▶ 0:15:51The task force on monetary policy, Treasury market resilience and economic prosperity will come to order. Without objection, the chair is authorized to declare a recess of the committee at any time. This hearing is titled US Treasury Debt in the Monetary System. Without objection, all members will have five legislative days within which to submit extemporaneous materials to the chair for inclusion in the record. I now recognize myself for four minutes for an opening statement.
▶ 0:16:20Welcome to the next hearing of the task force on monetary policy, Treasury Market Resilience and Economic Prosperity. This hearing is entitled US Treasury Debt in the Monetary System. Today we will evaluate the health of the US Treasury market and hear from our expert panelists on where improvements can be made. The US Treasury market is the deepest, strongest and most liquid in the world. As such, it is the foundation of the global financial system and we must safeguard its status and functions.
▶ 0:16:49The Treasury market is invaluable because of its multi-functionality. It equips investors with a safe investment in times of market stress. It serves as a risk-free benchmark for other financial instruments. It is also used to finance government operations and manage our debt in addition to being used as an essential tool with which the Fed conducts monetary policy. Put simply, US treasuries are the most essential asset class to the global economy.
▶ 0:17:16The willingness of global investors to hold treasuries, attracted by their low risk and high liquidity, is unrivaled. However, the Treasury market has undergone fundamental changes. First, the volume of US debt has been rapidly increasing. Our national debt has skyrocketed to over $35 trillion. Supply chain constraints, global conflicts, and irresponsible fiscal policy have contributed to unparalleled and unsustainable growth of our national debt.
▶ 0:17:47The Treasury Department must market this debt to investors to meet spending obligations. With more than 28 trillion dollars outstanding, the Treasury market has doubled in the last decade alone. Second, paired with this explosion in Treasury debt, there are challenging conditions for market participants. The last decade has brought significant changes in technology and regulation which have impacted the capacity of dealers to provide market liquidity in periods of stress.
▶ 0:18:16This was underscored most recently in March of 2020 where dynamic volatility in the Treasury market required the Federal Reserve to step in to calm the markets. We'll hear today from our witnesses about what these changes mean for the market and how we should respond. Today's hearing will also discuss how the Treasury market is an essential tool for the Fed's monetary policy goals. The Fed currently holds more than$4 trillion dollars of treasuries on its balance sheet.
▶ 0:18:44the largest single holder of Treasury debt. The composition of the Fed's balance sheet has a profound impact on market conditions and economic stability. We must ensure that the Fed's monetary policy functions aren't impeding the health of the Treasury market. An efficient and resilient Treasury market is paramount to US leadership abroad and the dollar status as the world's reserve currency. This privilege cannot be jeopardized.
▶ 0:19:10We must prioritize greater liquidity of the treasury market for the United States, for the investor, and for the taxpayer. And with that, I yield back. The chair now recognizes the ranking member of the task force, Mr. Vargas, for four minutes for an opening statement. Thank you very much, Mr. Chairman, and thank you for convening this hearing. I also want to thank all the witnesses for being here today. Thank you very much. We appreciate it. Before we discuss the issue of Treasury market resilience, we can't ignore the larger threat to our country's economy.
▶ 0:19:40Whether it's indiscriminate tariffs or increasing the deficit to cut taxes for the wealthy, President Trump's economic policies are making Americans feel less and less confident about the economic future. We see this in consumer sentiment data. The Conference Board's consumer confidence index has fallen to its lowest level since January of 2021. The University of Michigan's consumer sentiment survey for March had its lowest reading since November of 2022. And it's not just consumers that are feeling these effects.
▶ 0:20:10Businesses are tired of the chaos and the uncertainty. A survey conducted by the Federal Reserve Bank of Dallas had one executive respond, "How can you do business planning with all the uncertainty and all the daily changes in the direction made by the Trump administration?" The small business owners agree. A Harvard Business School study found that more than half of small and mid-size business owners in the United States expect tariffs enacted by Trump and the Trump administration to increase their operating costs.
▶ 0:20:38More than 40% predicted that their sales would decline because of the tariffs. On Friday, Chairman Pal cautioned that these tariffs are significantly larger than expected and the same is likely true for the effects which quote will include higher inflation and slower growth. And these tariffs won't just hurt the 62% of Americans who have exposure to the stock market.
▶ 0:21:00According to a recent analysis from a research center at Yale, these tariffs will cost the average US household an estimated $3800. Others have estimated that households could end up paying almost $8,000 more because of Trump's tariffs. This economic tsunami is going to hit workingclass and middle class Americans the hardest. So, not only are these tariffs attacks on Americans, they are textbook example of the kind of regressive tax that will be borne by most of the people who have the least.
▶ 0:21:30So, how does this uncertainty affect our treasury market? Not only is the Treasury market the deepest and most liquid market, but as former Secretary Janet Yellen put it, it is the very bedrock of the global financial system. The US Treasury market is so important because investors have come to trust the stability and the credit of the United States. Yet, less than 80 days into his term, President Trump has shown he's willing to gamble away the stability by picking a trade fight with the rest of the world.
▶ 0:22:00A recent Bloomberg article warned that foreign investors may also lose interest in purchasing more treasuries due to President Trump's actions. So, today we talk about what we can do to make our treasury market more resilient. We can't lose sight of the biggest threat to our economy, the Trump tariffs. And this ongoing tumult makes the resilience of our treasury market all the more important. Within the Treasury market, we should always be looking for ways to improve efficiency, resilience, and overall functionality.
