extraction. That 
is something that has to go through the White House.
    I do not expect you to get into that, but I do believe that 
we have to understand there is a reason for energy prices going 
up, and only a portion of which can be attributed to the 
geopolitical situation that we are in right now.
    Secretary Yellen. So----
    Senator Tillis. I want to ask--go ahead.
    Secretary Yellen. I feel like the real moral of this 
situation we face is that as long as we are as dependent as we 
are on fossil fuels and our energy supply that we will always 
face vulnerabilities from the decisions of Russia or other 
countries. We face geopolitical----
    Senator Tillis. I agree.
    Secretary Yellen. ----risk, and what we need to do is----
    Senator Tillis. Secretary Yellen----
    Secretary Yellen. ----we need to transition----
    Senator Tillis. ----I agree with that----
    Secretary Yellen. ----renewables----
    Senator Tillis. Secretary Yellen, if I could get you to 
yield----
    Secretary Yellen. ----and we need to deal with climate 
change.
    Senator Tillis. ----for a minute, if I could get you to 
yield for a minute, you can also see the risk of going too 
soon. That is why we have European Nations that are struggling 
to figure out because they went so far that they actually 
stopped drilling--I will give you a classic example in Germany. 
They have energy resources in Germany. They shut them down. And 
they just replaced their fossil fuels with fossil fuels coming 
from Russia.
    So if we do not get the transition right--I have supported 
renewables for years. That is why we have a prospering solar 
economy in North Carolina. But if we do not get it right and we 
are not extracting natural gas, for example, that is a fraction 
of the carbon footprint, we are expediting a transition and 
putting ourselves at risk in the process.
    But I want to move on to something that is in your lane. 
One question that I have, with the help of the Chairman and in 
collaboration with Senator Tester, we were able to get the 
LIBOR transition legislation passed. How is the implementation 
going?
    Secretary Yellen. I think that is very helpful and I really 
appreciate Congress doing that. We are in a transition phase 
and we see that banks are now moving off LIBOR as they have 
been required to do with a clear end date to when it is going 
to be produced. And I think they are making good progress in 
transitioning to SOFR.
    I would say the progress is a little bit less good when it 
comes to loan products. The progress has been very good on 
derivatives. We do think it is important that banks choose 
indices that are robust, based on strong data. We have some 
concerns, that we mentioned in the FSOC report, over credit-
related indices that banks may use. But generally I would say 
the transition is going well.
    Senator Tillis. OK. Thank you. Thank you, Mr. Chair.
    Chairman Brown. Thank you, Senator Tillis.
    Senator Warren, from Massachusetts, is recognized.
    Senator Warren. Thank you, Mr. Chairman.
    In the crash of 2008, we saw how financial institutions 
that were not banks could be big enough and risky enough to 
bring down our whole economy. It was the collapse of a few 
nonbanks, the investment companies Lehman Brothers and Bear 
Stearns, the insurance giant, AIG, that triggered the crisis 
and caused millions of families to lose their jobs, their 
homes, and their retirement savings.
    Now in response, Congress created FSOC to prevent such a 
crash from ever happening again, and one of the most powerful 
tools we gave to FSOC was the ability to designate nonbank 
firms as, quote, ``systemically important financial 
institutions,'' or SIFIs, and subject to the same oversight as 
the too-big-to-fail banks.
    Today these nonbank firms include asset managers that 
oversee trillions of dollars in assets, exceeding the GDPs of 
just about every Nation on Earth, mortgage companies that 
originate 60 percent of home loans in the United States, and 
hedge funds, private equity firms, and investment companies 
that operate in the shadows of the financial system. Those 
companies control huge amounts of the U.S. and the worldwide 
economy, which means their mismanagement or failure could 
threaten the entire economic system.
    Even so, in 2019, under the Trump administration, FSOC 
issued revised guidance that significantly weakens the 
Council's ability to conduct its oversight. But do not take my 
word for it. Secretary Yellen, you, along with Fed Chair Ben 
Bernanke and former Treasury Secretaries Tim Geithner and Jack 
Lew, wrote a letter, in 2019, opposing the revised guidance. 
You stated that the changes would, quote, ``neuter the 
designation authority,'' close quote, and, quote, ``amount to a 
substantial weakening of the postcrisis reforms,'' end quote. 
You also say that the 2019 guidance would, quote, ``make it 
impossible to prevent the buildup of risk in financial 
institutions whose failure would threaten the stability of the 
system as a whole,'' end quote.
    That sounds pretty serious. Do you still agree with that, 
Secretary Yellen?
    Secretary Yellen. Yes, I do.
    Senator Warren. Good. Under the Trump administration, 
regulators chipped away at the rules bit by bit, leaving our 
financial system and American families less safe. Restoring 
FSOC's ability to prevent giant corporations from taking our 
economy down again is a critical step to building those 
defenses back up.
    So Secretary Yellen, you have already joined others to say 
how dangerous you think it is that the 2019 SIFI guidance 
change was, and now you have the power to do something about 
it. Will you reverse the risky 2019 guidance this year?
    Secretary Yellen. We are looking at this very carefully and 
examining what our options are. I will be discussing this with 
other members of the Council, so I continue to hold the same 
set of views.
    But I do want to say, designation is not the only tool that 
was given to FSOC to address financial stability risks in the 
nonbank financial sector. Activity-based regulations are also 
relevant, and so there are two kinds of tools. Sometimes 
designation is clearly the right too. When there is an 
institution whose failure could threaten financial stability it 
is the right tool.
    But sometimes--and I would give you money market funds as 
an example--there is a practice that occurs throughout the 
financial sector. Many firms are involved in it. The risk comes 
from the activities or the structures that many firms have that 
risk. In situations of that sort of an activity-based approach 
may be relevant.
    And I want to say that FSOC has been very focused, ever 
since the day I became Treasury Secretary, on risks in the 
nonbank financial sector. We have focused on money market 
funds, we have focused on open-end mutual funds where there can 
be run risks, and hedge funds. And an activity-based analysis, 
or potential regulations in all of these cases, from the SEC or 
further data gathering, I think that is the right approach 
there as opposed to designation.
    Senator Warren. I appreciate that, Secretary Yellen, but we 
are going to run out of time here. I just want to remind you, 
though, I will quote Yellen to Yellen on this. The letter you 
co-led said, quote, ``Activity-based approaches cannot address 
risks that are tied to the funding, leverage, and combination 
of activities within a corporation,'' end quote. It also says, 
quote, ``Congress created the FSOC with both designation 
authority and the authority to review and make recommendations 
regarding activities. Congress did not intend for one authority 
to be used as a prerequisite for the other,'' end quote.
    My only point here is that with that 2019 designation that 
you wrote this letter against it has altered that balance, and 
I want to see that balance come----
    Secretary Yellen. I agree with that. I think both tools 
should be available and one should not be a prerequisite to 
another, in my wife.
    Senator Warren. Good.
    Secretary Yellen. But we need both tools, and hope to----
    Senator Warren. I want to see both as well.
    Secretary Yellen. ----look very carefully at the 
designation.
    Senator Warren. Stronger rules to protect our economy. I 
always agree. Thank you.
    Secretary Yellen. I agree.
    Chairman Brown. Thank you, Senator Warren.
    Senator Cramer, of North Dakota, is recognized.
    Senator Cramer. Thank you, Mr. Chairman. I cannot resist 
getting back to the issue of energy. You said a couple of 
questions ago that oil producers in the United States did not 
adequately anticipate, or something to this effect, anticipate 
the robust return to demand, and that as a consequence they did 
not respond by producing quickly enough. Is that basically what 
you said?
    Secretary Yellen. Well, prices were very low for a time. 
Many energy companies suffered losses, although I think they 
were gun-shy about putting themselves in a similar position. 
And so they cut production and investment and were probably 
surprised to see the rapid recovery and runup in oil prices 
that resulted.
    Senator Cramer. Since that time, though, there has been a 
runup in oil prices. I do not necessarily agree with your 
assessment of the situation there but giving you the benefit of 
the doubt.
    Let me tell you what else they respond to. They respond to 
chilling market signals being sent by this Administration every 
single day, and this hearing is a pretty good example of it. 
When I look at FSOC action on climate-related financial risks, 
it is one message after another after another--do not produce 
more oil in the United States of America. You have got John 
Kerry running around the world, saying, ``Do not buy ours. Buy 
somebody else's.'' You have got the moratorium on Federal 
drilling. You know, now they open up 20 percent of the 
available drilling but then they announce that they are not 
going to allow any drilling on the 20 percent that are open for 
easements.
    But FSOC itself, including the SEC evaluating these 
disclosure rules, these are chilling messages. The Fed, with 
its two committees to better understand climate risk and 
incorporate committees into supervision of financial firms. 
Even the Department of Defense, as we evaluate the National 
Defense Authorization Act, the President's budget, five times 
in his opening statement to the Armed Services Committee 
Secretary of Defense Lloyd Austin used the words ``climate 
change'' five times. Five times, while there is a war being 
fought in Europe, where energy has been weaponized, where this 
Administration itself has helped weaponize oil.
    And you know what else? Earlier Senator Cortez Masto said, 
``Inflation started with a $1.9 trillion tax cut'' and that led 
to an economy. Let me tell you what they led to. They led to an 
economy where we became energy dominant, because not only did 
the previous administration cut taxes, it cut regulations. And 
we became the No. 1 producer of oil and gas in the world. And 
our dominance at that same time lowered greenhouse gas 
emissions.
    If the goal is better climate action, produce more in the 
United States. We are living at time when our friends in Europe 
are pleading with us. They voluntarily have cut themselves off 
from hostile energy production in Russia and other places. This 
Administration went to Venezuela for help, and then they went 
to SPR, to your point. And now we have not completely depleted 
but less oil in the Strategic Petroleum Reserve at a much 
higher price to replenish it. It has done nothing to help 
inflation. It has only helped drive up costs.
    I could go on and on. I do not want to be the person that 
does not give you a minute to all of this, but I am all for 
aspirations, and I think a 2050 fantasy is a great aspiration. 
But there is a 2022 reality facing the American consumer, 
facing the globe, facing national security and international 
security, and I just think, let us get every regulator back in 
their own lane and let us deal with the reality in 2022.
    I will give you a moment to respond.
    Secretary Yellen. Well I agree with you that there is going 
to be a transition path with respect to energy, and I do not 
think that anybody believe that we can switch completely to 
renewables in the short term. But while the current situation 
certainly emphasizes the need for energy production now from 
fossil fuels it should remind us, especially coupled with the 
increasingly dire predictions of scientists that our 
grandchildren will not be able to have an inhabitable planet if 
we do not address the risks associated with climate change. We 
should not lose our focus on the need to transition as rapidly 
as possible to a path in which fossil fuels play a much less 
important role.
    And financial institutions themselves have recognized this. 
There is an alliance called GFANZ that almost all the large 
American banks voluntarily signed up, that they pledged, 
voluntarily, to align their own lending portfolios with a net 
zero by 2050 approach.
    So medium term we need to move away from fossil fuels. 
Short term, obviously we have a problem.
    Senator Cramer. And in the transition, though, we ought to 
be producing more American fossil fuels because as we produce 
more American fossil fuels and sell to the global marketplace 
we reduce the emissions and we create a transition that is both 
useful for the investor and useful, perhaps, for those who are 
worried about climate change.
    I have gone over my time. I appreciate it. Thank you, Mr. 
Chairman.
    Chairman Brown. Thank you, Senator Cramer.
    Senator Smith, from Minnesota, is recognized from her 
office.
    Senator Smith. Thank you, Chair Brown, and thank you, 
Secretary Yellen. It is wonderful to see you virtually.
    I want to just follow up a bit on the questions that 
Senator Cramer was raising. I, for one, am pleased that FSOC 
has made it a priority to address climate-related risks, both 
transition risks and also physical risks. And as I think about 
Minnesota--severe drought, flooding in the northwestern part of 
the State, right up next to where Senator Cramer is--the risks 
just seem so clear it only makes sense to me that we should 
have some sort of a systemic way of understanding them and 
being able to make comparisons across institutions, which I 
think is the goal of what you are working on.
    Here is just one example. A family today takes out a 30-
year mortgage that will not pay off until 2052, and by then, by 
2052, parts of the country could experience a 15-inch rise in 
sea levels, and a 2.5 degree increase Fahrenheit of temperature 
rise. So that strikes me as something that financial 
institutions need to be paying close attention to. And as you 
say, they already are.
    So Secretary Yellen, could you just address those, and what 
would you say to us about the pace of regulators moving to 
address this crisis and what more you want to see.
    Secretary Yellen. So I definitely think that financial 
institutions--you are absolutely right, they make long-term 
loans, whether they are for mortgages or other kinds of loans, 
and they definitely need to be taking account of the risks that 
are emerging over a long time period. So I think that is 
important.
    I think we need private sector actors, including financial 
institutions, to be taking the long view, and we need to make 
sure that they have the information that they need to evaluate 
their own risks, that supervisors and regulators need to be 
evaluating those risks, as well. And that is an important part 
of the agenda of FSOC is to amass the information that will 
enable that evaluation of risks, both by financial institutions 
and by regulators.
    And the SEC proposal on disclosure by firms, I think that 
is extremely important because investors, huge investor 
community, asset managers want to be able to understand the 
risks that they are undertaking when they invest in firms, and 
without this kind of disclosure of climate-related risks we are 
not providing the investor community the information they know 
to allocate capital properly.
    So I am very supportive of the SEC proposal to require 
disclosure of climate-related risks by firms. I think the SEC's 
job is to make sure that investors have the access to the 
information that they need to evaluate investments, and many 
countries around the globe are requiring this kind of 
disclosure as well.
    Senator Smith. I completely agree with you, and, of course, 
in a free market, a free market functions fairly when there is 
great information, widely shared and understood information. 
That transparency is a hallmark, and I think that is the goal 
here, so that people are not surprised, either investor or 
individual consumers or businesses, anybody is not surprised.
    And it seems to me that there is a real cost of inaction or 
slowness in this area as well, as we think about not like, you 
know, a long, long time from now but like right around the 
corner, right now risks. I think Senator Warner talked about 
the current fires in New Mexico, and we saw this in my State as 
well.
    I just would say that, you know, I talk to Minnesota 
farmers and ranchers about climate change all the time, and 
they see this risk as a current risk, not something that is 
going to be happening a gazillion years from now.
    I just have a minute or two left and I want to go to the 
issue of rising home prices. As noted in FSOC's annual report, 
home prices rose 18 percent between August of 2020 and August 
of 2021, far exceeding the pace in years prior. By one 
estimate, rents went up more than 11 percent national in 2021. 
This is a deep concern for all of us that want to see our 
economy rebound from the pandemic and appreciate that this is a 
challenge, a housing challenge that existed before the pandemic 
but has really been exacerbated by what is happening.
    So Secretary Yellen, could you talk a little bit about what 
is your expectation around housing prices and what more we 
ought to be doing to stabilize housing prices as we go forward?
    Secretary Yellen. Yes. Well, to start with, I think we have 
an extreme shortage of housing in the United States. We have 
been underbuilding since the 2008 financial crisis. The 
pandemic then led to an increase in the demand for housing. 
There has been insufficient inventory. And now with the supply 
chain problems we have it is actually hard to complete houses 
that are under construction. The stock of housing under 
construction is at a 50-year high.
    So we have a real housing problem, especially affordable 
housing, in the United States. House prices are rising very 
