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Yellen at the Senate Banking Committee by Kari Nelson, Impact Investing Intern, University of Virginia


On July 13, the Senate Committee on Banking, Housing, and Urban Affairs met in open session with the Chair of the Board of Governors of the Federal Reserve System, the Honorable Janet L. Yellen, for“The Semiannual Monetary Policy Report to the Congress.” I attended this hearing and this blog post shares my reaction as well as some analysis.

Despite the fact that the hearing was supposed to be about monetary policy, the Senators mostly questioned Yellen about regulatory issues. Republicans have been pushing for widespread rollbacks of Dodd-Frank financial regulations, so this is not surprising. This regulatory theme was apparent from the beginning, with Sen. Mike Crapo (R-ID), the Chairman of the Committee, asking Yellen to affirm that she believes Congress needs to act on some areas of financial reform and that the Fed would work to make suggestions to the Committee, both of which Yellen readily agreed to. The ranking Democrat, Sen. Sherrod Brown (D-OH), quickly responded by pushing Yellen to affirm that some rollbacks proposed by the Trump administration may increase the chance of a financial crisis, to which she also readily agreed. 

This back-and-forth about Dodd-Frank banking reforms continued throughout the hearing: Republicans sought Yellen’s support for loosening regulations and Democrats wanted Yellen to state that financial regulations are important in protecting the American economy from another financial crisis.

Yellen’s responses to regulatory issues were measured and conciliatory. She expressed support for regulations put in place after the 2008 financial crisis, but also made it clear that the she’s willing to consider changes. The financial regulatory issues Yellen expressed opinions on included:
  • Requirements for how much cash major banks must hold should be maintained
  • Stress tests: The main framework used by federal regulators to test a “systemically important” financial institution’s (SIFI’s) ability to continue to operate if a financial crisis hits;
  • Thresholds: The asset level that determines which banks are considered SIFIs and are therefore subject to additional, stricter regulation (now set at $50 billion or more) should be raised, though no specific number for a new threshold was given;
  • Capital requirements for banks or the orderly liquidation authority (OLA), an account funded by SIFIs and needed to resolve a SIFI were it to fail. (For more on the OLA, click here)
  • OLA should be kept
  • The Volcker Rule, which bans banks from making certain risky investments using their own capital, should be modified
  • Regulation of community banks should be reduced
For a hearing on monetary policy, there was some (but not much) discussion of that topic. Yellen reiterated that the Fed plans to begin reducing its bond holdings in an orderly fashion sometime this year, as previously discussed. Yellen attempted to correct a statement made at the House monetary policy hearing the day before, when she indicated that the recent slowdown in inflation may go on for longer than the Fed expects. Investors took those comments to mean that the Fed might slow down the pace of the interest rate hikes, which led to the Dow Jones industrial average spiking to a record high. (Note: the Fed has raised interest rates three times since December 2016.) But at the Senate hearing, Yellen emphasized that she saw the “risk on inflation as being two-sided” and that she does not believe that the recent slowdown in inflation means that the Fed will not be able to meet its goal of 2% annual inflation.

This hearing reiterates what we’ve been seeing lately (with the CHOICE Act and the recent Treasury Report): the Trump administration and Congressional Republicans are getting serious about rolling back Dodd-Frank financial reforms. Democrats will certainly fight hard to stop drastic changes, but only time will tell if Democratic efforts are enough to stop motivated Republicans from making it even easier and more profitable to be a big bank.

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