`[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]






                                 ______




 
                   THE ANNUAL REPORT OF THE FINANCIAL


                      STABILITY OVERSIGHT COUNCIL

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            FEBRUARY 6, 2024

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 118-73
                           
    GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT
    
    
                        
             U.S. GOVERNMENT PUBLISHING OFFICE 
 56-278 PDF          WASHINGTON : 2024 
                           
                           
                           

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas, Vice          EMANUEL CLEAVER, Missouri
    Chairman                         JIM A. HIMES, Connecticut
TOM EMMER, Minnesota                 BILL FOSTER, Illinois
BARRY LOUDERMILK, Georgia            JOYCE BEATTY, Ohio
ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
WARREN DAVIDSON, Ohio                JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee                 VICENTE GONZALEZ, Texas
BRYAN STEIL, Wisconsin               SEAN CASTEN, Illinois
WILLIAM TIMMONS, South Carolina      AYANNA PRESSLEY, Massachusetts
RALPH NORMAN, South Carolina         STEVEN HORSFORD, Nevada
DAN MEUSER, Pennsylvania             RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin          RITCHIE TORRES, New York
ANDREW GARBARINO, New York           SYLVIA GARCIA, Texas
YOUNG KIM, California                NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida               WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska                 BRITTANY PETTERSEN, Colorado
MIKE LAWLER, New York
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 6, 2024.............................................     1
Appendix:
    February 6, 2024.............................................    53

                               WITNESSES
                       Tuesday, February 6, 2024

Yellen, Hon. Janet L., Secretary, United States Department of the 
  Treasury, and Chair, Financial Stability Oversight Council 
  (FSOC).........................................................     5

                                APPENDIX

Prepared statements:
    Yellen, Hon. Janet L.........................................    54

              Additional Material Submitted for the Record

Horsford, Hon. Steven:
    McKinsey & Company impact report, ``Diversity Matters Even 
      More,'' dated December 5, 2023.............................    57
Yellen, Hon. Janet L.:
    Written responses to questions for the record from Chairman 
      McHenry....................................................    68
    Written responses to questions for the record from 
      Representative Barr........................................    71
    Written responses to questions for the record from 
      Representative Casten......................................    89
    Written responses to questions for the record from 
      Representative Fitzgerald..................................    87
    Written responses to questions for the record from 
      Representative Gottheimer..................................    90
    Written responses to questions for the record from 
      Representative Hill........................................    92
    Written responses to questions for the record from 
      Representative Lawler......................................   108
    Written responses to questions for the record from 
      Representative Sherman.....................................   105
    Written responses to questions for the record from 
      Representative Wagner......................................   101
    Written responses to questions for the record from 
      Representative Nikema Williams.............................    84


                   THE ANNUAL REPORT OF THE FINANCIAL



                      STABILITY OVERSIGHT COUNCIL

                              ----------                              


                       Tuesday, February 6, 2024

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:08 a.m., in 
room 2128, Rayburn House Office Building, Hon. Patrick McHenry 
[chairman of the committee] presiding.
    Members present: Representatives McHenry, Lucas, Sessions, 
Posey, Luetkemeyer, Huizenga, Wagner, Barr, Williams of Texas, 
Hill, Loudermilk, Mooney, Davidson, Rose, Steil, Timmons, 
Norman, Meuser, Fitzgerald, Kim, Flood, Lawler, Nunn, De La 
Cruz, Houchin, Ogles; Waters, Velazquez, Sherman, Scott, Lynch, 
Cleaver, Himes, Foster, Beatty, Vargas, Gottheimer, Gonzalez, 
Casten, Pressley, Horsford, Tlaib, Torres, Garcia, Williams of 
Georgia, Nickel, and Pettersen.
    Chairman McHenry. The Financial Services Committee will 
come to order.
    Without objection, the Chair is authorized to declare a 
recess of the committee at any time.
    Today's hearing is entitled, ``The Annual Report of the 
Financial Stability Oversight Council.''
    I will note at the outset that this hearing has a hard stop 
at 1:00 p.m., and thank you, Secretary Yellen, for being here.
    I will now recognize myself for 4 minutes to give an 
opening statement.
    Thank you, Secretary Yellen, for being here today in your 
capacity as Chair of the Financial Stability Oversight Council 
(FSOC). FSOC's purpose is straightforward: to identify risks 
that could impact our financial stability; to promote market 
discipline by eliminating expectations of bailouts; and to 
respond to emerging threats. FSOC's name pretty much sums up 
its mission, and yet, under the current leadership, we have 
seen FSOC expand its regulatory reach to fit the 
Administration's political priorities. That is unfortunate, 
and, unfortunately, FSOC appears to be a part of the same 
troubling trend as President Biden's other financial 
regulators.
    When you are distracted by shiny partisan objects, you take 
your eye off the ball. For example, aside from a stale mention 
of interest rate risks in 2022 in the annual FSOC report of 
that year, the FSOC did nothing to identify the emerging 
instability that set off the March 2023 banking sector 
turbulence, and indicators produced by FSOC's research arm, the 
Office of Financial Research (OFR), showed no signs of emerging 
risks even as the risk was indeed emerging. Secretary Yellen, 
we remember the panic Americans experienced in March. I commend 
you for your willingness to engage in stabilizing the markets. 
I think your credibility lent a lot of effort to the 
Administration, and at that time, we worked together to quell 
concerns and provide a levelheaded response in an uncertain 
time.
    The goal was to do no harm and to regain stability without 
injecting politics, and I think we achieved that, a goal that 
President Biden clearly did not share when he took advantage of 
the situation to blame Republicans for what was a widely 
bipartisan regulatory reform law enacted a few years ago. In 
real time, many members of this committee stood behind 
regulators' emerging actions with the expectation that we and 
the public would receive a full accounting of the decisions 
made that week.
    But now, nearly a year later, we do not still know the full 
story, as FSOC and other Administration officials have been 
less than transparent. To be clear, this does nothing to calm 
the nerves of an already-skittish consumer, and with issues 
still plaguing some regional banks, it is irresponsible for 
this Administration and your fellow regulators to continue to 
stonewall.
    While Republicans have worked to get the answers the 
American people deserve, FSOC has been busy making changes to 
enable it to serve as a roving regulator, something architects 
of the Dodd-Frank Act vigorously promised FSOC would not be. 
This includes relaxing the criteria used to designate nonbank 
financial companies as systemically important and putting them 
under Federal Reserve regulation. This proposal is based on the 
premise that our financial system would be best served with 
more oversight and control by the Federal Reserve, even beyond 
banks.
    It is important to note that the gross incompetence of 
Federal Reserve and FDIC supervision is what led to the bank 
failures in March. However, prudential regulation is grounded 
in mitigating the specific risk that bank activity poses. These 
regulations are not necessarily appropriate for institutions 
that may engage in different activities and, therefore, pose 
different risks. Given the significant consequences associated 
with the systemic risk designation, Congress did not intend for 
this designation to be politicized nor weaponized. This move, 
taken with the apparent failure to identify and respond to 
emerging risks, calls into question the effectiveness of the 
Financial Stability Oversight Council.
    Secretary Yellen, I would encourage you and your fellow 
Federal regulators to get back to the work with which you have 
been tasked. We have already experienced what happens when you 
take your eye off the ball and get engaged in politics. The 
American people should not have to suffer through that again. I 
yield back.
    I now recognize the ranking member, Ms. Waters, for 4 
minutes.
    Ms. Waters. Thank you, Mr. Chairman. Treasury Secretary 
Yellen and President's Biden economic team have been hard at 
work to turn the tide on the disastrous economy that the twice-
impeached, 4-times-criminally-indicted former President left 
us. The numbers show their hard work is paying off. In 2023, 
the unemployment rate remained below 4 percent, and the economy 
created a whopping 2.7 million new jobs, more than any year of 
the Trump Administration. Inflation has fallen to the pre-
pandemic level of 2 percent over the last 6 months, 16 million 
small businesses have been created, and twice as many Black 
households now own a business. Workers' wages and wealth are 
higher now than before the pandemic began, with income of 
nearly 4 percent last year after adjusting for inflation. To 
top it off, consumers' confidence is returning to our nation's 
economy, and they are shopping and traveling again.
    There is currently more work to do to address the housing 
affordability crisis, but the Biden Administration has 
masterfully guided the United States to the fastest economic 
rebound from the pandemic of any wealthy country in the world. 
Of course, this progress would not be possible if it were not 
for Secretary Yellen's strong leadership and that of President 
Biden's banking regulators, who decisively prevented harm to 
our financial system after the failures of Silicon Valley Bank, 
Signature Bank, and First Republic Bank. Make no mistake, the 
seeds of that banking crisis were planted by Mr. Trump and his 
bank regulators' deregulation of regional banks.
    Less than a year later, it is a shame that Republicans have 
teamed up with Wall Street to spread misinformation and to try 
and block efforts to strengthen capital. At our nation's 
biggest banks. Wall Street is peddling lies about what the 
needed capital reforms will do, going as far as taking out 
expensive TV and social media ads, and even setting up a 
website to purportedly educate the public, except it is filled 
with misleading claims. What they don't want you to know is 
that the only people who benefit from lower capital 
requirements are the wealthy bank executives. Less capital 
means consumers are left more vulnerable, especially in a 
downturn, while bank executives take home bigger bonuses each 
year.
    Lower capital requirements also mean that taxpayers are 
more likely to be called on to bail these banks out when they 
run into trouble. Let's be clear: Research overwhelmingly shows 
that well-capitalized banks lend more than other banks in good 
times and in bad. I am sure the Secretary will set the record 
straight about how these capital reforms will ensure first-time 
homebuyers, small business owners, and communities of color 
looking to build wealth can better access credit, and prevent 
future bank crises.
    Finally, I want to applaud the Financial Stability 
Oversight Council for updating its designation procedures to 
ensure the Council can use all of its tools to protect our 
economy. I also applaud the Council for continuing the work 
Committee Democrats started by guarding us against risk from 
artificial intelligence (AI), cryptocurrencies, and climate 
change. I am so proud to see Secretary Yellen here today. Thank 
you for all that you have done in your leadership, and I look 
forward to today's hearing. I yield back the balance of my 
time.
    Chairman McHenry. I will now recognize the Chair of our 
Financial Institutions and Monetary Policy Subcommittee, Mr. 
Barr, for 1 minute.
    Mr. Barr. Secretary Yellen, the three statutory purposes of 
the Financial Stability Oversight Council and the Dodd-Frank 
Act are to identify stability risks, promote market discipline 
by eliminating bailout expectations, and respond to emerging 
stability threats. Last March, FSOC did not identify a systemic 
risk as it emerged, did not promote market discipline as 100 
percent of large uninsured deposits were bailed out, and did 
nothing to respond to the emerging stability threat. Nothing 
would have been different if FSOC had never been created.
    FSOC has not fulfilled its statutory purposes. Instead, it 
is an unaccountable, roving regulator, ensnaring private firms 
into the regulatory net using new designation processes that 
remove analytical discipline. We are left with an FSOC used to 
pressure nominally-independent financial regulators into 
whatever policy objectives the Biden Administration wants to 
push into the regulatory framework without legislative 
authority.
    The current FSOC is poised to operate as a partisan body 
and a rogue regulator, which is not what is statutorily 
intended in Dodd-Frank, or maybe it was intended to act that 
way, and we don't like it. We look forward to your testimony 
today. I yield back.
    Chairman McHenry. The gentleman yields back. We will now go 
to the ranking member of our Financial Institutions and 
Monetary Policy Subcommittee, Mr. Foster, for 1 minute.
    Mr. Foster. Thank you, Chairman McHenry. Secretary Yellen, 
thank you for joining us today and for your leadership of the 
Treasury Department.
    Since the Dodd-Frank Act created FSOC in 2010, it has been 
a vital forum for U.S. financial regulators to share 
information regarding systemic risks to our economy. FSOC's 
comprehensive view of the financial system is critical because 
systemic risks rarely develop in ways that fall entirely within 
the jurisdiction of a single agency.
    This year also marks the first time that artificial 
intelligence (AI) has been listed as a vulnerability in FSOC's 
annual report, and I am happy to have seen the steps that 
financial regulators have started to take to address AI-related 
risks since President Biden's Executive Order on AI was issued 
last fall. While AI presents many opportunities to make our 
financial system stronger, deepfake impersonations have the 
potential to supercharge financial fraud and cybersecurity risk 
by making it harder to identify the real identity of the person 
on the other end of a call, a video, or an internet connection.
    The response to emerging issues like these should not take 
place in a silo, and I am happy to see FSOC recognize the 
importance of holistically addressing these and other emerging 
risks. Thank you, and I yield back.
    Chairman McHenry. The gentleman yields back. Today, we 
welcome the testimony of the Honorable Janet Yellen, Secretary 
of the Department of the Treasury. I will not go into her full 
bio, but suffice it to say she has held every significant 
economic post in our government. We welcome your testimony 
today, and thank you for being here. You will be recognized for 
5 minutes. And without objection, your written statement will 
be made a part of the record. You are now recognized for 5 
minutes. Thank you.

 STATEMENT OF THE HONORABLE JANET L. YELLEN, SECRETARY, UNITED 
    STATES DEPARTMENT OF THE TREASURY, AND CHAIR, FINANCIAL 
               STABILITY OVERSIGHT COUNCIL (FSOC)