rapidly. My expectation is with house prices very high relative 
to rents and having increased rapidly in an environment of 
rising interest rates, mortgage rates have already gone up more 
than 200 basis points just in recent months, my guess is that 
house prices will begin to level off in the not-too-distant 
future. But we do have a significant housing problem.
    Senator Smith. Thank you. I know I am out of time, Mr. 
Chair. I just want to acknowledge and thank you for your work 
on the reconciliation package and many of our work to try to 
address some of these deep challenges around housing. And I 
hope we will be able to find a way to come back to that 
important work because it is so needed right now. Thank you.
    Chairman Brown. Thank you, Senator Smith.
    Senator Hagerty, from Tennessee, is recognized.
    Senator Hagerty. Thank you, Mr. Chairman and Ranking Member 
Toomey. Thank you very much for holding this hearing. Secretary 
Yellen, good morning to you.
    Secretary Yellen, you and I have talked about this before, 
in fact, the past two times you have appeared before this 
Committee. I have talked with you about the confidential 
taxpayer information that ProPublica has been publishing. Each 
time I asked you for an update on the source of the leaks and 
the investigation that is underway to get to the bottom of 
that.
    The prior two meetings that we had you were not able to 
update me so I want to ask you now. More than a year has passed 
since the leaks of confidential taxpayer information had begun 
by ProPublica. Can you tell me, can you update this Committee, 
the American people, on where you are with respect to the 
investigation in terms of the source of the leaks of 
confidential taxpayer information and how it continues to be 
published?
    Secretary Yellen. Senator, I really wish I could update 
you. I really am anxious to see some results here as well. I 
regret that I am not able to do so. There are investigations 
that are ongoing by law enforcement agencies and also by the 
inspectors general. I respect these are independent 
investigations, as is appropriate, and I certainly respect the 
authorities of these independent investigators to complete 
their work. I have not seen any information on what is being 
found, and I am eager to see it, just as you are.
    Senator Hagerty. I am sure it must be every bit as 
disturbing to you, if not more so, given your role, that 
millions of taxpayers are still required to give their 
confidential information to the IRS, and in the face of these 
leaks and the publication of this information, in ways that may 
be perceived as perhaps partisan. It could be hacking. We do 
not know. But it creates a great amount of mistrust among the 
American people, and I encourage you to do everything within 
your power, Madam Secretary, to encourage this investigation to 
come to a conclusion, to get some results for the American 
people, certainly for this Committee. I agree with you. It is 
quite disturbing.
    And going forward, do you have a plan in place, or are you 
working on a plan to make certain that this type of leak does 
not happen again?
    Secretary Yellen. We have done everything within our power 
to make sure that there is not inappropriate access to such 
data. For example, there are some pieces of Treasury that, for 
very good reasons, based on their work, have access to this 
information, to individual taxpayer information. And we have 
asked our own inspector general to make sure that the controls 
that exist, wherever that information is available, are 
appropriate and working. And he has reported that he has looked 
into it and that is not an issue, that the controls are 
adequate and are working.
    So that is the kind of thing we can do to make sure there 
is nothing in our structure that could create an opportunity 
for leaks. The IRS inspector general is also examining similar 
issues within IRS.
    I could not agree with you more. This is very damaging. I 
absolutely want this work to be done and to figure out how this 
happened.
    Senator Hagerty. Thank you for your efforts on this, and 
again, the controls have obviously failed in the past because 
the leaks have occurred. However they occurred I hope we get to 
the bottom of it, and I hope whoever did it will be made an 
extreme example of so that this never happens again.
    Secretary Yellen. I agree with you, Senator.
    Senator Hagerty. I would like to turn to another point. 
Last month, the Department of Treasury released the 1-year 
progress report on what the Department calls its Equity Action 
Plan. On page 7, Treasury details its efforts to advance racial 
equity, including through IRS enforcement.
    I find the notion troubling that Treasury should 
potentially structure its policies with any particular group of 
Americans in mind, rather than advancing economic opportunities 
for all Americans, regardless of their race or gender.
    So Secretary Yellen, could you elaborate on what specific 
plans Treasury may be pursuing, or contemplating pursuing 
regarding racial equity in IRS enforcement?
    Secretary Yellen. So we simply want to make sure that there 
is nothing unintentional in techniques of enforcement used by 
the IRS that could result unintentional discrimination. You 
know, we certainly can see, for example, that in the conduct of 
enforcement that there might be undue attention to certain 
kinds of, you know, issues that could unfairly discriminate by 
race, and we want to make sure that that is not occurring. So 
that is part of our racial equity program.
    Senator Hagerty. I hope you can assure us that there will 
not be people targeted based on their race or gender or 
anything of that nature. Thank you.
    Chairman Brown. Thank you, Senator Hagerty.
    Senator Tester, of Montana, is recognized.
    Senator Tester. Yeah. Thank you, Mr. Chairman and Ranking 
Member. I also want to thank you for being here, Secretary 
Yellen. It is always good to see you.
    It is not breaking news that last year we had a drought 
that impacted nearly every State. There might have been a 
sliver or two west of the Mississippi. Huge weather event that, 
by the way, I am not sure we are out of the woods yet, 
certainly not where I live. Seeding this weekend into dry dirt. 
If we do not get rain it is not coming up. We have got fires in 
New Mexico, and it is not even fire season yet.
    We do not do much about climate as far as a Congress goes, 
and I think that is unfortunate because, whether we want to 
admit it or not, Mother Nature bats last. I am worried about 
the impact on small businesses, community banks, agriculture, 
and, quite frankly, the economy in general, not to mention the 
kind of money that we are putting out in disasters.
    So from your seat, how does our financial system need to 
prepare for these challenges?
    Secretary Yellen. So both the Financial Stability Oversight 
Council and individual supervisors, for example, all of the 
banking supervisors, have recognized that losses related to 
climate change can have an impact on banks, that this is a risk 
that individual banks need to monitor and assess, guard 
against, and that supervisors also need to be able to do 
independent evaluations. And these evaluations can be 
complicated and require data that are not so easily available. 
So the FSOC has prioritized collecting and disseminating 
relevant data as one of its priorities to work with supervisors 
to make sure these risks are assessed.
    Senator Tester. OK, and I appreciate that. So we have got a 
lot of smaller institutions, smaller banks, especially in a 
State like Montana, but it probably is this way all over, I 
mean, where community banks are really carrying the majority of 
the risk out there. How do you gather that information from 
those folks without being too burdensome?
    Secretary Yellen. Well, we are working with the Office of 
Financial Research to try to produce a data base, working with 
outside providers and pooling the resources and knowledge of 
the different agencies to be able to compile data that is 
relevant to evaluating these risks.
    Senator Tester. OK.
    Secretary Yellen. I think it is something--I agree, it 
would be very difficult for individual financial institutions 
to be able to do.
    Senator Tester. So I want to talk about cybersecurity 
threats. What threats, on the cybersecurity side, are of 
concern most to you right now?
    Secretary Yellen. We are definitely concerned about cyber 
risks to the financial sector. This has been a longstanding 
concern. Suppliers of software and inputs that many financial 
institutions use can be a source, when they contain malware, 
can create risks to multiple financial institutions. We are 
working carefully with Treasury that has oversight of the 
financial sector to quickly disseminate information. Of course, 
in connection with Russia and Ukraine we are on heightened 
alert with respect to potential cybersecurity risks.
    Senator Tester. In the cyber realm does Congress need to do 
anything to empower you to deal with this issue or do you have 
the capabilities to do it on your own?
    Secretary Yellen. I believe we do have capabilities working 
with law enforcement agencies, with CISA. This is largely 
something that private sector needs to be aware of, have the 
information. Information dissemination is sometimes imperfect 
and we need to make sure that when a risk is identified that 
firms know about it.
    I would be happy to get back to you with potential 
legislative needs.
    Senator Tester. I think it is good. I mean, I think it is, 
in my opinion, where the next war will be fought or a good 
portion of it. Thank you.
    Chairman Brown. Thank you, Senator Tester.
    Senator Daines, also of Montana, is recognized.
    Senator Daines. Thank you, Mr. Chairman. I would like to 
start by associating myself with Senator Tim Scott's remarks, 
because I also take issue with the characterization of abortion 
as a way to boost the economy.
    When I think about the loss of 63 million lives that have 
been lost to abortion in the United States over the past 50 
years I think of how many more scientists, engineers, farmers, 
teachers, artists, doctors that our Nation could have. And I 
think just look at low birth rates coupled with an aging 
population are a threat to our future economic prosperity. So I 
just want to state that I firmly disagree with your prior 
characterization.
    Turning to my remarks. Secretary Yellen, I believe the 
Treasury is done a good job rationing up sanctions over the 
past several months, but I do not believe we are moving fast 
enough. Ukraine has proven they are very capable of winning 
this war and we must do everything we can to ensure that they 
not only win but they win as soon as possible to stop the 
ongoing atrocities and the war crimes being committed by 
Vladimir Putin.
    Our current sanction regime is full of holes, and enforcing 
entities that are currently sanctioned is severely lacking. 
Today, online commercial registry data allows sanctioned 
entities to be monitored in near real time. This data is 
publicly available to Treasury's Office of Foreign Asset 
Controls. I do believe the use of real-time data needs to be 
stepped up in a significant manner.
    I also think sanctions need to be personalized to Putin. He 
spent decades building a massive commercial and financial 
network with money hidden all over the world. We need to act 
swiftly, deliberately in working with the international 
community to pursue these illicit financial assets.
    I did send a letter to you yesterday which outlined 
specific steps I believe should be taken in short order. 
Namely, I believe we should take the following actions. Here 
are a few: designate Bank Russii and all of its related 
entities as a primary money-laundering concern under 311 of the 
Patriot Act; second, revise the 50 percent rule to provide the 
OFAC more flexibility; and third, levy new sanctions on GAZPRM, 
GAZPRM Bank, and Rosneft.
    I recognize these actions come with tradeoffs, but I 
believe the prolonged war in which war crimes that I personally 
witnessed myself in Bucha a few weeks are repeated in city 
after city is simply an unacceptable outcome.
    My question, Secretary Yellen, I know the letter was just 
sent yesterday, if you have had a chance to read that letter, 
and whether Treasury would consider and would take any of these 
actions, and if not, why?
    Secretary Yellen. Well, Senator, first of all, we are 
working very closely with our allies to remain coordinated on 
sanctions. We are in the process of ratcheting up sanctions and 
periodically, almost every week, we have announced further 
steps to tighten our sanctions. So we wish to take every action 
that we possibly can to raise the pain to Russia and to end 
this war as soon as possible.
    I have not had a chance to look at your letter.
    Senator Daines. Thank you.
    Secretary Yellen. I will do so. My staff can get back to 
you to discuss----
    Senator Daines. Thank you. We have got some very specific 
actions that like to consider recommending.
    Secretary Yellen. It is a valuable set of suggestions.
    Senator Daines. And I think, also, we have got to continue 
to think about what a prolonged conflict might have on our 
financial stability and the world's financial stability as we 
see what is going on right now in terms of energy as well as 
food security. You know, Russia is occupying the port city of 
Kherson, and they aim to control Odessa. In the last 48 hours 
you have got significant attacks her on Odessa and, of course, 
the Black Sea.
    Given that Ukraine and Russia produce more than a quarter 
of the global wheat supply -Ukraine alone is 10 percent--they 
are equivalent to the United States in terms of global wheat 
exports. What will happen if the production and the export of 
the food supply here from that part of the world is taken 
offline for years?
    Secretary Yellen. Senator, we are terribly concerned about 
global food supplies. The IMF World Bank meetings were here a 
couple of weeks ago, and I convened a meeting of the heads of 
all the multilateral development banks and finance ministers to 
discuss this issue, to come up with an action plan. We have 275 
million people globally who are at risk in terms of 
starvation----
    Senator Daines. That letter I sent was meant to be helpful 
in trying to look at some other targeted sanctions here, to 
maybe ratchet up the pressure here so the Ukrainians can win 
this war.
    Secretary Yellen. We share your goal.
    Senator Daines. Thank you. I want to switch to a question 
on cyber. Senator Tester brought this up too. I believe that 
Treasury and FSOC are not placing enough emphasis on 
cybersecurity as it is a threat to our financial stability. I 
just spent a couple of hours at Fort Meade with General 
Nakasone to see this first-hand in a classified brief.
    But in your testimony you spend 158 words talking about 
climate-related financial risk. By comparison, you spent 1 word 
discussing cybersecurity. So do you believe that climate change 
poses orders of magnitude greater threats to financial 
stability than the threat posed by inadequate cybersecurity?
    Secretary Yellen. Cyber is a critical risk. We identify it 
as such in the report.
    Senator Daines. But 158 times climate change----
    Secretary Yellen. Look. You know, climate change has not 
ever previously received attention by FSOC, and it, from a long 
run standpoint, over decades, it is a great or greater risk to 
humanity. It is certainly on a level with cybersecurity. And I 
think it is appropriate for us to ratchet up attention given 
that it has received so little. But not trying to say that 
cybersecurity is not an utterly critical risk. It is.
    Senator Daines. 158 to 1 sends a pretty strong message, but 
thank you.
    Chairman Brown. Thank you, Senator Daines.
    Senator Warnock, from Georgia, is recognized.
    Senator Warnock. Thank you so very much, Chairman Brown, 
and thank you, Secretary Yellen, for testifying before the 
Committee.
    As I was saying last week, one of the most effective things 
that the President of the United States can do to lower costs 
for Georgians and to help close the racial wealth gap is to 
cancel student debt. This would have a transformative change on 
young Americans across the country, freeing an entire 
generation from this crushing economic burden of student debt.
    I know a little about student loans. I borrowed in order to 
make it through college, the first college graduate in my 
family, but it was a different time, I must admit, over 30 
years ago. Our kids now are graduating and they have a mortgage 
before they have a mortgage.
    Secretary Yellen, the average Georgian with student debt 
has to pay $277 per month. Without that monthly burden, would 
it be easier for Georgia borrowers to save for a downpayment, 
say, on their first home?
    Secretary Yellen. Sure. Senator, I agree that student debt 
is a substantial burden to many people, especially those who 
end up with low incomes or have gone to colleges or for-profit 
institutions that they have not actually completed their 
degrees or have not found themselves with enhanced skills that 
enable them to do well in the job market. It kind of makes it 
hard to buy a house, sir.
    Senator Warnock. Absolutely. And a lot of folks who are 
under the load of this crushing debt actually do not have a 
degree.
    Secretary Yellen. Yes. A lot of people do not finish their 
degrees, and that is a huge problem.
    Senator Warnock. Do you think if we cancel student debt it 
might encourage entrepreneurship, the starting of small 
businesses?
    Secretary Yellen. Well, it would provide greater resources 
to do so.
    Senator Warnock. It would make it easier. And collectively, 
are those things good for the economy or bad for the economy?
    Secretary Yellen. Well, they could be good for the economy. 
There are some tradeoffs involved that need to be analyzed.
    Senator Warnock. OK. As Secretary of the Treasury, of 
President Biden issues an Executive order to cancel student 
debt are you and the Treasury Department prepared to fully 
support the implementation of such an order?
    Secretary Yellen. You know, certainly we will support 
anything that President Biden decides is his policy, and he is 
the process of thinking through how he wishes to approach 
student debt.
    Senator Warnock. Yeah, I understand he is thinking it 
through and he has talked about it publicly. I just think that 
this is a real transformational possibility and I hope we do it 
in a way that will actually make a real difference for people's 
lives.
