What we would ask Sec. Yellen about FSOC
What we would ask Sec. Yellen about FSOC
It’s that time of year again for Secretary Yellen to come before the House Financial Services Committee and Senate Banking Committee to discuss the Financial Stability Oversight Council’s (FSOC) annual report. The report covers a lot of ground and—hopefully—we will hear substantive and thoughtful responses from Secretary Yellen on many important topics. While we at FinRegRag are not duly elected and sworn Members of Congress, we can still daydream about what it would be like if we were. On that note, if we had the opportunity to ask Secretary Yellen some questions, they would look like some of the following…
On the Role of Corporate Mergers in a Healthy Economy
Our colleague Alden Abbott has written and spoken at length about the FTC and DOJ’s new Merger Guidelines (released December 18, 2023), which appear to have been written with the specific intent of stymieing legitimate mergers on philosophical, rather than legal grounds. It would be worth asking Secretary Yellen if it were wise to limit merger activity at a time when corporate defaults are expected to increase significantly over the next 18 months. Perhaps something like the following:
1. Secretary Yellen, on page 33 your report states “Given increasing corporate fundamental headwinds and more restrictive interest rates, market analysts are largely expecting corporate default rates to increase over the next 18 months (particularly for lower-rated issuers in the high-yield market)...”
Given this prediction, aren’t you concerned that the FTC and DOJ’s new Merger Guidelines (which former FTC senior officials have described as being designed to “‘scar(e) away’ as many deals as possible”) will unnecessarily harm the economy by disincentivizing legitimate acquisitions of failing companies?
What is the Secretary’s outlook on Treasury Markets?
We've seen in recent months that certain tenors for Treasuries have faced somewhat weaker demand by primary dealers, which had to take on more issuance than they may have wanted. In addition, the Treasury Department has flagged potential declines in economic growth as potentially contributing to higher budget deficits (and the need for greater issuance) and also changes in structural demand for Treasuries.
1. The annual report does not seem to say much about the potential for growing federal budget deficits to adversely affect financial stability, but shouldn't the Committee (FSOC) also be looking into this potential problem of greater Treasury issuance in the face of weakening demand and its impact on the financial system?
How Should Private Firms and Regulators conceptualize “Climate Risk”
Much has been written on this subject as of late, including our own Andy Vollmer’s seminal comment letter on the SEC’s proposed Climate Disclosure rule. We know the Committee has already explored this topic with outside experts and select regulators, but we would like to hear directly from the Secretary as well.
1. The report highlights climate risk as something regulators be aware of and consider. Under the umbrella of climate risk there are physical risks, such as property damage caused by rising sea levels or fires, and transition risk, including the possibility that future policy changes will diminish the value of assets, and the risk that changes in technology will make certain assets or investments less profitable. Is this correct?
a. With regard to physical risks, does FSOC consider, or should it consider, the potential effects of mitigation of natural disasters? For example, if climate change is making forest fires more likely a more aggressive fire prevention regime may help mitigate that risk. Is that on FSOC’s radar? What about the risk that the federal, state, or local governments will fail to do necessary mitigation.
b. Don’t firms already take physical risk into account? Is there any concrete evidence of firms being indifferent to physical risk?
c. With regard to policy risks, is that unique to climate? Isn’t any asset whose value is subject to regulation or legislation vulnerable to transition risk? Do you highlight that risk globally with the same prominence as you do with climate? If not, isn’t the concern that you are signaling the climate is uniquely prone to policy risk?
i. Do you agree that in the United States the power to set laws ultimately rests with Congress and the President, rather than regulators?
ii. Do you agree that if a law is duly passed the regulators are responsible for administering it and should not frustrate it, even if the staff in question disagree?
iii. Do you agree that the voting public may have different policy preferences than any given agency head or agency employees?
iv. In light of this, how can financial regulators predict policy shifts? How do regulators avoid inserting their own policy preferences and hopes with regard to potential future policy changes. For example, it is certainly possible public policy will discourage fossil fuel use in the future, but it is also possible that geopolitical and economic events will require the continued and possibly even increased use of fossil fuels globally, and that policy will reflect this. How can regulators know what will happen?
d. With regard to technology risk, isn’t it a firm’s job to assess the impact of technology on its investment in all cases? As with policy risk, is this unique to the climate context? Do regulators look for technology risk broadly or just in the context of climate? Do they treat technology risk related, even tangentially, to climate different from general technology risk?
2. What is the definition of a “systemic risk” in practice? In discussing the 2023 banking “crisis” the government’s use of extraordinary powers was justified because the failure of a handful of banks could have posed a systemic risk, as evidenced by other regionals suffering deposit outflows. Is that what Congress meant by systemic? Are there objective criteria that regulators use or is it a “know it when I see it” thing? Given that regulators are given more discretion if there is a systemic risk, but those same regulators are the ones who declare the risk to exist, aren’t objective criteria necessary to ensure compliance with the law and Congress’ intent?
Anyway, those are some of the questions we would ask were we members of Congress. Plus what her recommends at In-and-Out of course.