    Secretary Yellen. Thank you. Chairman McHenry, Ranking 
Member Waters, and members of the committee, thank you for 
inviting me to testify.
    Over the past 3 years, the Biden Administration has driven 
an historic recovery. GDP growth is strong, and inflation has 
declined significantly. We have also achieved a healthy labor 
market. The prime age labor force participation rate is up by 
over 2 percentage points from January 2021. The unemployment 
rate remains below 4 percent, continuing the longest streak in 
50 years. Real wages have increased. Household median wealth 
has, too, by 37 percent between 2019 and 2022. That is the 
largest 3-year increase on record. Families are now putting 
their additional income and accumulated savings back into the 
economy.
    Our continued economic strength depends on a solid and 
resilient U.S. financial system. Throughout 2023, the Financial 
Stability Oversight Council monitored a wide range of risks, 
including risks stemming from the commercial and residential 
real estate sectors and from global geopolitical conflicts and 
technological developments.
    When two regional banks failed last March, we acted quickly 
to prevent contagion to banks with similar vulnerabilities and 
to maintain confidence in the banking system. The Council also 
increased transparency this year, issuing an analytic framework 
that, for the first time, provides the public with in-depth 
information on how it monitors, assesses, and responds to 
potential financial risks.
    Let me now highlight five areas of ongoing work that are 
further detailed in the Council's 2023 annual report. First, 
the Council is focused on risks from the banking sector and 
from nonbank financial institutions. It supports member 
agencies' plans to review whether capital measures 
appropriately reflect a banking institution's ability to absorb 
losses, improve resolvability at large, complex, or 
interconnected banks, and address vulnerabilities from 
uninsured deposit levels and depositor composition. Nonbank 
institutions are an important source of capital in financial 
markets but also pose potential risk to the financial system, 
including risks related to liquidity mismatch and leverage. 
Securities and Exchange Commission initiatives focused on hedge 
funds, money market funds, and other investment funds are an 
important step forward here.
    Second, the Council is focused on member agencies' 
enhancing assessment efforts and increasing coordination around 
climate-related financial stability risks from increasingly 
severe and frequent climate-related events. Financial 
regulators should also continue to promote disclosures that 
allow investors and financial institutions to consider these 
risks to their investment in lending decisions.
    Third, a key focus has been bolstering protections against 
cybersecurity risks. The Council promotes sharing timely and 
actionable cybersecurity information, including through ongoing 
partnerships between State and Federal agencies and the private 
sector.
    Fourth, the Council is closely monitoring the increasing 
use of artificial intelligence in financial services, which 
brings potential benefits, such as reducing costs and improving 
efficiencies and potential risks, like cyber and model risk. 
Financial institutions, regulators, and market participants 
should continue deepening their expertise and monitoring 
capacity in this area.
    Fifth, the Council is focused on digital assets and related 
risks, such as from runs on crypto asset platforms and 
stablecoins, potential vulnerabilities from crypto asset price 
volatility, and the proliferation of platforms acting outside 
of or out of compliance with applicable laws and regulations. 
Applicable rules and regulation should be enforced, and 
Congress should pass legislation to provide for the regulation 
of stablecoins and of the spot market for crypto assets that 
are not securities. We look forward to continuing to engage 
with Congress on this.
    With this overview, I look forward to answering your 
questions on these and other areas.
    [The prepared statement of Secretary Yellen can be found on 
page 54 of the appendix.]
    Chairman McHenry. Thank you, Secretary Yellen. I will now 
recognize myself for 5 minutes for questions.
    Let's begin with your last point on the regulation of the 
spot market for digital assets. This committee has produced two 
bipartisan bills--one on stablecoins, one on market structure--
to regulate the spot market of digital assets and provide this 
clarity between the Commodity Futures Trading Commission (CFTC) 
and the SEC. You testified that FSOC's view is that we need 
Federal law and law changes on the spot market. Can you tell us 
why? Can you describe why that is FSOC's belief?
    Secretary Yellen. There are many areas with respect to 
digital assets where we do have clear regulatory authority, but 
we have identified some gaps where, for consumer investor 
protection and to address financial stability risk, it would be 
very useful for Congress to take action to fill those gaps. The 
CFTC, for example, doesn't have supervisory or regulatory 
authority with respect to spot markets in commodities like 
Bitcoin, so that is a regulatory gap.
    Furthermore, stablecoins pose risk to the financial system 
that both FSOC and the President's Working Group on Financial 
Markets have identified as potentially becoming significant 
over time, and we would very much welcome an effort by Congress 
to create a regulatory framework that would be appropriate to 
address those risks.
    Chairman McHenry. Stablecoins are now being regulated by 
the States. New York has a very resilient regime. Are you 
suggesting something like the New York regime would be 
applicable to fix this problem?
    Secretary Yellen. FSOC believes that it is critical for 
there to be a Federal regulatory floor that would apply to all 
States and that a Federal regulator should have the ability to 
decide if a stablecoin issuer should be barred from issuing 
such an asset.
    Chairman McHenry. Okay.
    Secretary Yellen. Also, we believe that because wallets are 
a critical part of the stablecoin ecosystem, and we have seen 
many instances in which there have been significant losses, 
that it is critical to enact regulatory protections for holders 
of wallets.
    Chairman McHenry. Back to the spot market, though, in your 
report, you state clearly that we need to change the law in 
order for us to have proper regulation of the digital asset 
spot market. Is that correct?
    Secretary Yellen. Yes, that is a recommendation.
    Chairman McHenry. Okay. Let's go to the broader set, not 
the emerging issues, but in November, FSOC issued its final 
guidance on nonbank designation. Are there firms that FSOC has 
identified that are being analyzed right now for designation?
    Secretary Yellen. I don't think it is appropriate for me to 
talk about individual firms. We have certainly not reached a 
stage at which the Council has taken any action or received 
recommendations with respect to designation. We did put out, as 
you know, revised guidance pertaining to nonbank designations, 
and we published an analytic framework, but we wanted to make 
sure that our entire toolkit that Congress gave to FSOC is 
usable. There are many tools in that toolkit, and the analytic 
framework recognizes that designation is only one of those 
tools. It is not in any sense the preferred tool. It really 
depends on the specifics of the financial stability risk.
    Chairman McHenry. What many of us have highlighted is the 
fact that that is such an opaque process that it leads to 
greater instability, and greater uncertainty in the 
marketplace.
    Let me finish with this: the overall economy. Fed Chair 
Powell was interviewed this past weekend on 60 Minutes, and he 
said that the American people have a right to be unhappy. The 
cost of food is dramatically up under your tenure as Treasury 
Secretary in this Administration. What do you say to the 
American people, who are unhappy with paying more for the 
basics of life?
    Secretary Yellen. Households have been struggling through 
the pandemic with many burdens, including a higher cost of food 
and some increases in gas prices. We have had several years, a 
couple of years of high inflation, and it is a top priority of 
this Administration to bring inflation down and to use the 
tools we have to reduce the burdens on hardworking households. 
We have certainly used it with respect to healthcare costs, 
limiting insurance premiums for healthcare, and the copays for 
insulin.
    Chairman McHenry. My time has expired. Thank you for your 
testimony. I yield to the ranking member, Ms. Waters.
    Ms. Waters. Thank you again, Mr. Chairman. Secretary 
Yellen, I again want to applaud your excellent work and that of 
the Federal Reserve and the FDIC to quickly act last spring to 
contain the damage from the sudden failures of Silicon Valley 
Bank in my State, Signature Bank, and First Republic Bank that 
could have spiraled out of control into a costly financial 
crisis, a recession and corresponding layoffs, foreclosures, 
and lost savings for millions of people.
    Of course, some of us warned about Trump's deregulation 
efforts, and S. 2155, a Republican bill that Trump's regulators 
used to reduce capital and other requirements for regional 
banks like SVB. In fact, it allowed Silicon Valley Bank to opt 
out of maintaining nearly 2 percent more capital for their book 
of securities that had a large amount of unrealized losses when 
the Federal Government raised interest rates. When SVB was 
forced to sell those securities at a steep loss, it alarmed 
customers, resulting in the fastest bank run in United States 
history.
    Since then, Republicans have tried to claim that capital 
had nothing to do with the bank failures, but their own 
witness, Margaret Tahyar from Davis Polk, testified that SVB's 
capital shortcoming was a problem, and she supported efforts to 
fix it. I am so happy our Federal banking regulators have 
issued proposals to fix this issue and otherwise strengthen 
capital requirements for the largest banks. The Financial 
Stability Oversight Council urged regulators to finalize these 
bank capital rules in its annual report.
    Would you briefly try and explain to Members why the bank 
capital proposal is so important for financial stability?
    Secretary Yellen. It is really critically important to the 
safety and stability of our entire financial system for there 
to be strong standards of capital, liquidity, and risk 
management for banks, especially for the largest banks, and the 
banking regulators have proposed new rules to address these 
risks and to implement an international agreement on Basel III. 
I would say the proposals are out for comment, and it is really 
up to the banking regulators to decide on the appropriate 
specifics.
    Ms. Waters. Thank you, Madam Secretary. Unfortunately, I 
want you to know that the megabanks are working overtime to try 
and kill the bank capital proposal, claiming, among other 
things, that it will limit their ability to make loans to 
communities of color that they already rarely serve and 
routinely have discriminated against over the years. Capital is 
not something that is locked away, but, rather, it is a source 
of funds that banks can redeploy. In fact, research shows that 
better-capitalized banks actually lend more, not less, to 
consumers in both good times and bad.
    Secretary Yellen, will lending come to a halt if regulators 
implement their capital proposal? Did you hear similar industry 
attacks when you were at the Fed helping implement the Dodd-
Frank post-crisis reforms?
    Secretary Yellen. I think what we found during that time 
was that implementing strong capital, liquidity, and risk 
management rules led to a stronger banking system that was 
better able to meet the needs of borrowers throughout the 
country, and I think we saw the benefit of that when the 
pandemic struck. While there were many financial stability 
risks that did materialize, the banking system was strong and 
able to meet the credit needs of the country's businesses and 
households.
    Ms. Waters. Secretary Yellen, do you recall the weekend 
that all of the regulators and so many people were involved in 
after the failure of Silicon Valley Bank, to try and save this 
country from experiencing a bank run that could have actually 
crippled our banking system? Do you recall the work that went 
into that, 24 hours a day for 3 days, so that when we woke up 
on Monday morning, we were safe rather than going back to what 
happened in 2008. Do you remember that?
    Secretary Yellen. I will never forget it. I was involved in 
it, and we did everything we could to put together a package of 
measures that would stop what could have become a run on the 
banking system to the huge detriment of our economy and to 
hardworking Americans and businesses.
    Ms. Waters. And, again, if there had been adequate capital 
at Silicon Valley Bank, we could have aborted what took place 
in the way that it did.
    Secretary Yellen. There was an issue with their management 
of interest rate risk, which had produced mark-to-market losses 
on long-duration assets that they held, and that was coupled 
with very heavy reliance on uninsured deposits that were 
concentrated among a group of tech firms that were active on 
social media. We saw a run that was the largest and fastest of 
anything anyone has ever witnessed in this country.
    Ms. Waters. Thank you very much.
    Chairman McHenry. The gentlewoman's time----
    Ms. Waters. Do you support a 2-percent increase in capital 
for all of the biggest banks?
    Secretary Yellen. I am going to let the banking regulators 
decide what the----
    Chairman McHenry. The gentlelady's time has expired.
    Ms. Waters. Thank you. I yield back.
    Chairman McHenry. I will now go to the Vice Chair of the 
committee, Mr. Hill, for 5 minutes.
    Mr. Hill. Thank you, Mr. Chairman. Madam Secretary, it is 
nice to have you back here. We are grateful to have your 
expertise. The last time we were together, we talked about the 
subject that Chairman McHenry brought up, which is FSOC's 
recommendations on stablecoins and the spot market, and I was 
very pleased to hear your testimony on that, reiterating that 
Congress does need to take action there, and I am proud to have 
worked with the Chair and my Democratic colleagues on 
bipartisan bills to do precisely that.
    With that said, Madam Secretary, as Chair of FSOC, what 
have you done to encourage the SEC and the CFTC to work 
together in these areas to make these bills stronger, and 
cooperate together to make our work here in Congress go more 
smoothly? Have you had a meeting with the Chairman of the SEC 
about stablecoins and the digital assets regulatory framework?
    Secretary Yellen. The President's Working Group on 
Financial Markets produced a report----
    Mr. Hill. Yes, ma'am, we have read that report thoroughly. 
I am talking about in recent months, since June and July of 
last year. For example, when we marked up this bill in July, 
have you worked with Chairman Benham or Chairman Gensler on 
this legislation? Have you talked to them about it?
    Secretary Yellen. I have talked to them often over the last 
couple of years about stablecoins, and I am not sure if I have 
talked with them over the last couple of months on this topic, 
but we have had many, many conversations.
    Mr. Hill. Another area where I think Chairman Gensler has 
stumbled is his proposal on custody, which the bank regulators, 
like the Comptroller of the Currency and the Federal Reserve, 
don't support. Many of us on this committee are concerned about 
that. Do you support the SEC's rule on custody as proposed?
    Secretary Yellen. We have had some concerns about how it 
would impact banks, and that is something I have discussed with 
the Chairman.
    Mr. Hill. Thank you, Madam Secretary. Let me turn to 
Consumer Financial Protection Bureau (CFPB) Director Chopra 
suggesting that FSOC use, for the first time ever, Title VIII 
authority to address payment clearing and settlement 
activities. For example, he has proposed considering 
designating certain nonbank payment platforms as systemically 
important. Do you support that?
    Secretary Yellen. We have not taken a position on that. 
What I have said is that I think it is important for Congress 
to address this issue. We have made recommendations, and we 
think that is, by far, the preferred approach, and I have not 
looked into other alternatives. We stand ready to work on a 
bipartisan basis with you to take this on.
    Mr. Hill. Thank you. Would you agree with the Director that 
peer-to-peer (P2P) payment activity, or nonbank peer-to-peer 
payments, represent financial stability risks to the financial 
system overall--Zelle, Venmo, do you think peer-to-peer payment 
systems present a financial stability risk to the system?
    Secretary Yellen. I don't believe that is something that 
FSOC has highlighted, and I don't----
    Mr. Hill. I want you to reflect on that. I'd be happy to 
have your views in writing on that, but I think some FSOC 
members may not be viewing the designation of a nonbank 
activity as really a last resort, that we have regulatory 
systems and other rules to handle that, and I think this is a 
particular case.
     For example, do you think the Fed, having been the Chair 
there, has sufficient expertise, knowledge, and supervisory 
authority to deal with companies in different industries, like 
asset managers or cloud providers or big tech companies, if 
they were to be designated under that sort of an idea?
    Secretary Yellen. I do want to make clear that there is 
nothing about FSOC's approach that places designation as a 
preferred approach. There are many tools and only certain 
situations in which it would be appropriate. Congress 
designated in Dodd-Frank that if a company's material distress 
poses severe threats to financial stability, the Fed should be 
the regulator. And I certainly remember from my time there when 
several insurance companies had designated that the Fed build 
substantial expertise to----
    Mr. Hill. Thank you, Madam Secretary. I yield back.
    Secretary Yellen. ----iron that out.
    Chairman McHenry. The gentleman yields back. We will now go 
to the gentleman from California, Mr. Sherman, for 5 minutes.
    Mr. Sherman. You play an important role on foreign policy. 
I hope, in dealing with the International Monetary Fund (IMF), 
you make it clear that our support for Pakistan's request is 
focused on the fairness of their elections and on human rights 
and democracy in Pakistan in general. I hope you will do 
everything possible to make sure that any change at the IMF 
does not give Iran additional Special Drawing Rights (SDRs) or 
allow them to use their existing Special Drawing Rights to turn 
into currency that they can use. And finally, I hope that we 
see sanctions against the individual human rights watches 
identified with the Amhara regional forces in Northern 
Ethiopia, and that you will focus on Eritrea's terrorizing of 
the Tigray Region of Ethiopia.
    On taxation, I want to commend you on the Direct File 
Program, but you can go a step further. Senator Warren and I 
have focused on the 36 countries where they send you a pre-
populated return, and you can just click, ``yes,'' or you can 
change it, and, of course, it is voluntary. You don't have to 
look at it at all, and I look forward to the day when the vast 
majority of taxpayers can just click, ``yes,'' or maybe add the 
name of a newborn child and be done with their tax return.
    On crypto, you were instructed by the Infrastructure 
Investment and Jobs Act to have the rules in force for the 2023 
tax season. They are not in force, so you are behind on rules 
designed to enforce taxation on crypto transactions.
    But I want to focus your attention on the capital gains 
allowance. We provide, at very great cost to our Treasury, an 
incentive for investors to invest in stocks, chiefly real 
estate, because we want to build our economy, and there are 
arguments as to whether it is very effective or only slightly 
effective, but the reason for the capital gains allowance is to 
encourage investment that builds an economy. Can you think of a 
reason why we would, at a cost to the U.S. Government, 
incentivize people to invest in the Chinese economy? Why do we 
provide a capital gains allowance for investing in Chinese 
stock? Is there any reason you can think of?
    Secretary Yellen. In general, we have made a decision that 
capital gains should be treated similarly and only taxed when 
they are realized, and----
    Mr. Sherman. I am not talking about realization. You sell a 
Chinese stock at a profit. You pay a lower tax on that than 
your assistant pays on his or her earned income. Now, that is 
to encourage you to invest in the stock. Is there a national 
purpose in encouraging Americans to invest in Chinese equities 
that you are aware of, because I am not aware of any.
    Secretary Yellen. In general, I think the view has been 
that both inward and outward investment are economically 
beneficial. There certainly can be cases----
    Mr. Sherman. I want to move on to another issue.
    Secretary Yellen. There can be cases----
    Mr. Sherman. Encouraging the building of the Chinese 
economy is not thought by most Members of Congress to be a good 
use of Federal funds.
    On bank regulation, there is no easy answer. If our 