    I want to switch topics here. Last week I chaired a 
subcommittee hearing examining overdraft fees and their effects 
on working families. We heard testimony about the predatory 
practices of overdraft services offered by some banks. My 
office will be releasing a white paper showing the stark 
contrast between how banks and the American public view these 
fees--the way banks see it, the way their customer see it. If 
overdrafts have become a necessary financial safety feature 
then the public should not view them as predatory or illegal, 
as the white paper concludes.
    We also heard that some banks rely on these overdraft fees 
to stay solvent. Imagine that. The bank relying on overdraft 
fees so that the bank can remain solvent. Do you believe that a 
bank that relies on exorbitant overdraft fees to make any 
profit is a safe and sound financial institution?
    Secretary Yellen. Well, I would certainly hope that that is 
not the major source of profit for a bank that is serving the 
public, and certainly some of these fees, at least to my mind, 
are abusive.
    Senator Warnock. Yeah. I would think that of all 
businesses, a bank ought to be able to keep a healthy balance 
sheet without pilfering the folks who are literally putting 
their money in the bank.
    How do you plan on working with other regulators to hold 
banks that use overdraft fees to stay afloat accountable?
    Secretary Yellen. So this is not an issue that FSOC has 
taken up. I think it is one that is in the domain of the 
Consumer Financial Protection Bureau and also individual 
supervisors. But it seems to me like a natural thing for CFPB 
to be paying attention to.
    Senator Warnock. Well some of the banks are already moving 
in the right direction. As Secretary of the Treasury, would you 
encourage banks to follow their peers? Do you think it would be 
a good idea if they followed their peers instead of continuing 
these predatory practices?
    Secretary Yellen. I think it would be a positive 
development if they do so.
    Senator Warnock. OK. Thank you so much.
    Chairman Brown. Thank you, Senator Warnock.
    Senator Sinema, from Arizona, is recognized from her 
office.
    Senator Sinema. Thank you, Mr. Chairman, for holding this 
hearing today. Secretary Yellen, thanks for joining us.
    Arizonans continue to be concerned about inflation and 
rising prices. Both parties need to work together to address 
supply chain bottlenecks, reduce costs for families, and fight 
inflation, just like we worked together to pass the Bipartisan 
Infrastructure law.
    While I have been concerned about inflation for some time, 
I have also heard that recently many leading market analysts, 
like Goldman Sachs, could have begun revising their inflation 
projects downward. Now this is potentially an indication that 
economic conditions may be improving and that inflation may be 
cooling off, and it is promising news for Arizona families and 
businesses who are struggling in this current economic 
environment.
    So, Secretary, what do you think analysts are seeing in the 
market that is causing them to adjust their forecasts, and do 
you find those arguments persuasive?
    Secretary Yellen. So inflation has been very high, but many 
analysts think that it has recently peaked, and at least on a 
year-over-year basis it is likely to come down. The Federal 
Reserve has begun to, I think, address inflation in a forceful 
way, and that is another factor that people see that the Fed 
has expressed a commitment to take the steps that are necessary 
to bring inflation down. And, of course, the Administration is 
focused on everything that we can do to also bring inflation 
down, from steps ranging from opening up the Strategic 
Petroleum Reserve to respond to the pressures in energy markets 
from Russia's invasion of Ukraine to continuing work to address 
supply chain bottlenecks.
    But, you know, the course of inflation remains very 
uncertain. It depends, in part, on the pandemic, which, you 
know, continues to affect the economy. We are seeing lockdowns 
in China that continue to build supply chain pressures and 
problems. And in the United States, I think, consumer spending 
patterns are returning to something more normal, shifting 
somewhat away from goods and back toward services, which should 
be helpful. But the inflation outlook still remains quite 
uncertain.
    Senator Sinema. Thank you. You know, on Friday we learned 
that the price of used cars, a traditional leading indicator of 
inflation has dropped for the third consecutive month. In my 
mind, this means that used cars are depreciating in value 
again, which is another sign of economic activity returning to 
normal.
    So how do you think about this indicator and how do these 
data points inform the FSOC's thinking and work when it comes 
to inflation?
    Secretary Yellen. I guess when I think about the car market 
the major thing I think is we had a huge runup in the prices of 
both new and used cars. It contributed almost a third to the 
pick-up in inflation we saw and it partly reflected a rapid 
recovery and consumer demand to buy cars as the economy was 
recovering from the pandemic coupled with a shortage of 
semiconductors that actually depressed the ability of the 
industry to produce cars. And so we saw a drying up of 
inventories, extreme shortages, and huge pressure on the prices 
of new cars that spilled over to used cars as well, dramatic 
pick-up in prices, and that is beginning to mitigate now as the 
economy continues its recovery. So prices are finally beginning 
to come down a bit, but they remain very high until the 
semiconductor situation is resolved.
    Senator Sinema. Secretary, I am glad you mentioned the 
semiconductor issue because of course, as you know, that is 
very important not just to our Nation's consumer issues but 
also for national security, and it is important to Arizona's 
economy.
    My last question. As you know, I chair the Financial 
Innovation Caucus as the Democratic cochair, and I am committed 
to ensuring that we address systemic risk while cultivating an 
ecosystem that encourages responsible innovation, and 
especially that applies to Web3 and crypto.
    In February, the Financial Stability Board recommended that 
regulators improve coordination and information sharing to 
better address the cross-border and cross-sectoral nature of 
crypto assets. That is an important goal, and alongside that I 
would like to see greater regulatory clarity for crypto 
companies so that they know the rules of the road and we can 
build valuable products and services that help everyday people. 
And I want this innovation happening in the U.S. so that we are 
creating jobs and opportunities for people.
    But clarity and coordination ensures that companies are not 
simply built to exploit temporary regulatory gaps, so action by 
regulators to provide clarity to companies will provide clarity 
to consumers. That ensures that companies are focused on 
creating value and lowering costs rather than just taking 
advantage of regulatory loopholes or a lack of understanding or 
enforcement by the regulators.
    The FSOC and the regulatory entities that comprise its 
membership sit at the center of this dilemma. So how are these 
objectives being incorporated into the work going forward?
    Secretary Yellen. Let me first say that I completely agree 
with the discussion that you just gave that there can be 
benefits from innovation in these areas, and we want to make 
sure that there is a solid regulatory framework in place so 
that firms and consumers understand what the rules of the road 
are and we do not end up with regulatory arbitrage that is 
critical also from an international perspective. And we are 
working, certainly, with our G7 colleagues and through the FSB, 
Financial Stability Board, to make sure that our rules, to the 
best of our ability, are coordinated globally since these firms 
can locate in many different places.
    The Financial Stability Oversight Council has been directed 
by the President, as part of his Executive order, to issue a 
report on the risks, the financial stability risks associated 
with cryptocurrencies, and we are in the process of doing that.
    Chairman Brown. Thank you, Senator Sinema.
    Senator Ossoff, from Georgia, is recognized.
    Senator Ossoff. Thank you, Mr. Chairman, and thank you, 
Secretary Yellen, for joining us.
    You noted, and FSOC has noted, cyber risks as a threat to 
financial stability. I am working to protect credit unions and 
credit union customers in Georgia and across the country from 
cyber risks. I would like you to comment on the authorities 
that the National Credit Union Administration lacks and, in my 
view, should have to ensure that third-party services provided 
to credit unions, such as data processing, loan underwriting.
    Increasingly, credit unions rely on third-party service 
providers to undertake those tasks, but there is no requirement 
that those credit union service providers notify the NCUA of a 
cyberattack nor does the NCUA have the authority to examine 
those credit union service providers for cyber vulnerabilities, 
whereas a traditional bank, commercial bank regulators do have 
such authorities.
    Do you agree that empowering NCUA--and I am developing 
legislation to do this--to examine credit union service 
providers for cyber risks and requiring mandatory reporting of 
cyber incidents would help protect credit unions and their 
customers from cyber risk?
    Secretary Yellen. I would be glad to have a detailed look 
at the legislation that you are proposing and would be glad to 
provide technical advice. I am not an expert in this area but I 
am aware that NCUA lacks some of the ability to supervise, look 
at servicers that the bank regulatory agencies have. And if I 
understand that properly, that certainly seems like an 
important gap that deserves to be filled.
    Senator Ossoff. Thank you, Madam Secretary. I am going to 
ask you for your assistance identifying the appropriate 
official at Treasury or elsewhere in the Administration for 
designation to work with parties in Georgia on a range of 
issues of concern to my constituents. I am hoping that you can 
briefly commit, as I work through these issues, to helping me 
identify that official and working to connect them with the 
appropriate authorities in Georgia.
    Secretary Yellen. Absolutely, yes.
    Senator Ossoff. Thank you. I want to begin with the Port of 
Savannah and the Port of Brunswick. Senator Warnock and I 
worked with your staff and the White House and the Georgia 
Ports Authority last year to establish a pop-up container yard 
to relieve some of the congestion in the Port of Savannah. At 
the Port of Brunswick we worked last year to add a roll-on, 
roll-off berth. There is a lot of car shipment through the Port 
of Brunswick. I have just introduced legislation to expand the 
navigation channel, to expand the capacity.
    Will you please work with my office to identify the 
appropriate official designated to work with the Georgia Ports 
Authority on an ongoing basis to relieve congestion at the 
ports and improve shipping operations, and in so doing address 
supply chain bottlenecks and rapidly rising costs for American 
consumers?
    Secretary Yellen. Absolutely. I promise you that we will 
work with you on that.
    Senator Ossoff. Thank you, Secretary Yellen. I want to 
raise, as well, the challenge posed by rapidly rising rents and 
home prices. I want to focus in on metro Atlanta, and I am 
asking for your commitment that you will identify the 
appropriate Treasury official, other Administration official to 
work with the Office of the Mayor of Atlanta, the Atlanta 
Regional Commission, other local, municipal, and county 
officials to develop a regional housing plan, with the 
assistance and consultation of the appropriate Federal 
agencies. Will you help me with that?
    Secretary Yellen. Certainly. I mean, it might be that HUD 
should be involved in that as well. I am not sure what our 
division of responsibilities is, but I would be glad to connect 
you with the appropriate people in Treasury.
    Senator Ossoff. Great. I appreciate that.
    I want to also discuss the State Small Business Credit 
Initiative. This, as I understand it, has been useful for small 
businesses in Georgia. Last year, Congress authorized an 
additional $10 billion to expand access to capital for small 
businesses through the State Small Business Credit Initiative, 
and Georgia expects to receive about $200 million through our 
Department of Community Affairs to support lending to small 
businesses.
    So I am asking for a similar commitment that you will work 
with my office to determine how we can expedite the full 
provision of that resource to the State of Georgia, to help 
Georgia small businesses?
    Secretary Yellen. Yes, of course, we are working very hard 
on getting the money out under that initiative, and we will 
work closely with you to make sure it is successful.
    Senator Ossoff. Thank you. With my brief remaining time 
just a quick macroeconomic question for you, and, of course, in 
your experience previously as the Fed chair I am curious to get 
your view on the following. What economic purpose has been 
served and what has been the effect of continued bond buying 
through quantitative easing programs at the Fed since last 
summer? I know that is now being wound down.
    And I am not asking you to comment on future Fed policy or 
weigh in on what the Fed should be doing. What I want to 
understand is what is your understanding of the purpose and the 
effect of continuing that bond buying through quantitative 
easing even as the price level has continued to rise.
    Secretary Yellen. The Fed has ceased the bond buying under 
that program. The purpose of it was to ease financial 
conditions at a time when the economy appeared to require 
support when it was weak. By buying longer-term bonds it tends 
to flatten the yield curve or push down the term premium in 
longer-term bonds and promote spending on housing or other 
things that rely on long-term financing.
    But the program has ended and the Fed has announced that it 
is going to be diminishing its holdings over time, and that 
serves to tighten financial conditions.
    Chairman Brown. Thank you, Senator Ossoff.
    Senator Van Hollen is recognized, from Maryland.
    Senator Van Hollen. Thank you, Mr. Chairman. Welcome, Madam 
Secretary. Great to have you here.
    I do want to start by recognizing the good news in the jobs 
market. Jobs have come roaring back, much faster than anybody 
anticipated, as a result of the American Rescue Plan. We have a 
tight labor market and I want to associate myself with those of 
my colleagues who say one thing we could do right now is to 
reduce the cost of quality childcare so that more people could 
enter the workforce.
    My questions to you are going to focus mostly on the 
situation in Ukraine and the sanctions, and I want to applaud 
you and the President for the actions you took at the G7 to 
further tighten sanctions. Of course, our goal is to make sure 
that Russia feels the pain of the sanctions more than others 
around the world. Obviously, the war is creating all sorts of 
economic repercussions. So we have to make sure that we target 
those sanctions and make it felt.
    Here at home we are working to close any loopholes. As you 
know, I chair the subcommittee on the Appropriations Committee 
that oversees the Treasury Department, and this emergency 
proposal we have made includes an addition $52 million for 
FinCEN as well as the IRS Criminal Investigations group to go 
after any efforts of Russian money-laundering, and we need to 
accelerate the implementation of the Corporate Transparency Act 
and the Anti-Money Laundering Act, and I look forward to 
working with you on that.
    But I am concerned that as we are plugging these holes here 
at home other countries are opening doors to more purchases 
from Russia overseas, and it does not do us a lot of good to 
batten down the hatches here if we are just opening up escape 
and pressure valves overseas.
    So I asked Secretary Blinken last week whether we had used 
any of our secondary sanctions authority, whether the Biden 
administration used any secondary sanctions authority to go 
after countries, banks, others that could be found to be 
evading our sanctions. His answer last week was no. My 
understanding is to date we have not applied any secondary 
sanctions. Is that correct?
    Secretary Yellen. Well, we make it clear when we put in 
place sanctions that any entity that provides material support 
to help a sanctioned entity evade those sanctions can 
themselves be sanctioned. And that is something that we are 
prepared to do, and we think our willingness and ability to do 
so is having a very substantial impact. When you look around 
the world you find that financial institutions, whether they 
are in China or in other countries, that may not be terribly 
supportive of our views on the war that Russia has waged in 
Ukraine, they are very worried about themselves being the 
target of sanctions for providing material help in evading 
sanctions.
    Senator Van Hollen. Madam Secretary, if I could, I do not 
think--maybe it is--is it your testimony that no financial 
institutions around the world are providing material support 
to----
    Secretary Yellen. I am not going to go so far as to say no.
    Senator Van Hollen. If I could, let me--because I have 
limited time--I just want to read you a couple of headlines, 
recent headlines. BBC, ``Wealthy Russians Flee to Dubai To 
Avoid Sanctions,'' reads, ``Russian billionaires and 
entrepreneurs have been arriving in the United Arab Emirates in 
unprecedented numbers. Property purchases in Dubai by Russians 
surged by 67 percent in the first 3 months of 2022.'' I have to 
believe that some Dubai banks that have connections to the 
United States banking system have been involved.
    Here is a Financial Times first sentence: ``China's 
independent refiners start buying Russian oil at steep 
discounts.'' New York Times, ``India finds Russian oil 
irresistible deal despite the diplomatic pressure.''
    You have some countries that are actually increasing the 
volume of their imports of Russian----
    Secretary Yellen. We have not said that it is not a 
violation of our sanctions for countries to buy Russian oil.
    Senator Van Hollen. Right. So that is my question. I thank 
you for raising that. Here is the question. I hope you would 
agree that we do not want countries increasing their exports of 
Russian oil above what they were before the war. Would you 
