WASHINGTON — Treasury Secretary Janet Yellen appeared reluctant Wednesday to use her authority as the chair of the Financial Stability Oversight Council to designate individual asset managers as systemically risky, favoring designations for asset management activities instead.
Speaking before the Senate Banking Committee, Yellen said she intended to use the FSOC to investigate systemic risks in the asset management industry and among asset managers. But she highlighted that the council has examined the risks posed by asset managers under previous administrations, and those inquiries were aimed at specific activities. She said the council will likely take a similar approach in this administration.
"I think with respect to the risk of asset management, rather than focus on the designation of companies, I think it’s important to focus on activity and to consider what the appropriate restrictions are," Yellen said. "It’s not obvious to me that designation is the correct tool.”
Yellen's comments came in response to a question from Sen. Elizabeth Warren, D-Mass., who specifically called out $9 trillion asset management giant BlackRock as the kind of firm that the council should consider systemically risky.
“If a $9 trillion investment company failed, would that likely have a significant impact on our economy?” Warren said. “I understand that when the stock market is going up, it is easy to ignore risks that can be building up in the system. … When the party is going strong, it is the job of the regulators to take away the punchbowl. My view on this is that Congress gave you the tools to monitor these companies for risk and it is important to use them.”
Yellen, while demurring from designating specific firms, did affirm that the council is beginning to think about what regulatory responses might be appropriate in the wake of the pandemic, and those repsonses could well center on asset managers.
“FSOC has undertaken such work in the past, and as I said when it looked at asset managers, it issued a report outlining what it saw as some of the most significant risk from those industries,” Yellen said. “I am just beginning a work program with FSOC and certainly risk from asset management would be on the list.”
Yellen's comments are the first she has made about the FSOC's nascent regulatory agenda since being sworn in as Treasury secretary in January. And they occurred only hours before the FSOC announced its first open session since the inauguration of President Biden, to be held March 31. The agenda for the closed portion of the meeting includes "hedge fund activity and open-end mutual fund performance during the COVID-19 crisis."
The economic calamity brought on by the coronavirus pandemic highlighted several long-simmering problems in the financial system, particularly outside of the banking sector. The Federal Reserve established a number of lending facilities in response to the pandemic aimed at injecting liquidity into troubled financial markets, including money markets, commercial paper and corporate debt. Many of those facilities were disbanded late last year, including the Main Street Lending facility, though the Fed and Treasury in November agreed to extend the primary dealer facility, money market facility, commercial paper facility and Paycheck Protection Program liquidity facility until the end of March.
The FSOC has the power to designate firms as systemically important financial institutions — a designation that brings with it direct and enumerated prudential requirements from the Fed. The Obama FSOC designated four firms as SIFIs in the wake of the 2008 financial crisis, and all four of them have since been de-desingated —
The FSOC's prior activities-based inquiry into asset management yielded a 2016
"I think we saw some of those problems in March," Yellen said. "This is an activities-based approach that FSOC was pursuing, and I thought that that was the right approach."
Isaac Boltansky, director of policy research at Compass Point Research & Trading, said that Yellen’s comments signal that while the Biden administration’s FSOC will want to shore up the parts of the financial system that gave way last year, it will likely use a lighter touch than the Obama administration did in the wake of the 2008 financial crisis.
“What we are going to see from the FSOC under the Biden administration is going to be a much more nuanced and ultimately tailored assessment of specific risks posed by large asset managers, rather than an expansive look at company designations,” Boltansky said.
Boltansky said Warren is most likely trying to pressure Yellen to take some action on asset managers. By putting Yellen on the record as not wanting to designate firms individually, he said, Warren has put the onus on Yellen to do something else that gets results.
“She is able to frame the debate by setting the outermost flag,” Boltansky said. “So she is going to use the hearing to push for company-specific designations, in the hopes that at a minimum it will catalyze a thread of activities-based analysis at the FSOC.”
And that pressure from the progressive Democratic wing to designate nonbank firms individually could grow, depending on the quality, scope and enforcability of any activities-based restrictions that emerge from the council. Gregg Gelzinis, senior policy analyst at the Center for American Progress, said that in some cases FSOC would be within its power and well advised to designate certain asset managers as systemically risky.
“Dodd-Frank is quite clear that the Financial Stability Oversight Council should designate nonbank financial companies as systemically important if material financial distress at those companies could threaten financial stability or if the size, scope, scale, concentration or mix of activities at the company, threaten financial stability,” Gelzinis said. “I think that it’s incumbent on the FSOC to analyze firms through that statutory requirement. I don’t think that there is a class of institutions that we should immediately dismiss in terms of whether a designation is appropriate.”
Yellen also weighed in on the debate over banks capital distributions in the midst of the coronavirus pandemic. Democratic lawmakers pushed the Fed to ban stock buybacks and dividends as COVID-19 continues to take a toll on the U.S. economy. The
“I have been opposed earlier when we were very concerned about the situation that banks would face about stock buybacks, but the financial institutions look healthier now and I think they should have some ability to, abiding by the rules, make returns to their shareholders,” Yellen said.