standards are too low, we could see the need for bailouts, as 
we did in 2008, which not only shakes the economy, it shakes 
the social fabric of our society. But if those standards are 
too high, we lose economic growth and we move money away from 
banks, which do an inadequate job of lending to small 
businesses in our districts, over to Wall Street, where they 
don't even, for the most part, pretend to do the job of 
investing in small businesses in our districts.
    We have the possible designation of systemically important 
financial institutions (SIFIs). When I was here and we crafted 
that definition, the thinking was that some companies have such 
liabilities that if they go bankrupt, it would destroy the 
whole economy. Is there a reason why you are focused on 
identifying entities as SIFIs that don't have substantial 
liabilities, such as mutual funds and money managers?
    Secretary Yellen. I'm sorry. We are certainly focused on 
the entire financial system. FSOC is not only focused on banks.
    Mr. Sherman. Right, but why would you designate an entity 
that doesn't have substantial liabilities?
    Secretary Yellen. We would only designate an entity if FSOC 
determined that its material distress would pose a severe 
threat to the financial stability of the United States.
    Mr. Sherman. Thank you very much.
    Mr. Barr. [presiding]. The gentleman from Oklahoma, Mr. 
Lucas, is recognized.
    Mr. Lucas. Thank you, Mr. Chairman, and Secretary Yellen, 
thank you for testifying today. During our discussion when you 
were here last before the committee, the Basel Endgame proposal 
had not been officially proposed by the banking regulators, and 
since then, over the past 6 months, there has been a robust 
response to the overwhelmingly negative consequences of the 
proposal. I am concerned that the Basel Endgame will undermine 
many of the steps taken by Congress to strengthen the financial 
system and support the economy.
    One example I have focused on is the impact on derivative 
end users. Back in 2010, I sat on the Dodd-Frank conference 
committee where there was bipartisan support to not 
disadvantage end users like farmers, ranchers, and small 
businesses. This has a long history of broad bipartisan 
support. Unfortunately, both of the proposals from the Federal 
Reserve will drive up the cost of hedging for end users and 
undermine the longstanding work done by Congress and this 
committee, and this is just one example of how the Fed's 
proposal moves us in the wrong direction.
    Secretary Yellen, at some point in the months ahead, the 
banking regulators will vote on a final rule. When we last 
discussed Basel Endgame, you said that Treasury would have the 
opportunity to provide feedback on this proposal. Given 
Treasury's mission, which is to maintain a strong economy and 
promote economic growth, has Treasury provided feedback to the 
Fed, number one, and number two, are you confident that the 
proposal will not undermine the resilience of the U.S. capital 
markets that are so critical to the economy?
    Secretary Yellen. I am not aware that Treasury has provided 
any formal feedback to the Fed on the Basel regulations. As you 
know, they have received many comments expressing concern about 
a number of different proposals that were embodied in the Basel 
III package, and I know that all of the banking agencies that 
publish are considering how to respond to those comments and 
concerns in trying to craft a final rule.
    Mr. Lucas. Are you concerned that the proposal will 
undermine the resilience of the U.S. capital markets?
    Secretary Yellen. I am not going to take a position on the 
details of the rule. I would just say, again, that I believe 
that there should be strong capital and liquidity standards to 
ensure that these institutions operate in a safe and sound 
manner, but it is up to the banking agencies to evaluate the 
specifics.
    Mr. Lucas. So, it is fair to say that whatever concerns 
might be at Treasury don't rise to the point of providing 
feedback. Okay. Another aspect of the Basel Endgame is the 
impact on the U.S. Treasury market. Consumers, businesses, 
governments, and the global financial system depend on a well-
functioning U.S. Treasury market, and of course, a healthy 
market for U.S. Treasuries is essential for U.S. Government 
operations. However, the proposal from the Fed could cause 
banks to pull back from the market-making activities in the 
Treasury's futures markets, which would raise costs for market 
participants. At the same time, just this past December, the 
Securities and Exchange Commission (SEC) finalized a rule that 
would increase central clearing for Treasury markets along with 
other reforms. So, you have the increased cost coming from the 
Federal Reserve, and you have the significant market structure 
reforms coming from the Securities and Exchange Commission, all 
impacting the U.S. Treasury market at the same time. I just 
worry that this could create a huge problem.
    Secretary Yellen, how have you engaged the SEC and the Fed 
to evaluate the cumulative impact of the proposals, and how can 
we be sure that there will be no significant market 
disruptions? ``Turbulence'' may be a better word for it.
    Secretary Yellen. We have formed an interagency working 
group that includes all of those agencies and Treasury and the 
New York Fed to focus on the resilience and operation of the 
Treasury market. It is critically important to us that the 
Treasury market is well-functioning, deeply liquid, and can 
enable the dollar to be the most secure asset of any in the 
world, and they are looking at specifics, including improved 
disclosure. They have taken the view that increased central 
clearing can make the Treasury market more resilient, and they 
are considering many factors.
    Mr. Barr. The gentleman's time has expired.
    Mr. Lucas. My time has expired but not my concerns.
    Mr. Barr. Thank you. The gentleman from Georgia, Mr. Scott, 
is recognized.
    Mr. Scott. Secretary Yellen, in its 2023 annual report, 
FSOC identified several market vulnerabilities related to 
commercial real estate lending. FSOC specifically identified 
significant concentrations in the commercial real estate for 
many of our regional and community banks as a risk to our 
entire banking system, which means our entire economy, and I 
want to ask you your thoughts on that.
    And you went a little bit further in that report: ``The 
vulnerabilities to the regional and community banks are 
negative trends in the office market and an erosion in high 
multifamily property values.'' Now, Secretary Yellen, we are 
talking about the backbone. These communities and regional 
banks are the backbone of our banking system for most of the 
American people.
    So my question to you is, given that the commercial real 
estate loans are the largest loan category for half of U.S. 
banks, and that one-quarter have commercial real estate loan 
portfolios that are significantly larger relative to their 
capital reserves, Secretary Yellen, should we not be concerned 
that a spillover effect could lead to banks lending less to 
other very important sectors of the economy, like our American 
people?
    Secretary Yellen. Thank you for that question. Commercial 
real estate is an area that FSOC focused on in its annual 
report, and it is something that the Financial Stability 
Oversight Council addresses in its meetings on a regular basis 
because, as you mentioned, many, especially smaller and 
regional banks, have concentrations of commercial real estate 
lending. I think office properties in some cities are of 
special concern because vacancy rates have increased, and there 
have been declines in property value.
    Mr. Scott. Yes, and my time is slipping by, but I have to 
ask your opinion on something that is very, very important to 
me, and that is the implementation of this Basel III Endgame 
proposal. As you know, the largest banks would be required to 
hold more capital for their actual risk taking, and I remain 
deeply concerned that this will further diminish the credit 
capacities and weaken the economic conditions of our American 
people. Tell me your thoughts on this Basel Endgame business?
    Secretary Yellen. The banking agencies, I know, have 
received many comments that have expressed this concern, and 
the heads of those agencies, the financial regulators, have 
expressed a commitment----
    Mr. Scott. I have such respect for you and your economic 
genius and prowess in the financial system, and I think the 
majority of our committee is very much against it. How do you 
feel about it? Are you with us on this? This will be terrible 
for our economy.
    Secretary Yellen. I think it is important to ensure that 
credit availability is not significantly diminished, and----
    Mr. Scott. But do you support this Endgame business with 
Basel?
    Secretary Yellen. I do believe it is important to have a 
strong banking system with adequate----
    Mr. Scott. I really wanted a, ``yes'' or, ``no.''
    Secretary Yellen. ----capital.
    Mr. Barr. The gentleman's time has expired. The gentleman 
from Texas, Mr. Sessions, is now recognized.
    Mr. Sessions. Mr. Chairman, thank you very much. Madam 
Secretary, welcome back. You are here today to discuss this 
annual report of 2023 from FSOC, and I want to refer to, if you 
have someone there giving you notes, page 10 of the report. But 
I'd like to start with, on February 16, 2022, then-Chairman of 
the Budget Committee, John Yarmuth, said in a well-understood 
statement, ``Congress need not worry about rising borrowing 
costs because we can print all the money we need.'' The 
national debt at that time was $30 trillion, it is now $34 
trillion, and the national debt will triple, just a projection, 
from $475 billion in 2022 to $1.4 trillion in 2032.
    At what point does this become a problem? I say this 
because your own report says on page 10, ``Higher interest 
rates and slowing economic growth--they correspond to each 
other--have increased nonfinancial corporate credit risk. If 
credit quality significantly worsens, a potential wave of debt 
defaults could lead us to large redemptions at investment funds 
with significant liquidity mismatches and, in turn, disrupt 
bond market functions. Moreover, such defaults may have a 
cascading effect across broader financial markets.''
    Madam Secretary, tell me about what Chairman John Yarmuth, 
a Democrat from Kentucky, said, and tell me your viewpoint.
    Secretary Yellen. Well, let me make sure. Your question was 
about the Federal debt, was it not?
    Mr. Sessions. Of course, it is. That's what John Yarmuth 
was talking about.
    Secretary Yellen. Yes.
    Mr. Sessions. The Chairman of the Budget Committee.
    Secretary Yellen. I think it is critically important that 
the U.S. be on a fiscally-sustainable path, and President Biden 
has put forward a series of budget proposals, most recently----
    Mr. Sessions. Spending proposals.
    Secretary Yellen. No, and also tax proposals and investment 
proposals that would, I believe, guarantee that we are on a 
fiscally-sustainable path.
    Mr. Sessions. Does that mean ever attempting to balance any 
one particular year over the next 50 years?
    Secretary Yellen. I don't think the budget needs to be 
balanced to be on a fiscally----
    Mr. Sessions. This is what I wanted to get at. Your 
tendency is to say, as Mr. Yarmuth did, that Congress need not 
worry about rising borrowing costs. As you know, Treasury and 
the Fed are going to have to go to the marketplace and pay an 
extra large amount of money because of the risk that our debt 
now poses to the United States. And they are paying record 
amounts for Treasury, which takes money that is in banks, local 
banks, out of local banks that provide small business loans, 
housing loans, that provide agricultural loans, that do all of 
these things. It is moving, shifting the marketplace literally 
$10 trillion from where it had been in stability now to the 
Fed.
    Secretary Yellen. I believe that----
    Mr. Sessions. And we are paying for that.
    Secretary Yellen. I agree with you that we need to be on a 
fiscally-sustainable path, and it is critical to reduce 
deficits in order to ensure that is the case. And that is why 
President Biden's budget for 2024 proposed an additional $2.5 
trillion of deficit reduction, coupled with investments in our 
economy, that are critical to ensure that we grow and collect 
tax revenues that are----
    Mr. Sessions. Thank you, Madam Secretary. I would tell you 
that putting 10 million new illegal people in this country, and 
living in Central Texas, seeing the Federal Government let all 
these people in, give them free ticket rides, cellphones, go to 
the city of their choice, live in housing to knock children out 
of their own school, protect them at Chicago International 
Airport, doing all these things is not wise management of our 
resources. Madam Secretary, I want to thank you for being here. 
And Mr. Chairman, I yield back.
    Mr. Barr. I thank the gentleman, and the gentlewoman from 
New York, Ms. Velazquez, is now recognized.
    Ms. Velazquez. Thank you, Mr. Chairman. Secretary Yellen, 
welcome to the committee, and thank you for being here. I just 
want to say that I have great respect for my friend and 
colleague, Mr. Scott, but he does not speak for all members on 
this side of the aisle on the Basel III proposal. I, for one, 
support stronger capital requirements at our largest 
institutions, and I want the record to reflect that.
    Ms. Waters. Thank you.
    Ms. Velazquez. Ms. Yellen, the FSOC's annual report 
identifies property insurance, which is becoming prohibitively 
expensive or inaccessible for homeowners and developers, as an 
increasing risk to financial stability. This is becoming a more 
pervasive issue in my community, particularly when it comes to 
affordable housing. How is FIO working with the National 
Association of Insurance Commissioners (NAIC) insurance 
carriers and State regulators to analyze this increasingly-
important issue?
    Secretary Yellen. Thank you for that question. We are very 
focused on rising insurance costs in particular areas of the 
country and the risks that it poses to homeowners, to banks, 
and to financial stability. FIO has been working to improve our 
understanding of the ways in which climate change is impacting 
the availability and cost of insurance coverage, and in early 
January, the Office of Management and Budget (OMB) approved a 
data collection effort by FIO that would be at the ZIP Code 
level to collect granular data to evaluate what is happening to 
insurance premiums and availability across the country. FIO 
looks to work with the NAIC, which is engaging in a similar 
effort to reduce the burden associated with this data 
collection, and that collaboration is ongoing.
    Ms. Velazquez. And how is FIO working to ensure that it is 
not duplicating efforts already conducted by the NAIC or State 
regulators?
    Secretary Yellen. There is a collaboration. The focus and 
need for data is slightly different for NAIC and FIO, but I 
think there is a good chance that they will be able to 
collaborate and go out with a single collection in order to 
collaborate and reduce burdens on insurance companies.
    Ms. Velazquez. And has the Council or FIO had any 
conversations with HUD on how these insurance premiums are 
impacting the operation of its affordable housing programs?
    Secretary Yellen. I believe that FIO and the Council have 
had discussions. I know they have had discussions with other 
agencies. I am not positive. I assume HUD would be in them, but 
I'd have to verify that.
    Ms. Velazquez. I will encourage your Department to really 
talk to HUD because we cannot address the affordability crisis 
that we have in housing in this nation without tackling the 
issue of the cost of insurance in our country.
    Secretary Yellen. Absolutely.
    Ms. Velazquez. Last February, the Treasury Department 
published a White Paper that identified several challenges in 
the financial services sectors' growing reliance on third-party 
cloud service providers. In response, an executive steering 
committee was launched by FSOC. How has the executive steering 
committee worked with the big three service providers and the 
member agencies to reduce identified challenges?
    Secretary Yellen. The executive steering group has been 
very active on this issue. They have formed, I believe, nine 
different public-private workstreams. Each one is looking at a 
specific gap that was identified in the report that was issued 
last February, and they are trying to understand, also, what 
authorities the existing regulatory agencies have and how they 
have been using them, and they will release recommendations 
later this year.
    Ms. Velazquez. Thank you.
    Mr. Barr. The gentlelady's time has expired. The gentleman 
from Missouri, Mr. Luetkemeyer, who is also the Chair of our 
Subcommittee on National Security, is now recognized.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. Welcome, 
Secretary Yellen. It's good to see you today. As Vice Chair of 
the House Small Business Committee, it is disappointing that 
you still, almost 3 years from your statutory requirement to 
show up at a Small Business Committee hearing and give a report 
on the Paycheck Protection Program (PPP), have not done that. 
It is kind of amazing that you and your Administration continue 
to pick and choose which laws you want to obey, and which ones 
you want to ignore, so I'm very disappointed.
    My first question, though, deals with the World Bank. I had 
a conversation last week with the president of the World Bank, 
and he was talking about the need to increase capital. 
Unfortunately, that same board continues to give China 
preferential treatment and allows the world's second-largest 
economy to be considered a developing nation. My question to 
you is, will you commit to making a capital increase 
conditional on graduating China from World Bank assistance and 
not allowing Beijing's voting power, increasing the voting 
power, at the institution?
    Secretary Yellen. Let me first say we are not looking for a 
capital increase at this time for the World Bank. We do 
believe----
    Mr. Luetkemeyer. I am not saying you did. They are looking 
to do that, so my comment is, let's not do that unless you can 
get China, who wants to also increase their share, in a corner 
and not allow them to continue to be a country that gets 
assistance from the World Bank when they have the second-
largest economy in the world, and then allow them to increase 
their voting.
    Secretary Yellen. Let me say we are strongly opposed to the 
World Bank lending to China. We have pushed the World Bank and 
other MDBs to reduce and eliminate their lending volume to 
China.
    Mr. Luetkemeyer. Okay. Well, my comment is we have to work 
harder. We have to make sure they don't have access to that 
Bank. It is very important.
    You made a comment a minute ago that I really appreciate 
from the standpoint of the concern I have with AI. It is a 
wonderful technology, hopefully it can do wonderful things, but 
it can also be used for some bad stuff. As we saw with Silicon 
Valley Bank, social media, and the 24-hour news cycle, 
suddenly, within 10 hours, had $42 billion run out of the bank 
as a result of a tweet and social media following that around. 
AI could do the very same thing, and I am concerned about that 
and have some bills to address that. I haven't gotten a hearing 
on them yet, but hopefully that will happen soon.
    Along those lines, though, you talked about FSOC's role in 
these three banks and how you were able to help resolve the 
situation. My question to you is, what has FSOC done to fix the 
situation with these banks that are upside down with their 
interest rates? Their business models are off. They should be 
regulated differently. They should be forced to change how they 
are operating. Are you doing that?
    Secretary Yellen. The responsibility for supervision of 
these banks and regulation rests with the banking agency.
    Mr. Luetkemeyer. I agree with that, Madam Secretary. The 
problem is you, as the Chair overseeing the Comptroller, also 
have the ability to go in and change these business models. Are 
you doing that with the national banks that you oversee?
    Secretary Yellen. The Office of the Comptroller of the 
Currency (OCC) is an independent agency within Treasury. The 
FSOC is trying to understand and discusses the extent to 
which----
    Mr. Luetkemeyer. Madam Secretary, FSOC has a tremendous 
amount of control over this. They can dictate how these things 
are done----
    Secretary Yellen. That is not----
    Mr. Luetkemeyer. ----how regulatory attitudes are toward 
situations. My question is, are you taking an active role in 
trying to get the banking models that are upside down and 
beyond the norm--are you getting them back in order?
    Secretary Yellen. I would say that the supervision of 
interest rate risk and liquidity risk is a responsibility of 
the banking agencies, and----
    Mr. Luetkemeyer. I agree, but you oversee the banking 
agencies.
    Secretary Yellen. We do not----
    Mr. Luetkemeyer. I am hoping that you have some directions 
to those agencies to----
    Secretary Yellen. We do not oversee the agencies. We 
identify risks and sometimes make recommendations to agencies 
about actions that they should take.
    Mr. Luetkemeyer. With all due respect, that is----
    Secretary Yellen. And they do have frameworks for managing 
liquidity----