agree that that is something that is not in our interest?
    Secretary Yellen. Well, I think, personally, what I think 
is in our interest is depriving Russia of revenue from selling 
oil in global markets, and that is a somewhat different thing 
than saying that we wish to hold Russian oil off of global 
markets, because when we do that we can end up driving up the 
price of oil globally which, counterintuitively, can raise 
Russian revenues rather than lower them.
    So I think we have to be very careful----
    Senator Van Hollen. No, I appreciate that balance.
    Secretary Yellen. ----about that.
    Senator Van Hollen. I appreciate that balance. We are 
paying increased prices for oil in the United States because of 
the global markets. Others are too. It seems to me we should be 
taking strong action against those that are sort of taking 
advantage and war profiteering, effectively, off of this 
situation.
    We are going to pursue this. I have had conversations with 
Senator Toomey about secondary sanctions. It seems me we have 
enough flashing, you know, lights here, indicating that 
sanctions are being violated that it triggers the material 
support provisions. And I look forward to following up with you 
and your team.
    Secretary Yellen. I would like to work with you on that 
because it is an important issue.
    Chairman Brown. Thank you, Senator Van Hollen.
    I will now do my questions. I did not go in the round of 
questions.
    Secretary Yellen, we know how important financial stability 
is as we face the global uncertainty of the pandemic, supply 
chain disruptions, and Russia's attack on Ukraine. Putin's 
price hike is causing pain at the pump and market distortions 
in our country. What are the long-term financial stability 
impacts of Russia's illegal actions?
    Secretary Yellen. Well they certainly are causing pain in 
the United States and around the globe, and we are very 
worried. The IMF issued a recent report showing there is 
diminished prospects for global growth and higher inflation. We 
are likely to see, and are seeing, tighter monetary policy all 
around the world, so we are in an environment of high inflation 
and rising interest rates.
    A global downturn would have many repercussions on the 
United States, which could impact the well-being and earnings 
of financial institutions, including American banks. And in an 
environment of rising interest rates with high inflation there 
certainly are risks to banks and to borrowers who are indebted. 
Our financial stability report looks at some of those risks, 
generally. Although debt burdens of companies are high, debt 
service ratios are not very high, which suggests good prospects 
there.
    Supervisors regularly evaluate banks with respect to 
interest rate risks. As interest rates rise that tends to 
diminish the value of assets that they hold on their portfolio, 
but it has the contrary effect of tending to raise net interest 
margins, but there certainly are, in parts of the financial 
system where there may be leverage.
    The Federal Reserve issued its financial stability report 
just yesterday and noted insurance companies and some hedge 
funds as leveraged entities that could be vulnerable in a 
rising interest rate environment.
    Chairman Brown. Thank you. As you talk about the Fed's role 
in fighting inflation caused by Russia's war, as inflation 
caused by the pandemic, caused by supply chain interruptions, 
distortions, and as interest rates rise and risks could bubble 
up on Wall Street, walk through why it is important for 
financial firms to have sufficient capital liquidity and other 
safeguards to protect against economic shock from those risks.
    Secretary Yellen. It is critically important, and I think 
we have Dodd-Frank to thank for the fact that banks have 
adequate capital and liquidity, and certainly look from the 
Fed's stress tests like they would be able to fare very well in 
a stressful environment and did very well when the pandemic 
struck in March of 2020.
    Chairman Brown. And I know you recognize that banks did 
well through this pandemic. A number of banks did stock 
buybacks. Executive compensation was stratospheric. But I am 
also concerned, as I know you are from comments in the past, 
about risks in the shadow banking system.
    Secretary Yellen. Those remain, and they are high on our 
agenda to address, but they have not yet been addressed, money 
market funds, maybe hedge funds, open-end mutual funds.
    Chairman Brown. Thank you. My last question. You have 
warned a number of times that the last thing we need is for 
risky new financial products to crash our financial system. 
Stablecoin companies claim that they are backed by supposedly 
safe assets but they have proven to be wildly volatile. Just 
look what happened yesterday in the markets, rife with 
speculation and fraud, no recourse for consumers who have been 
the victims of scams. Why is it critical for FSOC, the member 
agencies of FSOC, which you chair, why is it critical for them 
to be united on a strong regulatory structure for stablecoins?
    Secretary Yellen. Well, I think it is important for us to 
agree on what kind of structure is needed to ensure that these 
are introduced in a safe and sound fashion and do not create 
financial stability risks. And our strong recommendation to 
Congress is that you work on a bipartisan basis to put in place 
a comprehensive national regulatory framework, and we would be 
glad to work with you on such an initiative.
    Chairman Brown. Thank you, Madam Secretary.
    As is the custom, the Ranking Member will do his close, and 
I understand he is going to yield to Senator Scott, and then I 
will do my close.
    Senator Toomey. Thank you, Mr. Chairman. Yes, I will yield 
to Senator Scott.
    Senator Scott. Thank you, Mr. Chairman. Thank you, 
Secretary Yellen, for investing your time with us, and 
certainly a hard banking hearing for many.
    I know that Senator Cortez Masto said, ``Why should I 
impose my circumstances on others?'' Well, I think because my 
circumstances is like so many others. Millions and millions of 
kids being raised in poverty by single-parent households who 
happen to be Black. Telling Black teenage moms that there is 
only one alternative for them is a depressing and challenging 
message.
    So sitting through and listening to so many folks 
stereotype the necessity of making a life-altering decision as 
if it is the option to me is not right. And I understand that 
this issue, the issue of abortion, is a difficult issue, but 
let us remember that the rate of abortion for teenage moms is 
at the lowest we have seen ever. The New York Times says it is 
under 10 percent.
    And so what I am talking about is the importance of 
understanding the reality that even during tough financial 
times and households like the in which I was raised, there is 
still hope. There is hope because we have seen the consequences 
of good policies, and unfortunately we have had to experience 
the consequences of bad policies.
    You are talking about the challenges in many of the 
minority communities around this country. We have seen, in the 
last couple of years, a 44 percent increase in homicides around 
this Nation. Eighty-five percent of that increase have been 
African Americans and Hispanics being killed. That impacts the 
labor force participation rate, without any question, and it 
does so so negatively.
    When I think about the reasons why we should be hopeful and 
send a message of optimism and opportunity to single moms 
around this country challenged with too much month at the end 
of the money, it is the policies where Senator Cortez Masto 
talked about the tax reform. Well, the tax reform of 2017 cut a 
single mom's taxes by 70 percent on the Federal level, led to 
$4,000 more dollars in the average pocket of the average 
household in this Nation. We created 7 million jobs, two-thirds 
of those jobs going to African Americans, Hispanics, and women. 
These are facts. It is a 50-year low in unemployment.
    So the labor force participation rate at that time was 
going up, not down, and because of the increase in the labor 
force participation rate you do not always expect that the 
unemployment rates will continue to drop, but they did. They 
dropped significantly. We saw the lowest unemployment rate for 
African Americans in this country, under 6 percent, for the 
first time, Hispanics under 5 percent for the first time, I 
believe, Asians under 3 percent. We saw a 70-year low for 
women. In 2019, we saw the lowest rate recorded in our Nation's 
history, it is my understanding, for poverty.
    And so what I am suggesting is that, yes, people on the 
left and people on the right can work together to bring about 
positive policy changes that can transform the lives of those 
living in poverty. It is one of the reasons why I am thankful 
for Senator Warner and Senator Van Hollen and Senator Booker 
working in a bipartisan fashion on opportunity zones. This is 
an opportunity for us to weigh the impact in some of the most 
devastated ZIP codes in America, where private sector has 
increased wages, reduced unemployment, reduced poverty, and 
increased property values, without gentrifying those 
neighborhoods.
    So when we are going to have a conversation about those 
issues that improve the economic reality of those living in 
poverty, when we are going to have a conversation about 
improving the outcome of this Nation's poorest Americans, I 
think we should have that conversation. I am frankly willing to 
have the debate with anyone, anywhere, at any time, on my lived 
experience versus anyone else's, because I believe that America 
is the solution, not the problem.
    I believe that we can work, both left and right together, 
to find those solutions, and not only debate them but try them 
in the public forum. And when we do so, I believe America is 
better, not when we demonize one side or the other side. I 
refuse to have a conversation about wrong on one side and right 
on the other side. I am simply saying that the experience of so 
many of us, millions of us, in poverty, I conclude is a reason 
to be hopeful about what is possible, even for those incredibly 
positive, powerful women making really hard choices.
    Chairman Brown. Thank you, Senator Scott, and Senator 
Toomey, I heard no stereotype from Senator Cortez Masto in her 
comments. I appreciate Secretary Yellen and Senator Cortez 
Masto noting that women should have the right to decide when to 
have children. I did hear revisionist history again about the 
Trump tax cut which blew a hole in the deficit and which 
clearly helped 70 percent of them went to the richest 1 
percent.
    I also heard talk of the lowest poverty rates. The lowest 
poverty rates came when we passed the child tax credit, the 
fully refundable child tax credit, which dropped poverty rate 
among children by 40 percent. Senator Scott voted against it 
twice, about a year ago, 14 months ago, and joined by every 
single Republican. Every Democrat passed it.
    We know what this is all about. Let us not make it about 
Senator Scott. It is Senator McConnell just wants to distract 
from the real issue and that is if Roe is overturned every 
American woman is going to have her freedom and make her own 
personal health decisions taken away and handed over to 
politicians. And it should not be handed over to me. It should 
not be handed over to Secretary Yellen. It should not be handed 
over to Mitch McConnell. And like Senator Cortez Masto, I am 
opposed to having the Government take away women's freedom to 
make their own personal health care decisions.
    Thank you, Secretary Yellen, for joining us. For Senators 
who wish to submit questions for the record they are due 1 week 
from today, Tuesday, May 17th. Secretary Yellen, please submit 
your response within 45 days from the day you receive them.
    The Committee is adjourned. Thank you.
    [Whereupon, at 12:09 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
              PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
    Today we will hear testimony from the Secretary of the Treasury on 
the Financial Stability Oversight Council's Annual Report for the first 
time in 4 years.
    This is the first time Secretary Yellen has been before this 
committee since Vladimir Putin's invasion of Ukraine. I want to commend 
you for Treasury's work helping implement our massive, historic 
multilateral sanctions and export control effort against Russia--
punishing them economically and isolating them politically and 
diplomatically.
    Putin has been shocked by two things--he was shocked by the courage 
of the Ukrainian people and the tenacity of their resistance.
    And he was shocked by how effectively President Biden and you and 
this Administration put together this broad international coalition.
    This past weekend's announcements by the G7 to further limit 
dependence on Russian energy will bite even harder.
    In the weeks and months to come we must sustain and expand our 
efforts to help Ukraine--including intensified sanctions, export 
controls, and other means of ratcheting up the economic pressure on 
Russia.
    Financial stability allows Americans to trust their money is safe 
in the bank. It means they can get an affordable mortgage without fear 
that they will lose their home. It means they can count on their 
retirement savings, knowing their investments won't be gambled away by 
reckless speculators.
    And it means taxpayers are not forced to shell out billions to bail 
out the biggest banks that gambled with our whole economy.
    That's why Congress created the Financial Stability Oversight 
Council in the Dodd-Frank Wall Street Reform and Consumer Protection 
Act.
    Americans are still living with the consequences from the last time 
Wall Street took too many risks. Families who lost their homes after 
2008 still haven't recovered all the wealth the crisis took from them.
    Whenever big banks or hedge funds come up with some new scheme that 
goes wrong, they're never the ones that pay the price. It's ordinary 
Americans whose homes, retirement savings, and livelihoods are at risk.
    And it's taxpayers. People in this town act like they've forgotten 
the bailouts. In too many cases, they probably have.
    Americans have not forgotten. When families who are already 
struggling with lost jobs, lost homes, lost savings are then forced to 
use their tax money to bail out some of the richest elites in the 
country--that stays with most people.
    We created this watchdog to make sure it never happens again.
    Under the Biden-Harris administration and with Secretary Yellen's 
leadership, we once again have an FSOC that is looking out for those 
risks to our financial system.
    They've turned the page on the prior Administration's Wall Street-
first mentality.
    The last White House--always looking out for its corporate allies--
did everything in its power to stop this agency from doing its job.
    They ignored shadow banks that grew in size and created risks to 
the system.
    They gutted the agency from the inside out, diminishing career 
public servants dedicated to protecting our economy.
    They abandoned their responsibilities. They did nothing to identify 
and address risks to financial stability.
    So when the global coronavirus pandemic froze our financial 
markets, big and small companies weren't prepared to withstand the 
shock, and our Government had to step in to prevent a market meltdown 
and stabilize the economy.
    What we've seen over the past 2 years is that risks to the economy 
can come at any time, in any form.
    Today, FSOC is keeping watch on all the potential risks to our 
economy, so working families don't have to.
    These public servants are looking at ways to improve financial 
system resilience in the face of climate-related financial risks.
    Their job is also to make sure our financial markets are efficient 
and fair. We've seen market frenzies like GameStop and hedge fund 
blowups like Archegos. These have the potential to cause dangerous 
volatility. And FSOC is watching out for asset bubbles, so that risky 
bets that go bad don't hurt the real economy.
    This watchdog is also working with financial institutions to shore 
up cyber defenses and protect our financial system from cyberattacks.
    And they're tackling risks posed by cryptocurrency and digital 
assets. So many Americans are searching for an alternative to the Wall 
Street system that has burned them time and again, but we can't allow 
them to be left holding the bag when an inevitable crash or hack comes.
    FSOC also monitors international risk. And today they are clear-
eyed about the threats to the U.S. and global economy--a pandemic, a 
broken global supply chain, Putin's invasion of Ukraine.
    Finally, the agency is doing its job again, working to prevent 
corporate greed, overleveraged deals, and risky bets on Wall Street 
from crashing our financial system as interest rates rise.
    For the first time in decades, workers are seeing real wage gains 
and more bargaining power.
    Over the past year, median wages for the lowest-income workers 
increased an average of 6 percent. The unemployment rate is 3.6 
percent--the lowest in five decades.
    But for many Americans, those gains don't go as far when you're 
paying more at the gas pump and grocery store.
    Corporations blame workers and claim they just have to raise prices 
to keep up with costs.
    Of course they don't have to raise prices to keep making a profit. 
They could cut their own executive bonuses or do fewer stock buybacks--
and still enjoy healthy profits. But instead they'd rather price gouge 
working families.
    Don't take it from me--listen to the CEOs who brag about their 
enormous pricing power every quarter on investor calls.
    And when big corporations have concentrated power and no 
competition, the usual rules of capitalism can't rein them in.
    This Wall Street business model incentivizes anything that juices 
stock prices, including excessive risk-taking, at the expense of long-
term stability and broad economic growth.
    We need to build and maintain a resilient financial system with 
strong safeguards in place at the biggest Wall Street firms, so that 
they can withstand economic shocks without wrecking the real economy.
    That is FSOC's job--to serve as the Wall Street watchdog looking 
out for working Americans on Main Street. At this critical moment in 
our economic recovery, FSOC's job is more important than ever.
    Secretary Yellen, I look forward to hearing how FSOC is carrying 
out that mission.
                                 ______
                                 
            PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
    Thank you, Mr. Chairman. And Secretary Yellen, welcome.
    Today's hearing is an opportunity to discuss FSOC's 2021 annual 
report. I have long been skeptical of FSOC's process for designating 
nonbank financial institutions as systemically important, or SIFIs. 
FSOC's process has been opaque and previous designations have lacked 
sufficient cost-benefit analysis.
    This approach also needlessly imposed bank-like regulations on 
nonbank financial institutions, such as insurance companies and asset 
managers. More fundamentally, the act of designating a firm as a 
nonbank SIFI signals to the market that the firm is ``too big to fail'' 
and would be bailed out if it became insolvent.
    For these reasons, I was glad to see FSOC in 2019 unanimously 
approved an activities-based approach to identify and assess potential 
risks, as well as an enhanced cost-benefit analysis for potential 
designations. These changes marked significant improvements over the 
previous approach with respect to both process and substance. I have 
been encouraged that you have recognized the value of this approach, 
and I urge FSOC to retain it going forward.
    I have also been concerned that FSOC-like other financial 
regulators--is becoming politicized. Consider global warming. FSOC has 
held 10 meetings under your leadership, and seven of those meetings 
have focused on global warming, according to the public readouts. By 
contrast, not a single one of those meetings included a discussion of 
cybersecurity, which presents a much more imminent and significant 
threat to the financial system.
    In October of last year, FSOC issued a lengthy report that 
audaciously claimed global warming is an ``emerging threat to the 
financial stability of the United States.'' FSOC uses this supposed 
risk to justify its recommendation that financial regulators consider 
sweeping changes to their rules.
    The actual data show that ``physical risks'' associated with global 
warming--that is, severe weather events--don't threaten financial 
stability. Economic damage from weather-related events as a percentage 
of GDP has actually trended down steadily over the past 30 years. And 
we're not aware of a single bank failure in the modern era caused by 
any weather event.
    As I have previously warned, the real risk is political. Some 
unelected financial regulators want to accelerate our transition to a 
lower-carbon economy by misusing their powers to allocate capital away 
from traditional energy companies.
    At a time of skyrocketing energy prices, we certainly don't need 
financial regulators making it even more expensive for Americans to 
fill up their gas tanks or heat their homes. Addressing global warming 
requires difficult political decisions involving tradeoffs. In a 
democratic society, these tradeoffs must be made by elected 
representatives accountable to the American people through a 
transparent and deliberative legislative process.
    Instead of pursuing political issues that are outside the mandate 
and expertise of financial regulators, the FSOC should enhance 
coordination across regulators on existing threats to the financial 
system. To this end, I was encouraged that the FSOC annual report 
identified certain issues that are worthy of regulatory attention, such 
as enhancing the resilience of the U.S. Treasury market, and improving 
the cybersecurity resilience of the financial sector. But I worry that 
progress on addressing these challenges is being stalled because of 
FSOC's focus on political issues.
    Finally, in your role as chair of the President's Working Group on 
Financial Markets, or PWG, you released a report last November on 
stablecoins. Although I disagree with the report's recommendation that 
all stablecoin issuers must be insured depository institutions, I was 
glad to see the report acknowledge that it is the responsibility of 
Congress to create new rules for stablecoins.
    To that end, last month, I released a discussion draft of a bill--
the Stablecoin TRUST Act--to establish a regulatory framework for 
stablecoins. There are tremendous potential societal benefits from 
stablecoins. Today, stablecoins primarily facilitate trading of digital 
assets.
    But tomorrow stablecoins could be widely used in the physical 
economy for payments and automating transactions.
    Because of the dollar price stability of stablecoins, they have the 
potential to serve all the traditional functions of money, including 
acting as a medium of exchange. Stablecoins could also improve upon 
traditional forms of money by increasing payment speed, reducing 
transaction costs, helping to combat illicit finance through an 
immutable and transparent record, and enabling programmable contracts.
    The proposed regulatory framework I've released will allow 
stablecoins to continue flourishing while protecting consumers and 
minimizing potential risks from stablecoins to the financial system. 
It's critical that Congress provide clarity in this area as soon as 
possible.
    Congress needs to enact a sensible regulatory framework before 
something bad happens with a stablecoin that harms consumers. If that 
were to happen, Congress will rightfully share some of the blame. 
Thankfully, I am optimistic that the administration is working with 
Members of Congress and that we can find common ground on bipartisan 
legislation that addresses the risks of stablecoins while also 
encouraging innovation and competition.
    Secretary Yellen, I look forward to hearing your testimony and 
discussing these and other important issues with you today.
                                 ______
                                 