    Mr. Luetkemeyer. Okay. I have one more----
    Secretary Yellen. ----capital interest rate risk, and----
    Mr. Luetkemeyer. ----question to ask you here very quickly. 
Last week, Chair McHenry, Mr. Jordan, Mr. Huizenga, and I sent 
a letter to Financial Crimes Enforcement Network (FinCEN) 
Director Gacki highlighting how FinCEN, an agency created to 
promote our national security, was using its authorities to 
target law-abiding citizens with countervailing political 
views. These allegations are reminiscent of the Obama 
Administration's Operation Choke Point that I spent years 
investigating as the Chair of our Financial Institutions 
Subcommittee. I am just very concerned about that. We are going 
to have Director Gacki here very soon, and we are going to ask 
her about her involvement with you and your response to that.
    Mr. Barr. The gentleman's time has expired. The Secretary 
is directed to respond to that question in writing, if she 
could.
    Secretary Yellen. Yes, I will.
    Mr. Barr. Thank you.
    Mr. Barr. The gentleman from Missouri, Mr. Cleaver, is now 
recognized.
    Mr. Cleaver. Thank you, Mr. Chairman. Madam Secretary, 
thank you for being here today. I want to follow up on my 
friend and colleague, Mr. Scott's, earlier question. I think he 
started out in this direction, and then was running out of time 
and went in another direction.
    In my community, in Kansas City, Missouri, there is a great 
deal of concern, and I would imagine around the whole country, 
that even though the pandemic is not taking all of the lives 
that it was taking a couple of years ago, its impact is still 
here, particularly on the economic level. I think of that Trepp 
Company analysis of commercial real estate, and they issued a 
frightening report that there is about $448 billion worth of 
loans that matured last year, $270 billion of which were from 
banks, and we have some people breaking leases, and we have 
others trying to renegotiate leases.
    In my estimation, we have a problem with our commercial 
real estate, and I think that is where Mr. Scott was going, 
that it could impact other components of the economy. Do you 
have a concern about where commercial real estate is and may 
continue to go?
    Secretary Yellen. Yes, I do have a concern about commercial 
real estate. We discuss it in the FSOC annual report, and FSOC 
has been quite focused on it. The banking supervisors have also 
been focused on commercial real estate and are working closely 
with the banks they supervise to discuss ways to manage and 
work with borrowers who have problems. They are, in some cases, 
working to make sure that loan loss reserves are built up to 
cover losses, that dividend policies are appropriate, and that 
liquidity is adequate. The higher interest rate environment 
and, in some cases, particularly in the case of office 
buildings, shifts in work patterns due to the pandemic, coupled 
with many commercial real estate loans coming due and needing 
to be refinanced in a context where vacancy rates in some 
cities are quite high, is going to put a lot of stress on the 
owners of these properties. And the banking agencies are very 
focused on helping the banks manage these situations.
    Mr. Cleaver. So, you are concerned but not distressed?
    Secretary Yellen. Yes, I am concerned. I believe it is 
manageable, although there may be some institutions that are 
quite stressed by this problem.
    Mr. Cleaver. Thank you. Madam Secretary, are you familiar 
with Larry Kudlow, the former Director of the National Economic 
Council?
    Secretary Yellen. Sure.
    Mr. Cleaver. Three days ago, he conceded that his 
prediction of a recession was wrong and admitted that the U.S. 
economy is doing much better than expected under President Joe 
Biden, and he said that on Fox News. He offered a mea culpa 
because if you look at some of his comments previous to that, 
everything was horrible. Do you agree with Mr. Kudlow that the 
U.S. economy is headed in the right direction?
    Secretary Yellen. I absolutely believe it is headed in the 
right direction. Our growth is extremely strong. The labor 
market is at least as strong as it was prior to the pandemic. 
It has been 50 years since we have had a string of unemployment 
rates this long, under 4 percent, and job creation remains 
utterly robust. More people are participating in the labor 
market----
    Mr. Barr. The gentleman's time has expired.
    Secretary Yellen. And inflation is way down.
    Mr. Barr. The gentleman's time has expired. The gentleman 
from Michigan, Mr. Huizenga, who is also the Chair of our 
Oversight and Investigations Subcommittee, is now recognized.
    Mr. Huizenga. Thank you, Mr. Chairman, and I will just note 
to my friend from Missouri that when the government is throwing 
that much money into the economy, yes, it has been propped up. 
I will also note it is so strong that the Federal Reserve 
cannot lower interest rates with unexpected job growth in those 
areas, so we are seeing inflation continue.
    Secretary Yellen, I want to very briefly touch on this--I 
think I wrote down a quote of yours, that you are not going to 
take a position on the details of the rule. I am talking about 
Basel III. Mr. Lucas responded, ``So any concerns don't rise to 
the level of feedback.'' Mr. Scott brought it up. A number of 
us have brought it up, on both sides of the aisle. So who are 
you giving your thoughts to on Basel III, because clearly, with 
your background--Federal Reserve, FSOC, Treasury--you must have 
thoughts about Basel III. You are not willing to share them 
with us, but who are you sharing those thoughts with?
    Secretary Yellen. I meet on a regular basis with all of the 
heads of supervisory agencies, including the OCC, the FDIC----
    Mr. Huizenga. Okay. And the President, I would assume, too? 
You are sharing that with the President, your thoughts?
    Secretary Yellen. I haven't had a meeting with the 
President on this specific topic.
    Mr. Huizenga. Then, I am left to assume that we are just to 
be left in the dark until things get sorted out, correct?
    Secretary Yellen. They have put out a notice of proposed 
rulemaking. They are evaluating----
    Mr. Huizenga. I know that, but you have had a number of 
people on both sides of the aisle asking your opinion, your 
learned, educated, experienced opinion about it, and you have 
refused to offer any of those insights to us. So, I can't come 
to any conclusion other than you are sharing those insights 
with others, but you are not willing to share them with 
Congress, which is your choice. I think it is a bad choice, but 
that is your choice.
    I want to very quickly take you down a path, and I am 
trying to be an equal opportunity questioner on this because I 
just asked Secretary Fudge this not that long ago. With the 
disaster at the FDIC under Marty Gruenberg's leadership and the 
culture--I am sure you saw the article that all of us saw in 
November regarding the unacceptable behaviors that have been 
happening there--I am concerned how it might impact their 
mission and, most importantly, how it can potentially spill 
over into the safety and soundness of our financial system. 
Following those revelations at the FDIC, did you take any steps 
at Treasury to make sure that Treasury isn't suffering from 
some of that same culture.
    Secretary Yellen. We have a rigorous process for reporting 
an investigation of----
    Mr. Huizenga. Okay. Nothing new necessarily, and I am not 
trying to be accusatory. I am not saying that there is a 
culture problem under your leadership. I am just curious if 
that prompted you to respond, and since the FDIC is part of 
FSOC as well, there are multiple times that you would have 
interacted.
    Secretary Yellen. I am not aware of any such allegations at 
Treasury.
    Mr. Huizenga. Okay. I am not either. That is not what I am 
saying. I just wanted to be clear. I am asking everybody, when 
they saw the culture problems at the FDIC, did that prompt 
anybody to change behavior or double down on making sure that 
whistleblowers are protected and those kinds of things.
    Secretary Yellen. We certainly believe in whistleblower 
protections and having in place systems that guard against the 
kind of thing that is alleged.
    Mr. Huizenga. Good. I will accept that answer. I have a 
minute-and-a-half left here and I want to shift topics to the 
CFRAC Committee that was established almost a year-and-a-half 
ago, the Climate-related Financial Risk Advisory Committee 
under FSOC. It looks like, according to the website, they have 
met twice: March 7th of 2023 and July 18th. Your report devotes 
a lot of time to the potential impacts of climate change. In 
fact, you say that is one of the things the Council is focused 
on: Member agencies enhancing assessment efforts and increasing 
coordination around climate-related financial stability risks. 
That is in your written testimony. Has there been a problem? 
Has there been a lack of cooperation or coordination?
    Secretary Yellen. No, I think CFRAC is----
    Mr. Huizenga. Then, why are you having to enhance those 
assessment efforts?
    Secretary Yellen. All of the agencies are increasingly 
focused on understanding the risks relating to climate change.
    Mr. Huizenga. Okay.
    Secretary Yellen. And it is appropriate for them to work 
together to exchange information.
    Mr. Huizenga. Okay. In my closing seconds here, are there 
any CFRAC meetings that have not been listed on the website?
    Secretary Yellen. Not to the best of my knowledge.
    Mr. Huizenga. Could you check on that and please get back 
to me?
    Secretary Yellen. Certainly.
    Mr. Huizenga. And I guess I will finish with this. I am 
sure you are aware that the SEC has been working on their 
climate rule for 2 years. Do they consult or do they just jam 
the rest of FSOC like they have been jamming those whom they 
are trying to regulate?
    Mr. Barr. The gentleman's time has expired.
    Secretary Yellen. The SEC's rule, I am supportive of their 
requiring disclosure on----
    Mr. Barr. Any additional comments can be submitted for the 
record.
    Mr. Huizenga. Thank you, Mr. Chairman.
    Mr. Barr. Thank you.
    The gentlewoman from Ohio, Mrs. Beatty, is now recognized.
    Mrs. Beatty. Thank you, Mr. Chairman, and Ranking Member 
Waters. Secretary Yellen, thank you so much for being here 
today testifying, and, also, I want to take this moment to 
thank you for clearly outlining for us risk factors, but then 
identifying the five areas that you are working on with the 
risk factors and for being very transparent about that, and 
also for the work that you do to keep our financial system safe 
and secure.
    I would like to start with climate-related financial risk. 
The FSOC report identifies climate change as an emerging and 
rising threat to the United States' financial stability. I, 
too, am concerned about this threat, especially considering the 
fact that low-income and minority households are more likely to 
face greater climate risk. Can you explain why these 
communities are at greater risk and how failing to address 
climate risk can exacerbate certain disparities that are 
already at risk, such as housing values and the costs 
associated with homeownership in some communities?
    Secretary Yellen. I believe there is a large body of 
research which shows that low-income communities are more 
exposed to some of the physical impacts of climate change and 
that they may be less able to afford protections, whether it is 
for their home or insurance, that are necessary to guard 
against it, so it is a severe risk to low-income communities.
    Mrs. Beatty. Thank you. Let me turn now to FSOC's guidance 
on the designation of nonbanks as systemically important. First 
of all, let me thank you for your leadership in issuing this 
guidance. As we see increasingly large roles that nonbanks are 
playing in the financial system, it is clear that any strategy 
to protect financial stability must also cover nonbanks. 
Nevertheless, there have been some concerns about due process 
for nonbanks that are designated as systemically important. 
FSOC's guidance emphasizes that the nonbank designation process 
will entail engagement with both the company and its current 
financial regulator, if it has one.
    Can you describe what other due process protections exist 
for the company, for example, the ability to request a hearing, 
meetings with FSOC staff, or the need for a two-thirds vote for 
destination in annual FSOC reevaluations?
    Secretary Yellen. I think you just listed the protections 
the company would be provided with, with a great deal of 
information from FSOC. If it completed stage one and entered 
stage two, it would have the opportunity to provide any 
information that it thought was eligible, the right to a 
hearing, and, as you said, designation requires a two-thirds 
vote, including the vote of the Chair.
    Mrs. Beatty. And lastly, when I was the Chair of our 
Diversity and Inclusion (DEI) Subcommittee, and you would come 
before the subcommittee--I think it is important, again, for me 
to thank you--you always had some of the highest numbers, or 
you admitted what you were doing and working on it.
    Secretary Yellen. Thank you.
    Mrs. Beatty. In light of all that is happening across this 
country, including in financial institutions, I am concerned 
about the effect that DEI rollbacks at financial institutions 
will have on our financial stability and on access to financial 
services in low-income or marginalized communities. I don't 
know if you have any comments or are you concerned when we are 
still struggling in America to make it look like America?
    Secretary Yellen. Certainly. Let me say the Biden 
Administration, Treasury, and other agencies I am aware of, we 
have a robust and committed agenda to promote diversity in all 
of the work we do, not only in terms of our hiring, but in 
terms of all of the programs. For example, at Treasury, we have 
undertaken research that you are probably well aware of which 
shows that low-income individuals, African Americans, are 
disadvantaged by the way the earned income tax credit has been. 
So, we are trying root out----
    Mr. Barr. The gentlelady's time has expired.
    Mrs. Beatty. Thank you, Mr. Chairman.
    Thank you, Secretary Yellen.
    Mr. Barr. The gentlelady from Missouri, Mrs. Wagner, who is 
also the Chair of our Subcommittee on Capital Markets, is now 
recognized.
    Mrs. Wagner. Thank you, Mr. Chairman. Secretary Yellen, as 
Treasury Secretary, you championed requirements that any 
deposit flows into Americans' bank accounts totaling as little 
as $600 are to be reported to the IRS. Increasingly, we are 
hearing that the Federal Government is suggesting that banks 
search private financial transactions using highly-partisan 
political terms, or check to see if customers made purchases 
that could be associated with legal sales of firearms or even 
religious texts. My question is this: Has Treasury, including 
FinCEN or Federal banking agencies like the Fed, the FDIC, or 
the OCC, instructed financial institutions to search Americans' 
legal transactions in attempts to surveil their purchases?
    Secretary Yellen. We received a letter from you, I believe, 
on this topic, and we intend to investigate fully and to 
respond.
    Mrs. Wagner. Have you instructed banks, financial 
institutions, to provide this information?
    Secretary Yellen. FinCEN's job is to work with financial 
institutions to make sure they instruct----
    Mrs. Wagner. Are they instructing, ma'am, financial 
institutions to search Americans' legal transactions in 
attempts to surveil their purchases?
    Secretary Yellen. I promise a thorough look into everything 
that has occurred----
    Mrs. Wagner. Well, this is really concerning, and I would 
hope that you get to it just as quickly as possible, Secretary 
Yellen, I am going to give this a shot, too, since we all have, 
on both sides of the aisle. The Financial Stability Oversight 
Council, which you chair, Madam Secretary, you chair FSOC----
    Secretary Yellen. I am aware of that.
    Mrs. Wagner. In 2023, FSOC put out their annual report 
plainly stating that, ``The U.S. banking system remains 
resilient overall,'' and, ``U.S. banks continue to have sound 
levels of regulatory capital.'' Do you still stand by these 
statements, ma'am?
    Secretary Yellen. As an overall statement, I do.
    Mrs. Wagner. Then, what is the need for the proposed 
massive increases in regulatory capital requirements from the 
Fed, the FDIC, and the OCC?
    Secretary Yellen. They have proposed regulations to enhance 
the safety and soundness of----
    Mrs. Wagner. But you just said that the safety and 
soundness is there. It is resilient. They are well-capitalized. 
It is clear, and as a Chair, your report.
    Secretary Yellen. There are risks that their guidance 
suggests could be handled better than it has been.
    Mrs. Wagner. Okay. Let me move on. Secretary Yellen, in a 
2019 letter to Secretary Mnuchin, and in 2021 testimony to the 
Senate Banking Committee, you said that, ``Activities-based 
regulation is the appropriate approach for asset management.'' 
Given the FSOC's recent guidance regarding the designation of 
nonbank financial institutions as systemically important, do 
you still stand by those public statements?
    Secretary Yellen. I am not sure that I made such a sweeping 
statement as you read.
    Mrs. Wagner. I have it right here. It is a letter. I would 
like to submit it for the record, please. This is your letter 
with those words, ma'am.
    Mr. Barr. Without objection, it is so ordered.
    Mrs. Wagner. So, I would tell you to go back to your 2019 
letter, and then again to your Senate Banking testimony in 
2020.
    Secretary Yellen. 2019, did you say?
    Mrs. Wagner. In 2019, in a letter to Secretary Mnuchin, and 
in 2021, in your testimony to the Senate Banking Committee, you 
said, ``Activities-based regulation is the appropriate approach 
for asset management.'' I want to know why FSOC is saying that 
designations of nonbank financial institutions are systemically 
important. Clearly, others don't think so. What do you believe 
FSOC did wrong that led to the courts vacating the MetLife 
designation in 2016, ma'am?
    Secretary Yellen. Look, there is no preferred approach to 
how to handle a financial stability risk that has been 
identified. In some cases, and perhaps this is what I was 
referring to, if that is an accurate quote, we----
    Mrs. Wagner. It is.
    Secretary Yellen. ----are, for example, concerned about 
risks associated with money market funds. We have been----
    Mrs. Wagner. Are you doing a cost-benefit analysis, 
anything?
    Secretary Yellen. Excuse me. We have been concerned about 
the pressures on open-end bond funds that can be forced to sell 
less-liquid assets. These are industry-wide practices that 
are----
    Mrs. Wagner. A court has already vacated you once, ma'am.
    Secretary Yellen. ----addressed with an activity-based 
approach.
    Mrs. Wagner. Mr. Chairman, I yield back.
    Secretary Yellen. The SEC----
    Mr. Barr. The Secretary may respond in writing with the 
remainder of the answer.
    The gentlelady's time has expired. The gentleman from 
Massachusetts, Mr. Lynch, is now recognized.
    Mr. Lynch. Thank you, Mr. Chairman. Madam Secretary, would 
you like additional time to express your thoughts there? You 
were sort of cut off. Rather than adding them in writing, would 
you like some time to respond?
    Secretary Yellen. Yes, if I could just----
    Mr. Lynch. Or we could move on, it's your choice.
    Secretary Yellen. Thank you. If I could finish the thought.
    Mr. Lynch. That would be great, yes.
    Secretary Yellen. Sometimes, activity-based regulation is 
the appropriate approach when there is an industry-wide 
practice of concern, as, for example, as the situation has 
been, in the situation with money market funds or with open-end 
bond funds. However, sometimes the risks have to do with a 
particular institution. For example, the largest U.S. banking 
organizations recognize that their failure could result in a 
threat to financial stability. The same could be true of a 
nonbank institution, and in that case, designation is 
appropriate, but the appropriate form of response by FSOC 
depends entirely on the specifics of a situation and the 
threat. And I thank the gentleman for his time.
    Mrs. Wagner. And I thank the gentleman for his time.
    Mr. Lynch. Reclaiming my time, that makes perfect sense, 
Madam Secretary. Recently, FSOC identified the use of 
artificial intelligence in financial services as an emerging 
vulnerability in the U.S. financial system, and not very long 
after that, Chairman McHenry and Ranking Member Waters created 
a bipartisan working group on artificial intelligence, and I 
have the good fortune of being the top Democrat on that working 
group.
    I have some concerns. There are some opportunities, I 
think, to use artificial intelligence in a thoughtful way. I 
think about the work that FinCEN does in trying to analyze 
suspicious activity reports (SARs) and currency transaction 
reports (CTRs), and how they might analyze those. But I think 
there is also a risk on the explainability end of some of these 
algorithms that are being used, and also the fact that many 
smaller firms, rather than developing their own data sets and 
developing their own artificial intelligence, are just simply 
buying them. And I am not quite sure that they have the 