                 PREPARED STATEMENT OF JANET L. YELLEN
                 Secretary, Department of the Treasury
                              May 10, 2022
    Thank you, Chairman Brown, Ranking Member Toomey, and Members of 
the Committee. I am pleased to speak with you today about the Financial 
Stability Oversight Council's (Council) 2021 annual report. The report 
is a collaborative effort of the Council member agencies. It is a 
vehicle for providing Congress and the public with the Council's 
collective assessments of potential risks to U.S. financial stability. 
Today, I will highlight a few topics in the report and provide an 
update on the Council's activities since the report's publication.
    First, the report discusses vulnerabilities in the nonbank 
financial sector, which were highlighted by the turmoil in financial 
markets in March 2020. While the Dodd-Frank Act reforms increased the 
resiliency of the U.S. financial system, the market turmoil in March 
2020 demonstrated that the liquidity mismatch and use of leverage by 
some nonbank financial institutions can make them vulnerable to acute 
financial stresses, and these stresses can be transmitted and amplified 
to the broader financial system. The Council has taken steps to examine 
these risks, including re-establishing its Hedge Fund Working Group to 
develop an interagency risk-monitoring system and to propose options to 
mitigate identified risks. And earlier this year, the Council issued a 
statement to express support for the Securities and Exchange 
Commission's (SEC) efforts to reform money market funds and their work 
to consider potential reforms of open-end funds.
    The Council is also working to support improving the resilience of 
the Treasury market and is coordinating with the Interagency Working 
Group on Treasury Market Surveillance (IAWG). Potential steps to be 
taken include improving data quality and availability, evaluating 
expanded central clearing, and enhancing trading venue transparency and 
oversight. The SEC has proposed certain reforms to enhance transparency 
and oversight over alternative trading systems that trade Government 
securities. The SEC has also proposed updating the definition of a 
Government securities dealer to include market participants that play 
an increasingly significant liquidity providing role in overall trading 
and market activity. Additionally, the Office of Financial Research is 
working to fill identified data gaps for uncleared bilateral repurchase 
agreements through a pilot data collection, which should improve 
visibility into a major source of financing for nonbank financial 
institutions in Treasury markets.
    Additionally, the Council is working to ensure that financial 
institutions better understand their climate-related financial risks. 
In its October 2021 Report on Climate-Related Financial Risk, the 
Council outlined how climate change can be a source of shocks to the 
financial system and increase risks to financial stability. To address 
these risks, the Council recommended that regulators build their 
capacity and expand their efforts to address climate-related risks, 
improve the availability of data, enhance and standardize disclosures, 
and assess and mitigate risks to financial stability. The Council has 
also formed its staff-level Climate-related Financial Risk Committee, 
which will serve as a coordinating body for the Council to share 
information, facilitate the development of common approaches and 
standards, and foster communication across FSOC members. In addition, 
the Council is establishing the Climate-related Financial Risk Advisory 
Committee. This advisory body, which will include a broad array of 
external stakeholders, will help the Council gather information and 
analysis on climate-related financial risks.
    With respect to digital assets, new products and technologies may 
present opportunities to promote innovation and increase efficiencies. 
However, digital assets may pose risks to the financial system, and 
increased and coordinated regulatory attention is necessary. On March 
9, 2022, President Biden signed an Executive order calling for 
comprehensive approach to digital asset policy. The Council is drafting 
a report that will identify financial stability risks and regulatory 
gaps. I look forward to working with you on the issues and 
opportunities posed by digital assets. We are also eager to work with 
you to ensure that payment stablecoins and their arrangements are 
subject to a Federal prudential framework on a consistent and 
comprehensive basis.
    Finally, there is the potential for continued volatility and 
unevenness of global growth as countries continue to grapple with the 
pandemic. Russia's unprovoked invasion of Ukraine has further increased 
economic uncertainty. The U.S. financial system has continued to 
function in an orderly manner, though valuations of some assets remain 
high compared with historical values. We stand firmly with the people 
of Ukraine and have implemented an unprecedented suite of sanctions on 
Russia that have been implemented by financial institutions. On 
February 28, I convened the Council in the wake of the invasion, and we 
will continue to monitor developments and coordinate actions as the 
risks and threats evolve.
    The Council's report also discusses other potential emerging 
threats and vulnerabilities that the Council continues to monitor, 
including short-term wholesale funding markets, central counterparties, 
alternative reference rates, cybersecurity, corporate credit markets, 
and real estate markets.
    The Council remains committed to its mission of identifying and 
responding to risks to U.S. financial stability, and I look forward to 
working with this Committee to promote a more robust and resilient 
financial system. Thank you.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                      FROM JANET L. YELLEN

Q.1. Stablecoins and Cryptocurrency--Does Treasury have a 
working definition of ``algorithmic stablecoins''?

A.1. Stablecoins are a type of digital asset designed to 
maintain a stable value relative to fiat currency or other 
reference asset. Most stablecoins attempt to maintain a stable 
price through the use of fiat-denominated reserve assets (e.g., 
sovereign debt, securities, or bank deposits). Stablecoins that 
are purportedly convertible for an underlying fiat currency are 
distinct from a smaller subset of stablecoin arrangements that 
use other means to attempt to stabilize the price of the 
instrument (sometimes referred to as ``synthetic'' or 
``algorithmic'' stablecoins) or are convertible for other 
assets. These stablecoins attempt to maintain a stable value 
through collateral or through smart contracts that adjust the 
supply of the stablecoin as needed to maintain a stable price. 
DAI is an example of such an arrangement.

Q.2. What were the main factors that led the President's 
Working Group on Financial Markets to assert that DAI is an 
algorithmic stablecoin?

A.2. See above.

Q.3. Regarding algorithmic stablecoins, does Treasury think it 
appropriate to regulate fiat-backed stablecoins issued by a 
company in the same manner as a stablecoin that has no 
centralized decision-making process?
    If yes, how would such regulations be enforced without a 
centralized entity responsible for ensuring compliance?
    If no, how does Treasury believe that decentralized 
stablecoins should be regulated?

A.3. Treasury believes it is critical for stablecoins to be 
subject to regulations that protect against risks to consumers, 
the broader financial system, and the economy, and that prevent 
stablecoins from being used in connection with illicit 
financial transactions. Because stablecoins are an emerging and 
rapidly developing type of financial instrument, regulators 
will need flexibility to address risks across a variety of 
organizational structures, including structures of varying 
degrees of formal or informal organization and 
decentralization.

Q.4. Has Treasury considered outlining factors that would be 
indicative of a decentralized cryptocurrency protocol?

A.4. See response above.

Q.5. Should stablecoin issuers that do not control any 
underlying assets (e.g., no legal right, authority, or ability 
to obtain upon demand) be subject to the same standards as 
entities that do custody assets to control the value of their 
stablecoin?

A.5. Treasury believes it is critical for stablecoins to be 
subject to regulations that protect against risks to consumers, 
the broader financial system, and the economy, and that prevent 
stablecoins from being used in connection with illicit 
financial transactions. Because stablecoins are an emerging and 
rapidly developing type of financial instrument, regulators 
will need flexibility to address risks across a variety of 
organizational structures.

Q.6. Foreign Tax Credit Final Regulations--In the closing days 
of December of 2021, the U.S. Department of Treasury (Treasury) 
and the Internal Revenue Service (IRS) released final 
regulations (T.D. 9959, 87 FR 276 (Jan. 4, 2022)) on foreign 
tax credits, which was published in the Federal Register on 
January 4, 2022. These final regulations built on proposed 
regulations issued by the previous administration but took on 
new issues far exceeding the creditability of novel digital 
services taxes that had been the initial focus of the project. 
Unfortunately, the effect of the final regulations is to deny 
Americans tax credits that have been creditable for decades. 
Denial of these credits for foreign taxes paid results in 
double-taxation on American businesses, making the U.S. a less 
competitive place to do business.
    When will Treasury and IRS release clear guidance to 
taxpayers on these regulations and what do you anticipate this 
guidance will cover?

A.6. The Treasury Department's Office of Tax Policy is actively 
engaged with stakeholders and evaluating whether refinements, 
clarifications, guidance, or further rulemaking would help 
illustrate how the final regulations are intended to apply to 
certain foreign taxes or otherwise be appropriate. Different 
types of guidance have different timelines and subject to 
different administrative procedural requirements. Taxpayers 
would be given the opportunity to comment on any new proposed 
rules.

Q.7. In the meantime, will IRS and Treasury delay 
implementation of the final regulations until 2023 in order to 
give taxpayers time to receive this guidance without the policy 
applying retroactively to January 1, 2022?

A.7. The final regulations largely adopted the substantive 
provisions of the proposed regulations released in 2020, which 
proposed rules of general application that were not limited to 
digital services taxes. The final regulations, however, 
included many clarifying changes to the proposed rules in 
response to comment letters received from many stakeholders 
addressing various aspects of the proposed rules. These changes 
meaningfully improved the administrability and certainty of the 
final regulations. The effective date of the final regulations 
follows the effective date specified in the 2020 proposed 
regulations, and the final regulations were promulgated in 
accordance with the relevant administrative procedural 
requirements.

Q.8. Financial Stability Oversight Council (FSOC) Secondary 
Market Review--On September 25, 2020, FSOC released a statement 
on its activities-based review of the secondary mortgage 
market. FSOC's statement affirmed the overall quantity and 
quality of the regulatory capital required by the Federal 
Housing Finance Agency's (FHFA) June 30, 2020, proposed rule to 
establish a new regulatory capital framework for Fannie Mae and 
Freddie Mac (each, a GSE or an Enterprise). Specifically, FSOC 
stated that ``risk-based capital requirements and leverage 
ratio requirements that are materially less than those 
contemplated by the proposed rule would likely not adequately 
mitigate the potential stability risk posed by the 
Enterprises.'' FSOC also concluded ``it is possible that 
additional capital could be required for the Enterprises to 
remain viable concerns in the event of a severely adverse 
stress.'' (emphasis added) FSOC committed to ``continue to 
monitor . . . FHFA's implementation of the regulatory framework 
to ensure potential risks to financial stability are adequately 
addressed.'' On December 17, 2020, FHFA finalized the 
regulatory capital framework for the GSEs largely along the 
lines of the June 30, 2020, proposed rule.
    As Chairperson of FSOC, do you accept each of the findings 
and recommendations made in the FSOC statement? If not, please 
identify each finding or recommendation with which you disagree 
and your rationale for the disagreement.

A.8. I am committed to a housing finance system that expands 
fair and equitable access to home ownership and affordable 
rental opportunities, protects taxpayers, and promotes 
financial stability. The GSEs are a central part of the housing 
finance system. It is critical to the stability of the broader 
financial system that the GSEs operate in a safe and sound 
manner and do not amplify or transmit market stress. FSOC 
regularly monitors financial market developments based on its 
responsibilities to identify risks to the financial stability 
of the United States, promote market discipline, and respond to 
emerging threats to the stability of the U.S. financial system.

Q.9. In particular, do you accept FSOC's finding that ``risk-
based capital requirements and leverage ratio requirements that 
are materially less than those contemplated by the proposed 
rule would likely not adequately mitigate the potential 
stability risk posed by the Enterprises''?

A.9. See response to Question 8.

Q.10. Do you accept FSOC's finding that ``[t]he alignment of 
market participants' credit risk capital requirements across 
similar credit risk exposures would mitigate risk to financial 
stability by minimizing market structure distortions''?

A.10. See response to Question 8.

Q.11. Do you accept FSOC's recommendation that ``FHFA and other 
regulatory agencies . . . coordinate and take other appropriate 
action to avoid market distortions that could increase risks to 
financial stability by generally taking consistent approaches 
to the capital requirements and other regulation of similar 
risks across market participants, consistent with the business 
models and missions of their regulated entities''?

A.11. See response to Question 8.

Q.12. Under what circumstances should FSOC determine under 
section 113 of the Dodd-Frank Act that a GSE should be 
supervised by the Board of Governors of the Federal Reserve 
System?

A.12. See response to Question 8.

Q.13. Reduction in the GSE Capital Requirements--On September 
27, 2021, FHFA proposed amendments that would have materially 
reduced the GSEs' regulatory capital requirements. On February 
25, 2022, FHFA finalized those amendments largely as proposed. 
The amendments reduced the tier 1 capital that must be 
maintained by a GSE to avoid restrictions on capital 
distributions from 4 percent to roughly 3 percent of the GSE's 
adjusted total assets. The amendments also reduced Freddie 
Mac's combined capital requirements from 4 percent to 3.6 
percent as of September 30, 2021, with further reductions 
likely to follow due to continued house price appreciation, 
among other things. Fannie Mae's combined capital requirements 
also could further decline as it reverts to prepandemic levels 
of credit risk transfer coverage (about twice the year-end 2021 
levels according to its annual reports on Form 10-K).
    As Chairperson of FSOC, what steps do you think FSOC should 
take with respect to FHFA's now-finalized amendments to fulfill 
FSOC's commitment to ``continue to monitor . . . FHFA's 
implementation of the regulatory framework to ensure potential 
risks to financial stability are adequately addressed''?

A.13. As mentioned in response to Question 8, it is critical to 
the stability of the broader financial system that the GSEs 
operate in a safe and sound manner and do not amplify or 
transmit market stress. Appropriately calibrated GSE capital 
requirements are important to the resiliency of the financial 
system. FSOC, in collaboration with FHFA and the other member 
agencies, regularly monitors financial market developments 
based on its responsibility to identify risks to the financial 
stability of the United States, promote market discipline, and 
respond to emerging threats to the stability of the U.S. 
financial system.