expertise or the personnel to make sure that technology is used 
in a compliant way with existing financial regulation and laws. 
Do you have a sense of whether we have the capacity in the 
industry to onboard much of this artificial intelligence that 
vendors are offering to financial firms?
    Secretary Yellen. We are concerned. This year, FSOC 
identified the use of AI in the financial sector as a potential 
financial stability risk, and at the moment, we are trying to 
understand what the risks are, some of them are related to, as 
you said, explainability when models are used and generate 
outputs. I believe the CFPB has been clear that financial 
institutions, when they take credit actions, have to explain to 
the customer what the reason is and not to be able to say, 
well, an AI system generated this result. But there are a whole 
variety of risks to customers, to cyber, and we are trying to 
build our expertise and work with the financial sector to 
address these risks.
    Mr. Lynch. At least from Treasury's position, do you accept 
the fact that when a financial firm acquires AI, that AI 
company, that vendor, is now a covered entity under financial 
services laws? Is that accepted, or is that still in dispute?
    Secretary Yellen. I am not sure. I need to get back to you 
on that.
    Mr. Lynch. Okay.
    Secretary Yellen. But certainly, when it comes to third-
party providers, the banking regulators, for example, do have 
authority to make sure that----
    Mr. Barr. The gentleman's time has expired.
    Secretary Yellen. ----are being----
    Mr. Barr. The gentleman's time has expired.
    Mr. Lynch. Thank you, Madam Secretary.
    Mr. Barr. I now recognize myself for 5 minutes. Madam 
Secretary, you tout a historic recovery, a healthy labor 
market, and economic strength, and Larry Kudlow's name was 
invoked earlier in this hearing, the former Trump White House 
Economic Advisor. I know Larry Kudlow, and, yes, he 
acknowledged that we are not in a recession right now, and I 
wouldn't presume to speak for Larry Kudlow, but I do think he 
would agree with me that asking Americans to feel good about 
Bidenomics is like asking them to smile during a root canal. 
The discomfort is just too hard to ignore.
    Americans continue to suffer from the effects of 40-year 
high inflation experienced throughout the Biden term so far, 
including lingering high prices. And the Administration may 
wish to tout inflation numbers coming down, but, Madam 
Secretary, you are an economist, and as you know, inflation, 
which is the rate of increase in prices, should not be confused 
with the overall level of prices. And prices have continued to 
rise even as the rate of inflation has fallen since the Fed 
began an aggressive program of monetary tightening and since 
House Republicans put a stop to Washington's spending spree.
    As a result, today, even with the decline in the rate of 
price increases, a family of four is paying $15,000 more per 
year just to purchase the same goods and services compared to 
the day President Biden took office. Yet, the Administration's 
plan to fix inflation caused by too much spending is even more 
spending. That is why the Inflation Reduction Act is perhaps 
the most misnamed legislation in American history, but this is 
a supply/demand mismatch. Too much spending created excess 
demand. Climate obsession constrained the supply of energy. But 
now, the Administration and the Fed are proposing to constrain 
the supply of credit, which will exacerbate inflation through 
this Basel III Endgame, precisely when corporate and commercial 
real estate borrowers will need to refinance at higher rates.
    Secretary Yellen, I want to ask you about Basel III. The 
heterogeneity and business model diversity within the banking 
sector distributes and diffuses risk across the system and, I 
believe, contributes to systemwide financial stability. The 
Basel III Endgame proposal would de facto repeal regulatory 
tailoring, subjecting Category 3 and 4 regional banks to one-
size-fits-all standards that currently apply to G-SIBs, 
eliminate the use of internal risk models, and transition the 
industry and regulators toward a standardized framework, 
reducing business model diversity, and push financial 
intermediation and lending outside of the bank regulatory 
perimeter. The banking industry will get smaller and more 
concentrated as a result. How does any of this reduce systemic 
risk?
    Secretary Yellen. Having strong capital and liquidity and 
resolution standards, I believe, does diminish systemic risk, 
and I think we have seen a clear example of this in the ability 
of the banking system to weather the pandemic.
    Mr. Barr. Yes, ma'am, and reclaiming my time.
    Secretary Yellen. But there are----
    Mr. Barr. Quickly, reclaiming my time, you have said many 
times that our banking system is currently well-capitalized. Do 
you agree that a less-diverse banking system, a barbell banking 
system, banks under $100 billion not directly affected by this 
proposal and Wall Street too-big-to-fail fail banks but no 
regional banks because of the forced consolidation this would 
provide, and less-diverse business models that this proposal 
will produce--do you believe that strengthens financial 
stability or undermines stability?
    Secretary Yellen. I think we benefit from having a diverse 
banking system with institutions that meet different needs of 
different firms----
    Mr. Barr. I agree.
    Secretary Yellen. ----and different households.
    Mr. Barr. And, Secretary----
    Secretary Yellen. Banking agencies have received extensive 
comments on all of these issues, and----
    Mr. Barr. I know, and just reclaiming my time because I 
only have a minute left, I agree with you that diversity and 
heterogeneity in the banking system and diverse business models 
actually diffuses risk, and FSOC should consider that as they 
consider Basel III Endgame.
    So to my final question, continuing with this topic of 
consolidation, which I believe Basel III would accelerate, the 
OCC's recent proposal on mergers and acquisitions would ban 
mergers for nationally-chartered banks, even if it is a 
transaction for a smaller community development financial 
institution (CDFI) or adding essential technology expertise. 
Even the smallest banks would face new scrutiny and prolonged 
delays of mergers that could threaten their viability. The 
OCC's proposal will increase the likelihood of costly and 
disorderly bank failures and decrease competition for G-SIBs. 
Secretary Yellen, won't this proposal increase systemic risk 
and reduce banking services?
    Secretary Yellen. I'm sorry. I think this is a question for 
the Acting Comptroller of the Currency rather than----
    Mr. Barr. My time has expired, but I think it is an FSOC 
issue, the fact that you would not have orderly consolidation 
and resultant bank failures. That is a systemic risk issue for 
you, Madam Secretary.
    With that, my time has expired, and the gentleman from 
California, Mr. Vargas, is now recognized.
    Mr. Vargas. Thank you very much, Mr. Chairman. Thank you 
very much, Madam Secretary, for being here. I appreciate it 
very much. I am going to try a couple of questions here. First 
question, a trivia question, who was the last Republican 
President who ran a budget surplus?
    Secretary Yellen. I can't think of one, but----
    Mr. Vargas. Think hard, because I don't remember, but every 
time I hear----
    Secretary Yellen. I certainly remember that Bill Clinton 
did.
    Mr. Vargas. Oh, Bill Clinton. Was he a Republican?
    Secretary Yellen. I don't believe so.
    Mr. Vargas. I don't believe so, either. Yes, it is 
interesting that every time you get up here, you hear these 
guys on the other side start touting their fiscal 
responsibility, and yet, every time they have a President, they 
either jack up the deficit, ruin the surplus, or destroy the 
economy, and then we come in and we fix it, and then they are 
upset, and once again, they become fiscal hawks. I do have 
something I have to get off my chest, though, about you, and 
that is, I think you are probably the smartest person who comes 
and testifies before us, and I think most people would agree 
with that.
    Secretary Yellen. Thank you.
    Mr. Vargas. And yet, every time you used to come and they 
used to beat you up on inflation, you never put it in the 
context of what was happening in Europe and the rest of the 
world. You would simply try to explain inflation within our own 
country, and it used to drive me nuts, because we are doing 
better than the rest of the world.
    Secretary Yellen. We are.
    Mr. Vargas. You never said that, and I was too far down the 
totem pole here to ever be able to get to ask you that 
question.
    Secretary Yellen. If you look at the United States vis-a-
vis other advanced countries, we have by far the strongest 
growth. Inflation has fallen more in the United States than in 
any of these other advanced countries, with the exception of 
Japan that has a different set of issues. And importantly, real 
wages, inflation-adjusted wages--I believe we are the only 
country that, since the pandemic, has seen those increase. And 
I think, according to our calculations, if you compare today 
with 2019 before the pandemic, the typical American household 
has enjoyed wage increases large enough that the median worker 
is able to buy the same basket of goods as in 2019 with $1,400 
left over to spend or save. So, we have gotten ahead in the 
United States. It has been an equitable recovery, and includes 
even the strongest gains for low-income people.
    Mr. Vargas. I agree with all that, and I wish you would 
have said it before, because it always used to annoy the heck 
out of me because you would lead with your chin. Again, I think 
you are the smartest person here, and maybe the good thing is 
that you are not political, and that is why I think you would 
lead right into their questions, which were political 
questions. They were really sophist, if you study the Bible. 
They were really asking you questions to try to do a, 
``gotcha,'' and it always used to annoy the heck out of me that 
you never explained it this way. I am glad you did today.
    I do want to talk about climate. That is the issue that has 
also driven me mad these last 2 decades. I have been preaching 
this for a long time, saying we have to do something about it. 
I did work in the insurance industry for a while, and whenever 
you had a big event, we called a cat or catastrophe, and you 
numbered them by a year, catastrophe: 5-year, 15-year, 20-year, 
25-year, 50-year or 100-year. We just had what they would call 
a thousand-year in San Diego, and now we are having what we 
call a hundred-year event again in San Diego. There are no 
longer cats of 100 years. They are happening all the time, and 
it is the weather. This is a real risk.
    Secretary Yellen. Absolutely. It is clear that is exactly 
what we are seeing, and vulnerable parts of the country, 
whether it is California or Florida, in some cases in New York, 
or Louisiana, we are getting priced out of insurance. Either 
the rates are becoming unaffordable or insurance companies 
don't want to bear the risk, can't reinsure adequately and are 
pulling out.
    Mr. Vargas. There is a line in insurance----
    Secretary Yellen. And it is causing tremendous problems.
    Mr. Vargas. ----Madam Secretary, that you should know. 
There is never a bad risk, only a bad price, and when they take 
a look at this and they see what it is going to cost them, 
these actuaries, they are soulless people. They sit in a room 
and they find out what it is going to cost them, and they are 
not in the business of losing money. And they look at Florida, 
they look at these places and say, we are not going to lose 
money. That is why they don't want to insure there.
    Secretary Yellen. Absolutely.
    Mr. Vargas. They are soulless people. I am not saying they 
are bad people. They just don't have a soul.
    [laughter]
    Secretary Yellen. They don't understand insurance.
    Mr. Vargas. My time is up. Again, I thank you very much.
    Chairman McHenry. Okay. There is bipartisan laughter at 
actuary humor. We will now go to the Chair of the House Small 
Business Committee, Mr. Williams of Texas.
    Mr. Williams of Texas. Thank you very much. I am a car 
dealer, not an insurance guy, so let me put that out there.
    The crisis at our southern border has spiraled out of 
control, and the Biden Administration has done little to 
nothing to secure the border and keep Americans safe. This 
increase in illegal immigration raises concerns on how the 
increase in migrants coming down across the border is impacting 
our financial network and opening the door to financial crimes. 
Money laundering, drug and human trafficking, and financial 
fraud will continue to plague our communities if nothing is 
done.
    I recently introduced the Evaluating Financial Impacts of 
Illegal Immigration Act, which requires FSOC to include illegal 
immigration risk, an emerging threat to our financial system, 
in their annual report and provide recommendations to mitigate 
these risks. Our States and cities are not equipped to deal 
with the influx of millions of migrants who put a significant 
strain on our public resources. We must hold government 
agencies accountable to report on how illegal immigration 
impacts Main Street and the larger financial system.
    So, Secretary Yellen, this will be easy. Just yes or no, do 
you agree that illegal immigration is a potential threat to our 
financial system? Yes or no?
    Secretary Yellen. I can't answer it just yes or no. You 
have pointed out some risks that are associated with 
immigration, and whether or not that is a threat to our 
financial stability is a complicated determination.
    Mr. Williams of Texas. So, you would say, yes?
    Secretary Yellen. I would not say, yes.
    Mr. Williams of Texas. You would say, no.
    Secretary Yellen. I say it requires further analysis.
    Mr. Williams of Texas. Okay. As I previously mentioned, we 
have seen the strain that illegal immigration has and will 
continue to have on our public resources. Therefore, I think it 
is necessary to see how far these impacts reach, and I request 
that you use your power as the Chair of the Financial Stability 
Oversight Council to investigate this emerging risk, okay?
    Over the last year, our nation's Federal banking agencies 
have been bombarding our financial system with excessive 
regulations and dangerous proposals like Basel III Endgame, 
which will dramatically affect the banking community and have 
other broad impacts on Americans' ability to access reliable 
credit. These increases in costs will make it harder for 
Americans to obtain a loan. Whether they want to start their 
own business, expand current business operations, or buy their 
own home, small businesses and everyday Americans rely heavily 
on loans and credit lines from banks of all sizes to access the 
capital they need to do so.
    Multiple regulators, including Chairman Powell, have come 
before this committee and testified that our banking system is 
already well-capitalized and resilient, and FSOC's 2023 annual 
report stated that banks continue to have sound levels of 
regulatory capital. So, Madam Secretary, if FSOC and Federal 
banking regulators have repeatedly identified the U.S. banking 
system as capitalized and resilient, then what is the need for 
the proposed massive increases in regulatory capital called for 
in the Basel III Endgame proposal? And also, how can we ensure 
proposals are good public policy when they lack a rigorous 
cost-benefit analysis?
    Secretary Yellen. I believe that the banking agencies, in 
putting out their rule, have pretty clearly articulated what 
their concerns are with the way in which operations risk and 
market risk are handled, and some of the ways in which internal 
models are used to evaluate credit risk. And I know they have 
received many comments, and we will take those seriously in 
coming up with a revised final rule proposal.
    Mr. Williams of Texas. In the time that I have remaining, 
in 2023, FSOC listed climate change as a vulnerability to our 
financial system. Under the Biden Administration, financial 
regulators are calling for climate policies to be included in 
banking regulations, which extends the Federal banking system 
beyond its intended purpose and threatens the agencies' long-
term independence. This sets a dangerous precedent that could 
lead to overall polarization of our financial system. Quickly, 
Secretary Yellen, is FSOC exploring nature-related financial 
risks, and will they urge Federal banking agencies to issue 
guidance to financial institutions on how to manage purported 
nature-related financial risks?
    Secretary Yellen. The banking agencies are evaluating what 
the impact of climate change is on the institutions they 
regulate and working with them to make sure that they are 
adequately evaluating the risks that climate change pose, and 
those are important supervisory activities that bear on safety 
and soundness.
    Mr. Williams of Texas. Okay. Mr. Chairman, I yield back.
    Chairman McHenry. The gentleman yields back. The gentleman 
from Illinois, Mr. Foster, the ranking member of our Financial 
Institutions Subcommittee, is recognized for 5 minutes.
    Mr. Foster. Secretary Yellen, as I discussed in my opening 
remarks, I am happy to see FSOC identify artificial 
intelligence as an area of concern for the financial system. 
While there are clearly benefits of certain applications of AI 
in areas like customer service, credit underwriting, and 
certain forms of fraud detection, I am worried that we are 
heading for a disaster when it comes to generative AI and 
deepfakes. Just last week, a finance worker at a multinational 
firm was tricked into paying $25 million to scammers following 
a multi-person video conference call with whom they thought 
were their colleagues, but were, in fact, deep fake AI 
impersonations. Not only did the scammers simulate the voice 
and likeness of the chief financial officer, they simulated 
several of the employees' colleagues at the same time.
    Now, I believe that the clearest and cleanest solution to 
this issue would be to have a simple but reliable form of 
digital ID built in the United States, built off of the 
Transportation Security Administration's (TSA's) Real ID 
system, and based on National Institute of Standards and 
Technology (NIST) technical standards that are already built 
into all modern cellphones, then, U.S. citizens could use this 
to prove they are who they say they are online and verify their 
identity remotely. Several States are rolling out these Mobile 
IDs for things like keeping children off porn websites, and 
several European and Asian nations have already taken steps to 
offer their citizens this form of digital ID backed up by 
secure device and biometrics. The EU is moving rapidly towards 
a standard, and they are using it from the start to be useful 
to verifying financial transactions.
    First question, are you aware of the steps that other 
nations are taking not only to offer a digital ID but to make 
it usable for verifying financial transactions, and do you 
believe it would be a useful component in preventing deepfake 
AI impersonations here in the United States?
    Secretary Yellen. I think you are making a very valuable 
suggestion. I know that FSOC and Treasury are engaging on this 
issue with financial institutions. Our staff are planning to 
issue a report on AI-specific cybersecurity and fraud risks. I 
believe they plan to issue that by the end of March. I have not 
seen the work myself that they are doing on this report or what 
recommendations they will come up with, but I know they will be 
doing follow-up work with the financial sector, and I think you 
have made a very good suggestion.
    Mr. Foster. Yes. Many financial firms I talked to just told 
me that a reliable form of digital ID would really simplify the 
Anti-Money Laundering/Know Your Customer (AML/KYC) process, and 
make it faster, cheaper, and more reliable when they have to 
confirm the identity of customers. And you also mentioned the 
difficulty with having this spread out in many agencies. For 
example, the TSA and the Homeland Security Committee in 
Congress sort of are in charge of the mobile ID, the Real ID 
system. On the other hand, it is FinCEN and Treasury that would 
supervise its use for financial transactions. The actual 
technical standards are done by NIST, which is the oversight of 
the Science Committee. So, we have at least three congressional 
committees that are all siloing this whole thing.
    Is there encouragement that you need to get FinCEN, TSA, 
and NIST to all work together to deliver a product that can 
eliminate deep fake impersonations in financial transactions at 
least?
    Secretary Yellen. My suggestion would be that my staff 
contact you and work with you on the specifics of this and give 
you some specific information on exactly what our thinking is 
on this. I am not knowledgeable enough to----
    Mr. Foster. If you find you need any specific encouragement 
from Congress, I think there will be bipartisan support for 
that, really, on all the----
    Secretary Yellen. Of course, this is a significant risk, 
and it is----
    Mr. Foster. Okay. Now, in my last 42 seconds here, last 
January, I introduced the Strengthening Cybersecurity for the 
Financial Sector Act that would give the National Credit Union 
Administration (NCUA) and the Federal Housing Finance Authority 
(FHFA) the authority to oversee third-party vendors that are 
employed by the entities under their purview. Other prudential 
regulators already have this authority. However, NCUA's and 
FHFA's authority was allowed to expire, and this left a 
dangerous gap that leaves consumers and our system at financial 
risk. In fact, last November, a cybersecurity breach of third-
party service providers disrupted the operations of 60 credit 
unions across 40 States. Can you explain why this authority is 
important and the kind of risk that this lack of authority 
presents to the financial system?
    Secretary Yellen. It is critical to oversee these 
providers, and FSOC has recommended that the NCUA and the FHFA 
be given these authorities. We appreciate your legislation and 
would be glad to work with you on it.
    Chairman McHenry. We will now recognize the gentleman from 
Georgia, Mr. Loudermilk, for 5 minutes.
    Mr. Loudermilk. Thank you, Mr. Chairman, and Madam 
Secretary, thank you for being with us. It's good to see you 
again.
    I want to start off by asking you about the nonvoting State 
Insurance Commissioner seat on FSOC. While I support the 
longstanding idea of State-based insurance regulation, I 
recognize that the insurance industry is critical to the 
overall stability of our financial system. Nearly every aspect 
of our financial system is represented by its primary regulator 
on FSOC with a voting seat, but without a voting seat for State 
Insurance Commissioners, the Council is missing the direct 
input from the primary regulators of the industry. My question 
is, do you agree that we should have State insurance regulators 
with a voting seat, and if not, why?
    Secretary Yellen. I absolutely agree with you that the 
insurance sector is critical and needs to be represented. I 
would note that there is a voting member of the Council who is 
an independent member with insurance expertise. That person is 
confirmed to that position, and in addition, there is a State 
Insurance Commissioner, a nonvoting member, but someone who 
serves a 2-year term designated by the National Association of 
Insurance Commissioners (NAIC). So, there is a good deal of 
understanding of the insurance industry represented on FSOC, 
and I think that is totally appropriate.
    Mr. Loudermilk. Do you not feel that it would be better 
representing of the primary regulators of the insurance 
industry if the nonvoting member from the State Insurance 
Commission was actually a voting member?
    Secretary Yellen. I don't have a position on this. Congress 
set up FSOC in this manner, and what I can tell you is that all 
of the members, voting and nonvoting, contribute importantly to 
the work of FSOC. I have really never seen an issue that I have 
dealt with where the voting status of a person who is part of 
FSOC would have made a critical difference.
    Mr. Loudermilk. So it would be fair to say that if Congress 
did seek to change this, you would not oppose it?
    Secretary Yellen. I would look at the specifics, but I 
would agree that we do need to have insurance expertise and I 
would be happy to look at something specific that you are 
considering.
    Mr. Loudermilk. Okay. Well, thank you. Earlier, you were 
asked about the Federal Insurance Office's (FIO's) plan to 
collect 6 years' worth of granular data on climate-related 
financial risk. FIO expects hundreds of property and casualty 
insurers across the country to assume the burden of compiling 
this data. You asserted that FIO looks to work with State 
insurance regulators as required in the Dodd-Frank Act, but FIO 
claims that the data they had initially requested was, ``not 
available or could not be attained in a timely manner from 
State regulators.'' Secretary Yellen, how did FIO define, 
``timely manner,'' for the purposes of collecting this data?
    Secretary Yellen. My understanding is that the NAIC intends 
to conduct its own survey and recognizes the desirability of 
collecting this more granular data, and given that both FIO and 
NAIC want to collect this data, there clearly exists 
opportunities to collaborate. I believe they are certainly 
trying to do that.
    Mr. Loudermilk. I guess I am a little bit confused, because 
they defined that they needed the data within 30 days of the 
request. Now, you are talking a significant amount of data, but 
they were obscure as to what they needed the data for, so why 
did FIO anticipate needing this data within 30 days? You are 
asking these insurance questions that are very detailed and 
giving folks 30 days to respond, and it was kind of obscure in 
the question. I am just wondering why such a short time frame?
    Secretary Yellen. Okay. I must admit I don't understand if 
that is the time frame, or what the logic was, and maybe I can 
get back to you on that.
    Mr. Loudermilk. With the remaining time I have left, in 
your view, was FIO's limited effort of trying to obtain this 
data within the short time frame and then claiming that they 
weren't able to get it actually consistent with the Dodd-Frank 
requirement to coordinate with State regulators, not just ask 
them, can you get this data, and they say, we really don't have 
time, and then say, we couldn't get it. To me, it seems like 
working with them is coming up with a reasonable plan to get 
the information they need and to be clear as to why.
    Secretary Yellen. I believe they intend to do so, and it is 
appropriate.
    Mr. Loudermilk. Thank you. I yield back.
    Chairman McHenry. The gentleman from New Jersey, Mr. 
Gottheimer, is recognized for 5 minutes.
    Mr. Gottheimer. Thank you, Mr. Chairman, and Ranking Member 
Waters. Hello, Secretary Yellen. Thank you for being here.
    Secretary Yellen, are you aware that from 2014 to 2019, 200 
American colleges and universities illegally withheld and 
failed to report information on $13 billion in undisclosed 
contributions from foreign and authoritarian regimes?
    Secretary Yellen. I don't believe I am. I'm sorry. What 
happened? The college, something about colleges?
    Mr. Gottheimer. Colleges receiving and didn't report 
funding from foreign and authoritarian regimes. I have sent you 
a letter, which I will make sure you get a copy of, urging 
Treasury to coordinate with the Department of Justice and 
Department of Education to investigate these American colleges 
and determine whether any of the foreign and authoritarian 
regimes contributed to the funding of antisemitic protest 
groups on our college and university campuses. And I will also 
enter the letter into the record, if that is okay, Mr. 
Chairman.
    Chairman McHenry. Without objection, it is so ordered.
    Mr. Gottheimer. And, again, thank you for reading it, and 
if you can get back and determine whether there are financial 
connections between those foreign entities making large 
donations to our institutions of higher learning and the 
outside funding of antisemitic protests on campuses, I would be 
grateful.
    Secretary Yellen. We will respond to your letter, and try 
to do it in a timely way.
    Mr. Gottheimer. Thank you. Madam Secretary, the last time 
you were in front of this committee in June, you agreed with me 
that the State and Local Tax (SALT) deduction has had a 
disparate impact on different States, including New Jersey, 
where I am from. You have also committed to finding a fair 
solution for the misguided limit that leaves double taxation on 
many of my constituents, especially middle-class, hardworking 
families. There may be a potential vote on SALT legislation as 
early as next week. The bill would double the SALT deduction 
for married couples in 2023 from $10,000 to $20,000. Do you 
believe, following on the question when I saw you last time, 
that this legislation will help ease the disparate impact of 
SALT on married couples in New Jersey?
    Secretary Yellen. I agree that SALT has had a 
disproportionate impact on different States. There are also 
fiscal implications. The legislation that you discuss, I 
haven't had a chance to examine, and it is really up to the 
White House and the President to decide whether or not to be 
supportive of this.
    Mr. Gottheimer. My concern from a Treasury perspective, is 
the IRS preparing for such a change, should the bill be 
enacted, because they would have to move pretty quickly.
    Secretary Yellen. This would be for 2023?
    Mr. Gottheimer. Yes.
    Secretary Yellen. I would have to look into it.
    Mr. Gottheimer. Okay. If you can get back to me on that, I 
would be grateful. We know that Hamas relies on support from 
the Iranian regime, the leading state sponsor of terror. As 
Iran deepens its ties to China and Russia, we are reminded that 
they cannot be trusted and must be held accountable. Iran is 
directly or through their terrorist proxies, including Hamas, 
Hezbollah, and the Palestinian Islamic Jihad, killed hundreds 
of Americans, attacked our bases and our allies in the region. 
Treasury has implemented several rounds of sanctions on Hamas 
in Iran in the aftermath of October 7th. Madam Secretary, do 
you believe that the U.S. should impose sanctions on China 
because of its ties to Iran?
    Secretary Yellen. I'm sorry, on China because of its ties 
to Iran?
    Mr. Gottheimer. Yes.
    Secretary Yellen. That is really a question for the State 
Department and the interagency, and I am not aware that that 
has been considered. I don't have a position to offer you on 
that.
    Mr. Gottheimer. Okay, because I am concerned that Treasury 
hasn't enforced Iran oil sanctions, especially sanctions 
targeting China and its dozens of teapot refineries that are 
responsible for practically 100 percent of Chinese oil imports 
from Iran.
    Secretary Yellen. Look, what I can tell you is that the 
Treasury Department and the Office of Foreign Assets Control 
(OFAC) are doing everything that they possibly can to crack 
down on illegal Iranian shipments of oil, and we have recently 
had actions in that regard and, I believe, seizures of illicit 
material as well.
    Mr. Gottheimer. Thank you. I know Treasury's OFAC publishes 
a list of individuals and companies owned, controlled by, or 
acting on behalf of individual groups and entities such as 
terrorists. Their assets are blocked, and U.S. persons are 
generally prohibited from dealing with them. In recent weeks, 
it has been reported widely that United Nations Relief and 
Works Agency (UNRA) employees have engaged in terror activities 
and materially supported Hamas in the massacre and in other 
depraved atrocities committed against Israel. Is Treasury 
considering terrorism designations for UNRA employees who have 
been found to be materially supporting Hamas or engaging in 
terror activities themselves?
    Secretary Yellen. We have engaged, as you mentioned, in 
numerous actions against Hamas and a wide range of supporters.
    Mr. Gottheimer. While the U.S. gives millions of dollars to 
UNRA every year, the organization doesn't screen for known 
terrorists and terror affiliations the way U.S. agencies like 
USAID would do. Do you believe that, at a minimum, U.N. 
agencies that receive U.S. aid should at least vet employees 
against U.S. terrorism lists?
    Secretary Yellen. I don't know the details. I am happy to 
look into that. That certainly seems reasonable.
    Mr. Gottheimer. Thank you, Madam Secretary. I will follow 
up with your office. Thank you so much.
    Chairman McHenry. The gentleman from Ohio, Mr. Davidson, is 
now recognized for 5 minutes.
    Mr. Davidson. Thank you, Mr. Chairman. Madam Secretary, 
thank you for being here today, and I just want to highlight a 
couple of the activities of FSOC. For the last 2 years, FSOC 
has made digital assets one of its top priorities. Do you 
believe that it is appropriate for FSOC to list digital assets 
among its top priorities, given the relative size of the 
market?
    Secretary Yellen. The market is relatively small, and I 
believe the annual report states that, and the connections are 
not enormous to the banking system, although rule involvement 
in digital assets did play some role in the banking problems we 
had last March, particularly with respect to Signature Bank and 
to Silvergate Bank, so there are concerns along those lines.
    Mr. Davidson. And that is----
    Secretary Yellen. But there is the potential for, for 
example, stablecoins that we have made recommendations to 
Congress, require regulation. They could----
    Chairman McHenry. The gentleman will suspend. If the 
Secretary will suspend. If you could please exit the dais, 
Members. Thank you. We can continue. Thank you.
    Secretary Yellen. There is no appropriate regulatory 
framework for stablecoins.
    Mr. Davidson. We have certainly been working on that. It 
would be great to get it across the finish line.
    Secretary Yellen. I appreciate that, and we have tried to 
work on a bipartisan basis with the committee to see 
legislation enacted.
    Mr. Davidson. So, the concern would be that there is some 
systemic risk to the market because of the introduction of 
digital assets, and you referenced Silvergate. They didn't pose 
a systemic risk to the market. In fact, they wound down in a 
very orderly fashion with no risk to the market. That's not 
true of Silicon Valley Bank, but that was interest rate risk, 
not digital assets. Signature, on the other hand, there was an 
FSOC meeting on Saturday, and on Sunday, the assets of 
Signature Bank were seized, and former Congressman Barney 
Frank, whose portrait hangs right there, a former Chair of this 
committee, said that it was because they were banking crypto, 
not because they were insolvent. So it kind of highlights, is 
there a coordinated effort because there is a disfavored 
industry, like digital assets, or is there a coordinated effort 
because there is actually systemic risk?
    Secretary Yellen. FSOC has recommended to Congress that 
stablecoins require a regulatory framework. No stablecoin at 
this point may yet have achieved the scale that would pose a 
systemic risk, but certainly that could happen if a stablecoin 
were widely used for payments. And you have the classic run 
risk that is associated with that if the stablecoin proceeds 
are not invested in a secure and utterly safe manner.
    Mr. Davidson. Well, this is the case.
    Secretary Yellen. And we have seen this happen with similar 
types of, it is essentially a banking type of----
    Mr. Davidson. It is not fractional reserve banking, and 
those banks are regulated. Stablecoins certify that they have 
$1 of government-backed securities for every $1 of tokens 
issued.
    Secretary Yellen. They don't always certify that.
    Mr. Davidson. No. The three that are regulated in the 
United States by the New York Department of Financial Services, 
or four actually, do certify that, and they are State-
regulated. The one that doesn't, that the Treasury Department 
and others seem unwilling to address by providing clarity in 
our market, don't certify that. Tether is a time bomb, and it 
is offshore, and it is the only thin functional, frankly. 
Everyone is moving offshore because we can't agree to regulate 
our own markets, and, frankly, there are people who really 
would love to regulate the market. There just always seems to 
be an excuse not to.
    I would like to change topics here briefly to the 
Government-Sponsored Enterprises (GSEs). There was a report 
that was due to Congress on September 30 of 2021, so quite a 
while ago that report was due, as to what is the plan to end 
the conservatorship, which has gone on longer than Britney 
Spears' conservatorship went on at this point. So, it would be 
great to get the plan, whether we agree or not, but could you 
commit to give us the plan?
    Secretary Yellen. That was a promise made by the previous 
Administration, and it is----
    Mr. Davidson. It is a statutory requirement, Madam 
Secretary.
    Secretary Yellen. And we are committed to working with 
Congress to clarify what a reasonable strategy is for the GSEs.
    Mr. Davidson. Whatever the plan, it is already the law to 
give us the plan. I yield back.
    Chairman McHenry. The gentleman's time has expired. We will 
now go to Mr. Casten of Illinois for 5 minutes.
    Mr. Casten. Thank you, Chairman McHenry. It's a pleasure to 
see you, Madam Secretary. I want to touch on a couple of 
things, but first, I don't know if you had a chance, and it 
doesn't matter if you read it or not, but there was a 
Congressional Budget Office (CBO) report that came out on 
January 18th about demographic trends in the United States that 
has been rattling in my head for a while, and I think it was 2 
weeks ago, but it said, among other things, that net 
immigration, which some of my colleagues have mentioned, is 
running twice as high as was expected, and that the population 
of folks immigrating to the United States is unsurprisingly, 
overwhelmingly of working age, 25 to 54. I think that is the 
sort of demographic trend that keeps Tucker Carlson awake at 
night, that our population is aging and we are a country that 
is getting more diverse.
    But what I am wondering is f you could speak to the 
conversation with Mr. Vargas. We talked about the fact that 
this economy is doing things that economies aren't normally 
supposed to do. Gross domestic product (GDP) is rising, we keep 
creating jobs, unemployment rates keep falling, and how much of 
that is directly attributable to the fact that our workforce is 
growing so much faster than we anticipated?
    Secretary Yellen. Part of it is due to the fact that labor 
force participation has increased.
    Mr. Casten. I don't mean just the participation rate, 
though--the actual number of workers.
    Secretary Yellen. Yes. Partly, it is immigration, but it is 
also we are seeing a big pickup in adult labor force 
participation in the aftermath of the pandemic. Some of it is 
the availability of jobs, which has been amazing, and some of 
it is the ability to work, at least partially, from home, may 
be drawing people into the labor force who otherwise wouldn't 
do so.
    Mr. Casten. Okay.
    Secretary Yellen. But that is one way in which we continue. 
Just in the last 3 months, we have an average of 290,000 jobs a 
month being created, which is quite remarkable.
    Mr. Casten. Yes. I think about a comment that Jay Powell 
made, I think a year ago, that the growing workforce, not just 
workforce participation, was helping to rebalance the economy. 
I think his words were that it was tilted too much in the favor 
of workers. I know some workers who might disagree, but 
nonetheless.
    Secretary Yellen. Yes.
    Mr. Casten. You had mentioned in your discussion with Mr. 
Vargas that our growth on all of these metrics, from GDP, to 
job creation, to recovery from COVID is outpacing all of our 
other peers. You mentioned Japan being an exception that 
famously is not as open to immigration as some other countries.
    Secretary Yellen. That is true.
    Mr. Casten. And maybe it is too soon to say this, but can 
you speak to what the United States has done that has led to 
our outperformance relative to other industrialized economies 
since COVID?
    Secretary Yellen. We have supported the economy in 
difficult times, and, particularly, the households and workers 
who were most affected through programs, including the American 
Rescue Program, that made sure we didn't have permanent 
scarring of individuals who lost their jobs and remained out of 
work, and may be discouraged and, essentially, scarred to the 
point where they can't participate in the workforce. We made 
sure people had a roof over their heads and food on the table, 
helped them take care of their children, provided emergency 
rental assistance, and then put in place a series of programs 
as the economy, as people got back to work, that are investing 
in people. The bipartisan infrastructure program, the CHIPS and 
Science Act, and the Inflation Reduction Act are stimulating a 
tremendous amount of investment and the creation of good jobs, 
especially in parts of the country that haven't seen 
opportunity for a long time.
    Mr. Casten. I think we have a lot, on this side of the dais 
and in your office, a lot to be proud of, of what we did to go 
through, and maybe we can follow up offline. When so much of 
the growth in the working-age population is from the foreign-
born population, and when so much of the conversation over here 
on the Hill is using immigration as a political football, I 
want to make sure we don't cut off our nose to spite our face 
and understand how that contributes.
    Secretary Yellen. I agree. I think it has been a plus.
    Mr. Casten. I see that I am out of time. I had wanted to 
follow up with you on the FIO and climate risk, but I will 
follow up with you offline on that one. Thank you. I yield 
back.
    Secretary Yellen. Thank you.
    Chairman McHenry. The gentleman from Tennessee, Mr. Rose, 
is recognized for 5 minutes.
    Mr. Rose. Thank you, Chairman McHenry, and Ranking Member 
Waters, for holding this hearing, and thank you, Secretary 
Yellen, for taking the time to be with us today.
    Secretary Yellen, I have been following news of insurers 
pulling out of States like California, and as a former State 
official myself, I am confident that the culprit is a terrible 
State-based regulatory environment. Given the focus of this 
Administration and the Treasury Department on the solvency of 
the financial system and our financial institutions, what would 
be the impact of insurers underwriting the risk of their 
policies at levels that are lower than actuarily sound?