Q.14. In light of FSOC's commitment, does the absence of any 
comment by FSOC on FHFA's now-finalized amendments pose a risk 
to the credibility of FSOC or risk politicizing FSOC?

A.14. See response to Question 13.

Q.15. Do you agree that these new risk-based capital 
requirements and leverage ratio requirements, as amended by 
FHFA, are ``materially less than those contemplated by the 
proposed rule'' and are not adequate to ``mitigate the 
potential stability risk posed by the Enterprises''?

A.15. See response to Question 13.

Q.16. GSE Conservatorships--The terms of Treasury's senior 
preferred shares and warrants for common shares in each GSE 
preclude the GSE from issuing new common shares.
    Will Treasury commit to working with FHFA in the near term 
to resolve the open questions relating to Treasury's equity 
interests in each GSE?

A.16. Treasury is considering housing finance policy options 
that promote financial stability, protect consumers and 
taxpayers, and provide stability and affordability to 
households. Treasury continues to work with FHFA to address a 
range of issues at the GSEs while subject to the 
conservatorship. See responses to Questions 8 and 13.

Q.17. Who is or will be the specific Treasury official charged 
with being directly responsible for navigating and managing an 
end to the GSE conservatorships?

A.17. I am committed to a housing finance system that expands 
fair and equitable access to home ownership and affordable 
rental opportunities, protects taxpayers, and promotes 
financial stability.

Q.18. Related to this, on January 14, 2021, Treasury and each 
GSE, acting through FHFA as its conservator, entered into a 
letter agreement amending the Amended and Restated Preferred 
Stock Purchase Agreement dated September 26, 2008, between 
Treasury and the GSE (each, a ``PSPA''). Pursuant to section IX 
of that letter agreement, Treasury committed to develop a 
proposal to resolve the conservatorships and transmit that 
proposal to both Houses of Congress on or prior to September 
30, 2021. As of May 13, 2022, I had not received this proposal.
    When does Treasury expect to transmit this proposal?

A.18. We continue to work with FHFA to address a range of 
issues at the GSEs while subject to the conservatorship. While 
we have no news at this time, we will brief Members of Congress 
with any new policy views or developments. See responses to 
Questions 8 and 13.

Q.19. Pursuant to section IX of that letter agreement, Treasury 
also ``commit[ted] to work to restructure Treasury's investment 
and dividend amount in a manner that facilitates the orderly 
exit from conservatorship, ensures Treasury is appropriately 
compensated, and permits the [GSE] to raise third-party capital 
and make distributions as appropriate.''
    What actions does Treasury expect to perform to satisfy 
that commitment? When will each of those actions be performed?

A.19. We continue to work with FHFA to address a range of 
issues at the GSEs while subject to the conservatorship. While 
we have no news at this time, we will brief Members of Congress 
with any new policy views or developments. See responses to 
Questions 8 and 13.

Q.20. Has Treasury retained any financial, legal, or other 
advisors to support Treasury's effort to resolve the GSEs' 
conservatorships or otherwise assess or modify its rights or 
obligations under the PSPAs?

A.20. No. Treasury has not retained any financial, legal, or 
other advisors at this time.

Q.21. Housing Finance Reform--In its recent annual reports to 
Congress, FHFA has recommended that Congress provide FHFA with 
chartering authority similar to that of the Office of the 
Comptroller of the Currency. Treasury made similar 
recommendations in its September 2019 Housing Reform Plan.
    Do you support Congress authorizing FHFA to charter 
competitors to the Enterprises?

A.21. See responses to Questions 8 and 13.

Q.22. Do you believe the duopoly market structure increases the 
systemic importance of each GSE, fosters a market perception 
that the Federal Government will not permit the GSE to default 
on its financial obligations, undermines market discipline over 
its risk taking, and thereby fosters excessive risk taking by 
the GSE and exposes taxpayers to risk of future bailouts?

A.22. See responses to Questions 8 and 13.

Q.23. GSE Resolution Framework--FSOC's statement on its 
activities-based review of the secondary mortgage market 
encouraged FHFA to continue its efforts to enhance the GSEs' 
regulatory framework, including resolution planning 
requirements. In May 2021, FHFA finalized a rule that requires 
each GSE to develop a plan to facilitate its rapid and orderly 
resolution in the event FHFA is appointed receiver. These 
resolution plans are intended to, among other things, 
``foster[] market discipline by making clear that no 
extraordinary Government support will be available to indemnify 
investors against losses or fund the resolution of an 
Enterprise.'' Specifically, ``[i]n developing a resolution 
plan, each Enterprise shall: . . . [n]ot assume the provision 
or continuation of extraordinary support by the United States 
to the Enterprise to prevent either its becoming in danger of 
default or in default (including, in particular, support 
obtained or negotiated on behalf of the Enterprise by FHFA in 
its capacity as supervisor, conservator, or receiver of the 
Enterprise, including the Senior Preferred Stock Purchase 
Agreements entered into by FHFA and the U.S. Department of the 
Treasury on September 7, 2008, and any amendments thereto).'' 
Related to this, Treasury's Housing Reform Plan released in 
September 2019 recommended that ``[a] credible resolution 
framework can ensure that shareholders and unsecured creditors 
bear losses, thereby protecting taxpayers against bailouts, 
enhancing market discipline, and mitigating moral hazard and 
systemic risk.''
    In light of the risks to financial stability that could be 
posed by a future insolvency event at GSE, do you agree with 
the recommendation in Treasury's September 2019 Housing Reform 
Plan that ``[a] credible resolution framework can ensure that 
shareholders and unsecured creditors bear losses, thereby 
protecting taxpayers against bailouts, enhancing market 
discipline, and mitigating moral hazard and systemic risk''?

A.23. As mentioned in response to Question 13, it is critical 
to the stability of the broader financial system that the GSEs 
operate in a safe and sound manner and do not amplify or 
transmit market stress. Appropriately calibrated GSE capital 
requirements are important to the resiliency of the financial 
system. We continue to work with FHFA to address a range of 
issues at the GSEs while subject to the conservatorship. In 
2021, FHFA issued a final rule requiring the GSEs to submit 
resolutions plans for FHFA's review. The resolution plans are 
due in April 2023.

Q.24. Do you agree with FHFA's requirement that ``each 
Enterprise shall: . . . [n]ot assume the provision or 
continuation of extraordinary support by the United States to 
the Enterprise to prevent either its becoming in danger of 
default or in default (including . . . the Senior Preferred 
Stock Purchase Agreements entered into by FHFA and the U.S. 
Department of the Treasury on September 7, 2008, and any 
amendments thereto)''?

A.24. See responses to Questions 8, 13, and 23.

Q.25. As you noted in your hearing opening statement on May 10, 
2022, FSOC has issued a statement to express support for the 
Securities and Exchange Commission's efforts to reform money 
market funds and its work to consider potential reforms of 
open-end funds. Given FHFA's policy that, notwithstanding the 
PSPAs, unsecured creditors of each GSE should be at risk of 
loss upon an insolvency event affecting the GSE, do you think 
the Securities and Exchange Commission's regulations governing 
money market mutual funds, registration requirements, or other 
market activity should continue to give the GSEs special 
treatment (e.g., by treating them as Government securities for 
certain purposes)?

A.25. The FSOC expressed support for the SEC's engagement on 
reforms that would improve the resilience and functioning of 
short-term funding markets. The FSOC will continue to monitor 
this effort. In addition, the FSOC's working groups on open-end 
funds and on hedge funds are assessing the risks posed by these 
types of firms and will evaluate whether actions are necessary 
to address their vulnerabilities. It is encouraging that 
regulators are considering substantive reform options for money 
market mutual funds, and I support the SEC's efforts to 
strengthen short-term funding markets.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
                      FROM JANET L. YELLEN

Q.1. Do you agree with the sentiments expressed in GAO reports 
and the recent Treasury Inspector General for Tax 
Administration report that there should be more granular data 
collected and available with regards to the Low Income Housing 
Tax Credit Program?

A.1. The reports you reference found that the IRS has 
incomplete and inaccurate data regarding some low-income 
housing credit (LIHTC) projects. I believe the IRS can and 
should take steps to address these data quality issues. In 
particular, in its January 2022 report, TIGTA made several 
recommendations to the IRS which I understand the IRS agrees 
with and is working to implement.
    These include:

    System validity checks.

    A quality review system for LIHTC form processing.

    Changes to the process for selecting returns for 
        examination, to additionally check for certain 
        inconsistencies between tax forms.

    Revising tax forms so taxpayers may not claim 
        LIHTCs for buildings placed into service prior to 2008.

Q.2. What is Treasury and the IRS going to do to address the 
problems highlighted in these reports to ensure this program is 
free from fraud?

A.2. The statutory scheme of the LIHTC tax incentive gives 
State or local housing credit agencies (HCAs) the 
responsibility for allocating potential credits to LIHTC 
building projects from a finite pool of statutorily allocated 
credit amounts. By statute, these pools of credits are 
partially replenished each year. The statute also gives the 
HCAs another responsibility--determining the amount of LIHTCs 
that are needed for financial feasibility. Allocations of 
LIHTCs that are more than necessary for financial feasibility 
of the project as determined by the HCA are barred by the 
statute.
    The discretion statutorily vested in the HCAs limits the 
extent to which the IRS or the Treasury Department can control 
the HCAs' conduct. For example, the statute requires each HCA 
to publish a Qualified Allocation Plan (QAP) that establishes 
the criteria the HCA will use in allocating potential LIHTCs. 
The Federal tax statute contains three preferences and ten 
selection criteria that must be included in every QAP. Each QAP 
should also contain additional State or local provisions to 
align LIHTC allocations with local needs and the entire QAP 
must be approved by a non-Federal governmental authority. 
(Sometimes, this authority is the State legislature.) In 
theory, an allocation of potential LIHTCs not made pursuant to 
the QAP is ineffective. On the other hand, if an HCA makes an 
allocation of potential LIHTCs that is not in accordance with 
the HCA's established priorities and selection criteria, the 
HCA can just make a written explanation available to the 
general public.
    Moreover, in the absence of explicit authorization by 
Congress, IRS and the Treasury Department are limited in their 
ability to regulate or examine either the efficiency of the 
competitive processes that an HCA uses to allocate potential 
credits or the accuracy of its economic determinations of the 
potential LIHTC amount needed for a LIHTC building's financial 
feasibility.

Q.3. What can be done to improve the regulation of stablecoin 
arrangements and ensure that stablecoins do not pose a risk to 
consumers or the financial system? Would requiring stablecoin 
issuers to be insured depository institutions be the most 
effective way to address risks to stablecoin users and guard 
against stablecoin runs?

A.3. Congress should enact legislation to ensure that 
stablecoins and stablecoin arrangements are subject to a 
Federal prudential framework, on a consistent and comprehensive 
basis. The PWG report recommends that, as part of this 
framework, legislation should require stablecoin issuers to be 
insured depository institutions, which would mitigate the risk 
of runs.

Q.4. Treasury has recently ended its CDFI streamlined 
application program, which had been a useful way to certify 
community lenders and efficiently get CDFI dollars to those in 
need. Are there plans to replace this program with another 
similar initiative?

A.4. Treasury does not have a CDFI streamlined application 
program. However, the NCUA recently ended its streamlined data 
collection service for credit unions seeking CDFI 
certification. The CDFI Fund continues to work with regulators 
to share data so as to minimize burden on CDFI certification 
and program applicants and avoid the need to collect 
duplicative information.