    Secretary Yellen. They would tend to lose money over time 
and it is not commercially viable for them to do that----
    Mr. Rose. Thank you.
    Secretary Yellen. ----without some other government 
support.
    Mr. Rose. I completely agree, and what would happen to the 
fiscal stability and solvency of insurers who were forced to 
issue policies at rates that do not reflect the risk they 
cover?
    Secretary Yellen. They would be financially challenged in 
the event that a risk event materializes.
    Mr. Rose. Thank you. I completely agree with that. Thinking 
back a couple of years ago, actually go back to the fall of 
2021, as you will remember, some of us on this committee were 
concerned about the overly-aggressive spending of the Federal 
Government. We were concerned about early signs and signals of 
inflation, and in a hearing at that point, I asked you if you 
had concerns about the national debt. And as I recall, and I am 
paraphrasing your words, but you expressed the view that the 
interest payments as a percent of GDP were particularly low and 
that maybe that was a more reasonable way to measure the 
Federal debt. Shortly after that, I asked the Fed Chair whether 
he would commit to keeping interest rates at near zero so as to 
make sure that the cost of financing the burgeoning Federal 
debt remained low. He answered correctly that he would not, in 
my view, and he has not. The Fed has not kept rates low.
    Fast forward a couple of years, and we find the cost of 
financing the Federal debt ballooning. The Congressional Budget 
Office has recently stated that the higher interest rates could 
lead to the government's net interest payments spiking to 6.7 
percent of GDP and beyond, and, of course, current estimates 
this year is that net interest may exceed $800 billion, just a 
stone's throw away from exceeding the cost of national defense. 
I wonder, in light of these changes, has your assessment of how 
we measure the capacity of this country to finance and to 
continue to incur additional debt changed?
    Secretary Yellen. I still believe that real net interest is 
an appropriate metric for judging the path to decide whether or 
not a fiscal path is sustainable. Real net interest in, I 
believe, the most recent Biden Administration document, the 
mid-session review, I believe that it remained over the 20-year 
window, given the proposals in that budget, at around 1 
percent, which is historically normal, but the budget included 
$2.5 trillion of deficit reduction that Congress hasn't acted 
on. Now, that is a low level and with higher interest rates.
    We have always projected that interest rates would rise 
from extremely-low levels to more normal levels, but if the 
interest rate path moves up, that does imply, of course, higher 
real net interest.
    Mr. Rose. Pardon me. In the interest of time, if we assume 
that rates remain at historic long-term norms, which would be 
at or above the current levels, is the current fiscal situation 
sustainable?
    Secretary Yellen. It depends on the actions that we take, 
and----
    Mr. Rose. So, new debt would be difficult to support----
    Secretary Yellen. ----we are preparing a----
    Mr. Rose. ----at these interest----
    Secretary Yellen. We are preparing a budget for the next 
fiscal year that will contain proposals to make sure we are on 
a fiscally-sustainable path.
    Mr. Rose. I am deeply concerned about it. I fear we are 
nearing a tipping point where this country cannot sustain the 
fiscal levels that we see now and cannot service our debt and 
continue to honor obligations to the American people. Thank you 
for being here, and I yield back.
    Chairman McHenry. The gentleman from New York, Mr. Torres, 
is recognized for 5 minutes.
    Mr. Torres. Thank you. Madam Secretary, I have concerns 
about the signs of volatility at the New York Community Bank. 
The New York Community Bank is the largest multifamily 
portfolio lender in New York City, with more than $37 billion 
in multifamily loans. By way of contrast, Signature Bank had 
far less, $15 billion in multifamily loans, so a crisis at New 
York Community Bank would not only destabilize the banking 
system, it would destabilize the largest multifamily housing 
market in the United States. Do you share these concerns, and 
how closely are you monitoring the situation at New York 
Community Bank?
    Secretary Yellen. We are in touch with supervisors, and we 
are monitoring current banking stresses carefully. I don't want 
to comment on the situation of an individual bank, but 
commercial real estate is an area that we have long been aware 
could create financial stability risks or losses in the banking 
system, and this is something that requires careful supervisory 
attention.
    Mr. Torres. Is it fair to say, as U.S. Treasury Secretary, 
that you are prepared to do whatever is necessary to prevent a 
second wave of bank failures?
    Secretary Yellen. I don't want to get ahead of where we 
should be given what is happening, and I don't want to comment 
on the individual situation here, but as Treasury Secretary, I 
would work with the banking supervisors to make sure that we 
addressed anything that looked like it could create systemic 
risk.
    Mr. Torres. There has been considerable reporting about the 
rise of private credit. I am wondering if we are seeing in the 
American financial system the paradox of more regulation having 
the unintended consequence of causing less regulation. 
Specifically, to what extent has the intensive regulation of 
banking in America led to the emergence of a largely 
deregulated shadow banking system?
    Secretary Yellen. That naturally happens when one carves 
out an area to regulate, that there is an attempt to move 
activity outside that regulatory system, and perhaps private 
credit is an example of that.
    Mr. Torres. If that is true, to what extent will Basel III 
accelerate that trend?
    Secretary Yellen. It is conceivable that it could, but it 
is important, and FSOC, in part, exists to make sure that we 
are looking not only at banks, but----
    Mr. Torres. Are we managing risk or are we transferring 
risk?
    Secretary Yellen. We are making sure that there is adequate 
regulation to address risks that could have spillovers that 
threaten economic performance in the entire financial system.
    Mr. Torres. The PricewaterhouseCoopers (PwC) report 
proposes something resembling banking regulation for stablecoin 
issuers. Unlike a bank, a stablecoin issuer has no lending and 
no fractional reserves, so if a stablecoin issuer operates 
differently from a bank, why not regulate it differently from a 
bank?
    Secretary Yellen. Perhaps, it should be regulated 
differently from a bank, but nevertheless, it is necessary to 
regulate the risks to make sure that the deposits are channeled 
into safe assets. Perhaps, the capital standard should be 
different and other features of its regulation should be 
appropriate and different. It is something more like a narrow 
bank, but it should be regulated because it inherently has run 
risk very similar to banking organizations.
    Mr. Torres. The single greatest powder keg in the world is 
the Taiwan Strait, where a People's Republic of China (PRC) 
invasion of Taiwan or a blockade could conceivably cause the 
gravest global catastrophe since World War II. According to 
Bloomberg Economics, the cost of a war over Taiwan would cost 
$10 trillion, 10 percent of global GDP. It would exceed the 
cost of the global financial crisis and the global pandemic. 
Does the Treasury Department conduct economic and financial 
simulations or war games to determine the impacts of a possible 
conflict and determine what actions that we as a country should 
take in advance to mitigate those impacts?
    Secretary Yellen. The National Security Council and the 
interagency--I don't want to detail steps that they have taken, 
but certainly the risks from the Taiwan Strait have commanded 
their attention and preparation.
    Mr. Torres. Thank you.
    Chairman McHenry. Before we continue, we have approximately 
25 minutes remaining. There is a clock for both Members and for 
the Secretary. We have a hard stop at 1:00 p.m., and we intend 
to honor that within a minute or two or three or so. So with 
that, the gentleman from South Carolina, Mr. Timmons, is now 
recognized for 5 minutes.
    Mr. Timmons. Thank you, Mr. Chairman, and thank you, 
Secretary Yellen, for being here today.
    You have stated that FSOC believes a congressionally-
approved regulatory structure would help improve the digital 
asset sector. This year's FSOC report also outlines several 
vulnerabilities in the digital asset sector, including the lack 
of consumer protection. Does the current lack of regulatory 
structure make it harder for consumers to tell the difference 
between quality products and crypto scams, and how do you 
believe regulatory clarity will help mitigate risk to the 
consumer?
    Secretary Yellen. I believe there are some risks to the 
consumer. We haven't made recommendations to Congress about 
those. I am not sure. I think the CFPB and other agencies--the 
SEC has some regulatory authorities in this space that they can 
use.
    Mr. Timmons. But it seems that there is some confusion, and 
there is a lack of clarity. Do you believe that if Congress 
were to act, it would improve consumer protections?
    Secretary Yellen. I really need to know more about the 
specifics.
    Mr. Timmons. Okay. The FSOC report repeatedly states the 
health and resiliency of our banking sector, yet our Federal 
regulators have arguably proposed the largest increase in 
capital requirements since Dodd-Frank. My colleague, Vice Chair 
Barr, has already hit on concerns related to Basel III. 
However, the regulators have also introduced several other 
proposals, such as the long-term debt proposal and resolution 
planning requirements. Given such vast proposals, there must be 
a potential for negative impacts on our financial systems and 
their ability to operate in a safe and resilient manner, so my 
question is this: Has FSOC reviewed the long-term debt proposal 
as well as the numerous proposals the banking regulators have 
put forward?
    Secretary Yellen. FSOC does not engage in regular reviews 
of banking regulations that are within the authority of the 
banking regulators. They are charged with achieving safety and 
soundness and putting appropriate rules in place, and FSOC, of 
course, is supportive of those general efforts but not involved 
in a review of agency proposals.
    Mr. Timmons. I think the agency proposals are missing the 
mark across-the-board, but we will move on to China. This 
Administration seems to be so focused on regulating the 
American economy out of existence in the name of climate 
change, yet it is completely turning a blind eye to clear and 
present dangers presented by the Chinese Communist Party (CCP). 
In fact, the FSOC report mentions the word, ``climate,'' 136 
times, which is close to 10 times more than China. 
Additionally, two subsections of the report are dedicated to 
climate risk. You failed to mention China in your testimony 
while citing climate risk as the second-highest priority issue 
for FSOC. On top of all that, this past summer, you visited 
China in yet another signal of this Administration's meager 
approach towards our communist adversaries.
    I just feel like we are asleep at the wheel with the 
biggest risk to the system barreling toward us. It is 
unfathomable to think that we are allowing the CCP to expand 
its footprint in our financial sector. Whether it is allowing 
CCP-backed broker-dealers to operate in the U.S., allowing 
federally-registered agents to be based in mainland China, or 
simply encouraging broad foreign investments, we are empowering 
the same country that seeks to undermine us at almost every 
step of the way. Imagine the security risks or threats that 
could be developed utilizing American financial data or trading 
trends. It is a national security concern that could undermine 
the stability of our financial sector, and it is not being 
talked about enough, and your report is only further evidence 
of this.
    My colleague across the aisle just mentioned the impact of 
China invading Taiwan--$10 trillion, a huge hit to the global 
economy--and I just think that this is a concern that we need 
to take seriously. And if we are going to be talking about 
climate risk, China is the number-one polluter on this planet 
by far, and we need to hold them accountable if we are going to 
tell our economy that it needs to take precautions as well 
because at the end of the day, we need to be competitive in the 
global economy. And by adding additional layers of regulation 
onto U.S. businesses, it impedes their ability to impact in the 
global economy. And with that, Mr. Chairman, I going to yield 
back. Thank you.
    Chairman McHenry. The gentleman yields back. We now go to 
the gentlewoman from Massachusetts, Ms. Pressley, for 5 
minutes.
    Ms. Pressley. Thank you for joining us, Secretary Yellen. 
On August 23rd of last year, I sent letters to the CEOs of the 
five largest banks in the United States: JPMorgan Chase, Bank 
of America, U.S. Bank, Wells Fargo, and Citi. I sought detailed 
information on the status of the pledges they announced in 
response to the global movement for Black Lives in 2020 
following the murder of George Floyd. Collectively, the five 
banks pledged more than $32.5 billion towards investing in 
racial equity. Although the racial wealth gap is over $10 
trillion, it was encouraging to see the banks take this step.
    For generations, there has been the intentional refusal of 
mortgages to Black residents, the systemic denial of loans to 
Black entrepreneurs, and the wholesale redlining of Black 
neighborhoods. I truly believe that the banking industry has 
long contributed to the problem and must now work toward a 
solution. When I told this to the CEOs and requested an audit, 
I received a response from each of the five banks.
    For months, my team poured over hundreds of documents. It 
is clear that the banks have made progress in fulfilling their 
racial equity promises in many areas. Unfortunately, there has 
been little to no progress in the category of institutional 
policy changes. This category is focused on the internal 
policies of a bank, not just the external investments. It 
includes things like eliminating overdraft fees, expanding 
language access, opening physical branches in Black 
communities, and promoting Black people to the highest 
leadership levels of the bank. Our final analysis is that steps 
have been taken, but not enough. We need long-term change, not 
just one-time investments, to root out racial injustice in the 
banking industry.
    Secretary Yellen, when financial institutions perpetuate 
and benefit from racism, discrimination, and the exploitation 
of Black communities, they exacerbate systemic risk in our 
financial system. The FSOC Analytic Framework for Financial 
Stability Risk, published last November, pointed out that risk 
to low-income, minority, and underserved communities can become 
serious enough to pose a threat to financial stability. For 
example, in the 2007 to 2009 financial crisis, we saw how 
decades of redlining made Black communities more vulnerable 
targets for subprime mortgages.
    In light of this, and I hope this is a simple yes-or-no 
answer, Secretary Yellen, do you agree that racism and racial 
inequity is a threat to the financial system?
    Secretary Yellen. It could be, and it is one of the factors 
that Dodd-Frank told us to take into account in considering 
designations.
    Ms. Pressley. I will take that as a, yes. Very good. And to 
follow up on that, what steps is FSOC taking to monitor and 
mitigate the threat that racist practices and policies 
perpetuated by banks can pose to the financial system?
    Secretary Yellen. Individual supervisors of banks are 
responsible for ensuring, for example, that Community 
Reinvestment Act (CRA) requirements are met by banks, and the 
CFPB has authority to make sure that our fair lending and other 
laws are obeyed.
    Ms. Pressley. Okay. As I close here, Chair McHenry, in 
previous Congresses, this committee held hearings with the 
largest financial institutions in order to allow Members to 
directly ask them questions on the record. This, of course, is 
in recognition of the banks' outsized role in our economy and 
our congressional responsibility for proper oversight for the 
American public. Mr. Chairman, will you convene a hearing with 
the CEOs of the largest banks?
    Chairman McHenry. Will the gentlelady restate her question?
    Ms. Pressley. Yes. I wanted to ask if you would follow the 
esteemed tradition and efforts of Ranking Member Waters and do 
a hearing with the largest banks so that we could ask them 
questions on the record and conduct proper oversight, given the 
outsized role they play in the economy.
    Chairman McHenry. It was the Chair's decision that it was 
easier just to watch the Senate do that hearing rather than to 
hear the second day of the same testimony. So, that is why the 
Chair did not do that this year.
    Ms. Pressley. Okay. Well, that is my time. Thank you, and I 
yield back.
    Chairman McHenry. The gentlelady yields back. We will now 
go to the gentleman from Wisconsin, Mr. Steil, for 5 minutes.
    Mr. Steil. Thank you very much, Mr. Chairman. And thank you 
for being here, Secretary Yellen.
    Over the course of the next year, it is estimated that 
about $10 trillion in U.S. debt will be reissued, most likely 
at a higher interest rate. Have you calculated the financial 
impact that reissuing that $10 trillion at a higher interest 
rate would be?
    Secretary Yellen. I don't have a number for you at my 
fingertips, but----
    Mr. Steil. But you do model that, I assume, at the 
Treasury, the implications that would have?
    Secretary Yellen. Yes, and I think the Office of Management 
and Budget (OMB) does, and it would be part of the projections 
that would be included in the budget.
    Mr. Steil. And the United States reissues in the 
neighborhood of $10 trillion in debt. Do you have concerns at 
all about the ability to find buyers for that debt?
    Secretary Yellen. We have very deep, robust markets and 
very robust demand for our debt.
    Mr. Steil. So, you do not have concerns about a weakening 
demand with the volume of issuance of $10 trillion at this 
time?
    Secretary Yellen. We take steps to make sure that we issue 
in a way that is predictable and orderly and keep the markets 
well informed about our plans, and we have had great success in 
issuing our debt and maintaining liquidity in a deep Treasury 
market.
    Mr. Steil. But $10 trillion would be the largest issuance 
of debt the United States has ever seen in a given year by a 
significant amount. Is that accurate?
    Secretary Yellen. I believe so.
    Mr. Steil. I appreciate your comments. I would hope that 
you keep us abreast if you have any concerns as it relates to 
the demand on the issuance of debt at the volume that the 
United States is doing, then the carry costs associated with 
higher interest rates as this new debt is issued.
    Let me shift gears. I am concerned about U.S. enforcement 
of sanctions with Iran. Not only is it the number of sanctions 
that are in place, but it is also our ability to actually 
enforce those sanctions and take action upon them. That can 
actually alter the behavior of countries, and, in particular, 
in this case, Iran. I am uniquely concerned about the lack of 
enforcement as it relates to oil sanctions with Iran, and as we 
look at the target of Iranian oil revenues, has Treasury 
sanctioned any of the Chinese entities purchasing Iranian oil 
products, and if so, how many?
    Secretary Yellen. I am not aware that we have, but we have 
certainly tried to stop those oil shipments by sanctioning 
shippers and others involved with them.
    Mr. Steil. You sanctioned some. Should we be looking at the 
ultimate purchaser of the oil, which in many cases is China? 
You said you haven't implemented any sanctions vis-a-vis China, 
which is obviously one of the largest buyers of Iranian oil. Is 
that something of concern?
    Secretary Yellen. I will need to get back to you on that.
    Mr. Steil. I would love to have you follow up. I have grave 
concerns about the amount of money flowing into Iran, and, in 
particular, we have----
    Secretary Yellen. We certainly do.
    Mr. Steil. Right. I appreciate you sharing that concern. I 
think we look at the sanctions that have been put in place by 
the United States, but it is truly the enforcement of those 
sanctions, in large part at Treasury under your leadership, 
that is so essential to be able to change the behavior of Iran, 
which continues to threaten U.S. troops in the region as well 
as our ally, Israel. Treasury officials are in China this week, 
and reports indicate that you are considering a visit later 
this year. Would you be willing to raise this issue with 
Chinese officials, either through people who currently work at 
Treasury or through yourself if you choose to make a visit to 
China?
    Secretary Yellen. I will discuss it with people at 
Treasury.
    Mr. Steil. Would you be willing to discuss it with your 
Chinese counterparts?
    Secretary Yellen. I want to understand the issue and 
concerns around it before I make any such promise.
    Mr. Steil. That's fair. I would appreciate you looking into 
that, because I think it is something that is absolutely worthy 
of your time, and you have been vested great power by Congress 
with the ability to enforce a lot of these sanctions, and our 
ability to deter Iran from their continued funding of terrorism 
is really dependent on the action of Treasury under your 
leadership. How would you respond to concerns that China should 
not receive a high-level visit if it is purchasing oil from 
Iran?
    Secretary Yellen. We are----
    Mr. Steil. Do you think that should alter a decision by you 
or others from Treasury to engage and visit China?
    Secretary Yellen. We have many differences with China and 
concerns about its behavior, but President Biden and President 
Xi agreed that we should talk to one another and create 
channels for exchanging information and sharing our concerns 
and discussing them. It is a way to stabilize our relationship, 
and my dialogues with my Chinese counterparts are intended to 
do that. I have very honestly and thoroughly in past 
engagements explained many issues that concern us about China's 
economic behavior.
    Mr. Steil. Thank you. I yield back.
    Chairman McHenry. The gentleman from Nevada, Mr. Horsford, 
is now recognized for 5 minutes.
    Mr. Horsford. Thank you to the chairman and to the ranking 
member. It's good to see you, Secretary, and I appreciate you 
appearing here to discuss the recent report from the Financial 
Stability Oversight Council. It is a great opportunity to have 
you here today because since we last spoke about your 
leadership and how it was instrumental in successfully 
restoring stability to our banking sector, promoting economic 
growth far beyond expectations, and adding a staggering 225,000 
jobs a month, 3.1 million total in 2023 alone, the year covered 
by your report.
    Critically, there was not just growth in the number of jobs 
created, but the quality of the jobs is rising as well. 
Americans are finally seeing their incomes climb, and now not 
only is the level of real annual earnings higher than before 
the pandemic, but in 2023, the growth of real wages was faster 
than it was during the pre-pandemic trend. Everyday working 
families, those earning in the bottom 25th percentile of 
workers, saw the fastest expansion, with a 3.2-percent jump in 
their inflation-adjusted incomes.
    So, I want to commend you and the Treasury Department for 
your invaluable efforts in contributing to this strong growth 
as your efforts to mitigate the contagion of a bank run earlier 
in the year were largely successful. Importantly, the growth in 
real wages was also concentrated in communities that have 
historically fared poorly during times of economic recovery, 
with specific gains being made for Black and Hispanic workers, 
who saw their earnings grow 4 percent, and 2.4 percent, 
respectively. As you mentioned earlier this year to the 
Economic Club of Chicago, and according to the Treasury 
Department's October Equitable Recovery report, this may have 
even been the most equitable recovery in recent history.
    Now, while I recognize that these gains were far better 
than forecasters predicted, I hope you will agree with me that 
there is still more work that needs to be done. While House 
Democrats and President Biden are working to ensure we all have 
a chance to succeed, recently we have seen an extreme 
conservative movement begin a new assault on the lending firms 
that aim to expand access to historically-underserved 
communities.
    Far broader and equally as sinister has been the rapid 
escalation in attacks on diversity, equity, and inclusion 
initiatives throughout our economy in the wake of last June's 
Supreme Court ruling on affirmative action. Given these actions 
against institutional efforts to address longstanding 
inequities, it is more important than ever that we speak up to 
protect Black and minority entrepreneurs and their access to 
the limited capital that is available to them in the first 
place.
    The organizers of the latest attacks are organized, and 
they are determined, as they work to undermine our efforts to 
make a more inclusive economy, but rest assured, we will be 
equally as resolute in our defense, and we will not be silent. 
The baseless attacks on these efforts harm everyone. Diversity, 
equity, and inclusion are a business imperative. In fact, I 
want to enter into the record a report from McKinsey & Company, 
entitled, ``Diversity Matters Even More,'' where they report 
that the companies with the most diversity in their management 
team in the top quartile have 39 percent better performance 
than those that are not diverse.
    Chairman McHenry. Without objection, it is so ordered.
    Mr. Horsford. Thank you.
    Secretary Yellen, as Treasury weighs key policy priorities, 
such as the Community Reinvestment Act, the Inflation Reduction 
Act, and CHIPS implementation, and other determinations, do you 
agree with the McKinsey report findings that companies and 
financial institutions that refuse to incorporate diversity, 
equity, and inclusion practices into their businesses perform 
worse than their peers and, thus, may be riskier?
    Secretary Yellen. I am aware of the research that you 
cited, and it strikes me as being well done. So while I have 
not looked at this issue myself, I see very good reasons for 
the findings you mentioned.
    Mr. Horsford. Thank you. And do you believe that these 
renewed attacks on diversity, equity, and inclusion efforts may 
lead financial institutions to lower the availability of credit 
to low-income, minority, and underserved communities, and could 
these pullbacks increase systemic risk within those communities 
if those institutions are a main source of credit for those 
underserved populations?
    Secretary Yellen. I think access to credit is critically 
important for these communities, and it would be a devastating 
thing to see a pullback. As you know, Treasury and the Biden 
Administration have been highly focused on adding, through many 
different programs, including CDFIs and the State Small 
Business Credit Initiative (SSBCI) program, access to capital 
in minority, low-income communities.
    Mr. Horsford. Thank you. And for that reason, Mr. Chairman, 
I join with my colleague and call on you to bring a hearing on 
this important issue. This is an attack that must be addressed, 
and this committee should be at the center of it. With that, I 
yield back.
    Chairman McHenry. The gentleman from Pennsylvania, Mr. 
Meuser, is recognized for 5 minutes.
    Mr. Meuser. Thank you very much, Mr. Chairman. It's great 
to see you, Secretary Yellen. A little while ago, you had an 
exchange with Mr. Casten about the employment numbers and 
unemployment numbers, and you stated, I believe, if I heard it 
right, that the situation of the number of illegal migrants 
coming into our country--I believe you said it was a positive 
thing. Did I hear that right?
    Secretary Yellen. Did you say illegal immigration?
    Mr. Meuser. Yes.
    Secretary Yellen. I didn't speak to illegal immigration.
    Mr. Meuser. Okay. Well, that is what he was referencing. He 
was referencing the level of migrants coming into the country, 
and----
    Secretary Yellen. I simply said that immigration that is 
added to our----
    Mr. Meuser. Because legal immigration is great.
    Secretary Yellen. I am really----
    Mr. Meuser. Drugs, human trafficking----
    Secretary Yellen. ----not weighing in on that.
    Mr. Meuser. Okay. Thank you, Secretary. The FSOC's recent 
guidance on climate change, nonbank SIFI designations, and the 
Basel III Endgame proposal, have received wildly overwhelming 
criticism by the financial industry for being unclear, overly 
broad, all kinds of descriptions--creates confusion, not being 
data-based, and we have had conversations with Vice Chair Barr 
and many others, Chairman Powell related to this, so that is 
certainly nothing new. Yet, the regulators are not conducting 
cost-benefit analyses for each rule they implement.
    The guidance on nonbank SIFI designations, climate change, 
and the Fed's Basel III Endgame omits any cost-benefit 
analysis. So, Secretary, why do you believe any business 
subject to nonbank SIFI designation should not receive a cost-
benefit analysis to determine the effects on the business?
    Secretary Yellen. FSOC was given by Congress the ability to 
designate a nonbank whose material distress would pose a risk 
to the financial system, and, most clearly, FSOC did not 
require a cost-benefit analysis in association with that, 
something that they could have done and chose not to do. And 
there are very good reasons not to do it because what we are 
talking about in terms of the benefits of designation is a 
reduced chance of a financial crisis, and to try to quantify 
exactly what are the costs of a financial crisis is not a 
useful exercise.
    Mr. Meuser. Okay.
    Secretary Yellen. Even in the aftermath of financial crises 
we have experienced, like the 2008 crisis, people can't agree 
what the cost of it was.
    Mr. Meuser. Okay. Just because it is not in the rule, 
doesn't mean it wouldn't be worthwhile, and they could pursue 
it anyway to gain a more accurate finding and outcome, but 
let's just talk about Basel III Endgame for a moment. No cost-
benefit analysis, not much data to support it, small businesses 
across the country will suffer from it because there will be 
less lending taking place. Nobody can argue with that. Some 
people say it could be as much as 20 percent from the big 
banks, and then all kinds of pressure is put on the smaller 
banks where they will have, instead of 20 small businesses 
coming to them, they will have a hundred because there is less 
funding and capital available from the large banks, yet some 
people argue those very basic, simple, fundamental points.
    So I ask you, on Basel III, are you concerned about the 
overwhelming feedback regarding the problems and potential risk 
to our economy that the Basel III Endggame proposal will cause?
    Secretary Yellen. The banking agencies put out this 
proposal. This is not something that I have been involved with, 
and they have received many comments and expressions of concern 
along the lines that you have just indicated, and it is their 
job under the Administrative Procedure Act (APA) to review 
those comments and to respond appropriately.
    Mr. Meuser. Okay.
    Secretary Yellen. My understanding is that they believe 
that changes in some of the proposals are going to be 
appropriate and necessary to address the commenters.
    Mr. Meuser. Thank you, and as Secretary of the Treasury, 
and all of the things you have done in the past, is there a 
plan in place to help American business become more competitive 
besides spending in an excessive manner, which some argue 
creates an artificial growth initiative?
    Chairman McHenry. The gentleman's time has expired. The 
Secretary can respond in writing for the record.
    We have one final questioner. In consultation with the 
Secretary's team, she is game for it. It's been a nice day of 
endurance here. With that, we will now recognize the gentleman 
from Wisconsin, Mr. Fitzgerald, for 5 minutes.
    Mr. Fitzgerald. Thank you. Madam Secretary, I am the last 
Member, I guess.
    When Fannie Mae and Freddie Mac were taken into 
conservatorship in 2008, Treasury received warrants that give 
it the right to buy common stock in each of the GSEs equal to 
80 percent of the total outstanding shares, and those warrants 
expire on September 7, 2028. In August of 2020, the 
Congressional Budget Office issued a report that estimated 
Treasury could receive the $190 billion for its senior 
preferred shares, in addition to $110 from exercising its 
warrants in the GSEs. FHFA Director Thompson said in a hearing 
last May that the two of you have not discussed these warrants. 
The conservatorship has gone on, I think you could agree, for 
probably too long now, and I am concerned that the 
conservatorship of the GSEs and the warrants could be used to 
further politicize the entities. Have you or your staff given 
any consideration to the monetization of Treasury's warrants in 
the GSE?
    Secretary Yellen. This is not a matter on which I am up to 
speed. I am not knowledgeable about this. I have a staff who 
spends a great deal of time thinking about it, but I have not 
had a discussion with them about this. I would appreciate it if 
I could get back to you on this matter.
    Mr. Fitzgerald. Absolutely. I appreciate it. Thank you.
    Secretary Yellen, last May, you said, ``This might be an 
environment in which we are going to see more mergers, and that 
is something I think the regulators will be open to if it 
occurs.'' But I think as a member of the committee, the 
perception out there is that regulators review kind of the 
proposed bank deals at a slow pace, and there is also a 
relatively high degree of uncertainty about the outcomes, both 
of which have kind of this chilling effect that we have had 
reported right here in the committee. So, given that regional 
banks are subject to constant onsite supervision--we have heard 
from the bankers about this numerous times--can you think of 
any reason why it should take the Federal Reserve more than the 
statutorily-prescribed 90 days to decide if a merger is 
appropriate under the Bank Holding Company Act?
    Secretary Yellen. I can just say, based on my own 
experience in the Fed, that often issues are raised in 
connection with the community performance of banks that need to 
be investigated, and these investigations can involve a lot of 
back and forth and be time-consuming. So, I share your 
frustration that it often took a good deal of time, but 
sometimes there are difficult issues that need work to respond 
to before a proposal can be presented to, in the Fed's case, 
the Board.
    Mr. Fitzgerald. Very good. Thank you. Saudi Arabia pricing 
their barrels of oil in dollars has played a large role in the 
U.S. dollar building and maintaining its status as the global 
reserve currency. The Saudi minister of finance stated that 
they are open to trading oil and currencies other than dollars, 
and has held talks with China. I am not sure if you are aware 
of that. I am not asking you that question. Combined with the 
de-dollarization efforts by adversaries like China, Iran, and 
Russia to evade sanctions, the potential weakening of the 
dollar as a global reserve currency is concerning. What are 
some of the actions Congress can take to maintain the dominance 
of the dollar and ensure we can maintain effective sanctions?
    Secretary Yellen. The dollar is valued as an asset because 
of the deep and liquid Treasury market that we have, the 
strength of the U.S. economy, the strength of our currency, and 
the fact that we keep inflation under control and it is a good 
investment. We have rule of law, we have open capital markets, 
and protecting these fundamental assets that give rise to the 
strength of the dollar is critical to its role. But the 
important role of the dollar also enables us to levy sanctions 
against countries that act against our interests, and by 
depriving them of access to the dollar financial system, we can 
really exercise some control over their behavior. And it should 
be understood to be natural that when we use sanctions, those 
who are sanctioned are incented to try to figure out 
workarounds. I have not seen anything that I believe poses a 
deep threat to the dollar, but those incentives exist, and our 
ability to sanction countries' activities that threaten our 
national security, I think is very important.
    Chairman McHenry. The gentleman's time has expired.
    Mr. Fitzgerald. Thank you. I yield back.
    Chairman McHenry. Secretary Yellen, I ask for your 
forgiveness. We are now 8 minutes past the time. In order to 
have partisan balance, Ms. Tlaib is here, and I think it would 
be appropriate if we can allow her to ask questions for 5 
minutes.
    Secretary Yellen. Mr. Chairman, I am certainly willing to 
do that.
    Chairman McHenry. We did start a few minutes late, so thank 
you for that, Secretary Yellen. We will go to Ms. Tlaib for the 
final set of questions for today, then we will adjourn 
immediately after.
    Ms. Tlaib. Thank you so much, Mr. Chairman. As you know, 
Secretary, nonbank financial companies like AIG and Lehman 
Brothers played a large role in the 2008 financial crisis, and 
that crisis decimated the U.S. economy, causing millions of 
families to lose their jobs or homes or both. And I know in my 
district, including Wayne County, and broader Southeastern 
Michigan, we saw employment fall 51 percent for low- and 
moderate-income households. The median home value for low and 
moderate homes plummeted about 53 percent.
    Countless families, as you know, lost their homes to 
foreclosure. We had the worst tax foreclosure crisis in Wayne 
County. When the pandemic hit, another financial crisis emerged 
seemingly overnight, and, again, liquidity pressures on 
vulnerable and overleveraged shadow banks contributed to the 
market volatility. The risks posed by such companies have not 
been addressed. Today, nonbank financial intermediaries, I 
think they are called, broadly defined, are responsible for 60 
percent of the credit provided to the U.S. economy.
    And so, Secretary Yellen, can you discuss the size of the 
so-called shadow banking sector and its interconnections with 
the traditional banking sector?
    Secretary Yellen. The shadow banking sector is very large, 
and we are very focused on potential risks. I agree with your 
assessment that much of the damage, not all of it, but much of 
it during the financial crisis arose from this so-called shadow 
banking system, and in part, FSOC was created in order to try 
to address those risks, so it is very high on our agenda. We 
have a variety of tools to do so, and we have identified a 
number of areas that give us concern.
    Ms. Tlaib. Yes.
    Secretary Yellen. Some of those were the areas, as you 
mentioned, in March of 2020, where we saw problems and there 
were open-end bond funds.
    Ms. Tlaib. But given the size of nonbanks, their 
interconnectedness, and the incentives they face, I greatly 
appreciate your leadership in establishing FSOC's new guidance 
on the designation of nonbanks as systemically important. I 
completely agree. The question now turns to implementation, and 
implementation matters. Zero nonbanks are currently designated 
as systemically important. Do you believe that no nonbank 
financial institution is systemically important?
    Secretary Yellen. Very often, the financial stability risks 
are not created by an institution, but rather, by market 
practices within a market. For example, money market funds have 
been a problem both recently and in the crisis, and to deal 
with those risks, it is not appropriate to just choose one or 
two large money market funds to designate. I don't think 
designation is the right tool. I think an approach that 
regulates the practices in the industry is appropriate.
    Ms. Tlaib. What is----
    Secretary Yellen. The so-called activity-based approach, 
that is what the SEC has been pursuing in that space. 
Sometimes, it is appropriate to designate a firm when it 
creates risks, but in other situations----
    Ms. Tlaib. What I hear is the different regulatory 
environments that we are creating. What does it mean? What is 
regulatory, what is it, arbitrage? What does that mean?
    Secretary Yellen. ``Regulatory arbitrage'' means that when 
one sector is regulated, that a kind of activity that becomes 
more expensive to conduct through that sector moves to a less-
regulated part of the economy.
    Ms. Tlaib. Yes.
    Secretary Yellen. But this isn't always about individual 
firms. It is often about a group of firms or an industry----
    Ms. Tlaib. Or maybe a culture.
    Secretary Yellen. It might be a culture, but often, it is 
many firms and not just one or two firms that are responsible 
for the problems.
    Ms. Tlaib. Yes. And I just want FSOC, of course, it was 
important for you, and thank you for your leadership on that, 
but it has to fulfill its total responsibilities when it talks 
about protecting our residents, especially our low-income and 
underserved communities, from the systemic risk, as you know, 
and financial instability that results from the failure of the 
megabanks. Describe what specific actions--maybe you talked to 
some of my colleagues about this already--has FSOC really taken 
or plans to take in full responsibility in protecting those 
families. Again, I am looking at these and trying to learn 
about these process and the culture as I create it, I call it--
--
    Chairman McHenry. The gentlelady's time has expired, and if 
the Secretary could answer for the record in writing, that 
would be sufficient.
    Secretary Yellen. Okay. I will answer for the record.
    Ms. Tlaib. Yes. I want to learn more. Thank you.
    Chairman McHenry. Thank you, Secretary Yellen, for your 
testimony today.
    The Chair notes that some Members may have additional 
questions for this witness, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to this witness and to place her responses in the record. Also, 
without objection, Members will have 5 legislative days to 
submit extraneous materials to the Chair for inclusion in the 
record.
    I want to thank you again, Secretary Yellen, and please 
respond to these questions, if you would, no later than March 
30, 2024.
    This hearing is adjourned.
    [Whereupon, at 1:14 p.m., the hearing was adjourned.]
    
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                            February 6, 2024`