▶ 0:22:28This includes looking at the supplemental leverage ratio, SLR, to make sure that the intermediaries are not disincentivized to hold low-risk assets like treasuries. And we must simultaneously make sure that the intermediaries remain well capitalized to maintain the safety and soundness of our economy. Central clearing is another way we can strengthen our treasury market and continue to mitigate risk.
▶ 0:22:50The SEC's effort to increase the number of treasury markets transactions that are centrally cleared is laudable and it is good to see that the market participants are committed to a collaborative approach to make sure that we reduce the risk in the Treasury market. I look forward to the discussion and I yield back the balance of my time. Gentleman yields back. The chair now recognizes the chairman of the full committee, Mr. Hill, for one minute. I thank Chairman Lucas. Appreciate the panel being with us today.
▶ 0:23:15The Treasury Markets the world's largest, most liquid government bond market with 28 trillion of Treasury securities outstanding. It's woven into the fabric of our economy and that of the entire globe. It's the fundamental anchor of the dollarbased reserve currency system. The Treasury market affords investors the opportunity to purchase nearly risk field free assets that facilitate our nation using those favorably priced proceeds to invest in our national priorities. This globally critical role of the Treasury market requires our attention.
▶ 0:23:45While the Treasury is the global safe haven asset for many trading partners, one must note of the most consequential purchaser of the US debt is not a foreign nation. It's the Federal Reserve. Owning over$4 trillion dollars of treasuries through its many rounds of quantitative easing is the Fed is the single largest owner of US debt. However, increasing federal budget deficits and ownorous regulations call into question the Treasury market's resilience.
▶ 0:24:11A Treasury market that fails to function effectively stops our economic growth from prospering. This hearing is an opportunity to explore the relationships between the Treasury market and examine its securities and how they're utilized for monetary policy. I thank the chairman and I yield back. Gentleman yields back. The chair now recognizes the ranking member of the full committee, Miss Waters, for one minute. Thank you very much.
▶ 0:24:41While we examine ways to strengthen the resilience of the Treasury market, it is impossible to ignore the impact of Trump's harmful policies and the damage they are inflicting on the economy after Trump announced his tariff plan last week. A record 6.6 trillion in wealth was erased in two days in the stock market. And there's more pain to come.
▶ 0:25:08In fact, Fed Chair Powell has warned uh that, and I quote, "We face a highly uncertain outlook with elevated risk of both higher unemployment and higher inflation." Quote unquote, so much for the lower cost for consumers.
▶ 0:25:25Now, Republicans are trying to pass a budget loaded with 7 trillion in tax cuts for the wealthy while they slash Medicaid by $880 billion. If we want lower prices, more jobs, and a stable market, Trump and the Republicans should promptly course. Thank you. There's a lot more I could say, but I just yield back the balance of my time.
▶ 0:25:55Chair, thank the gentle lady and uh notes to my colleagues that presently we are scheduled to have a couple of votes. But since the floor has not been called into session, I'm inclined to the agreement of my ranking member to proceed with the testimony because your time is extremely valuable, my friends. But at a certain point in the votes, we'll suspend and return. With that, today I'd like to welcome the testimony of Mr.
▶ 0:26:20Tom Wiff, who is the managing director of USB, currently serving as the CEO of the Credit Swiss US entities, and the Honorable Scott Omalia, who is the CEO of the International Swaps and Derivities Association. Also, Professor Kristen Forbes, who is the Jerome and Dorothy Limson Professor of International Economics and Management at MIT Sloan School of Management, and the Honorable Nelly Lang, who is a senior fellow economic studies at the Brookings Institute.
▶ 0:26:50We thank you for taking the time to be here, and you each will be recognized for five minutes to give an oral presentation of your testimony, and without objection, your written statements will be entered into the record. Uh let's begin with you Mr. Whiff. You are recognized for five minutes for your oral remarks. Very good.
▶ 0:27:16Chairman Lucas, ranking member of Vargas, and distinguished members of the task force, thank you for the opportunity to testify today on the United States Treasury Market. My name is Tom Wiff. I'm a managing director at UBS, where I currently lead the integration of the Credit Swiss acquisition. I'm here today uh as a board member of the Securities Industry and Financial Markets Association.
▶ 0:27:35Uh as well from 2007 through 2019, I served as the chair of the Treasury Market Practices Group or the TMPG, a group sponsored by the Federal Reserve Bank of New York that focuses on the integrity and efficiency of the Treasury market. I've also had the pleasure of testifying before this committee in 2021 when I served as chair of the alternative reference rate committee or the arc, a group of private sector market participants convened by the Fed to ensure a successful transition from Libore.
▶ 0:28:02The US Treasury market is the largest and most liquid bond market on the planet. Its smooth functioning is essential to achieving the lowest cost to taxpayers in connection with the financing of our debt and the efficient operation of the financial system. Backed by the full faith and credit of the United States government, treasuries are considered by market participants to be the benchmark credit. Treasury yields have an impact on the rates that consumers, businesses, and governments across the globe pay to borrow money.
▶ 0:28:30In addition, the US Treasury repo market is a key transmission mechanism for US monetary policy. The Treasury markets operate through primary dealers, banks, and broker dealers that have been designated as counterparties of the Fed. They are the largest buyers of new treasury debt and act as market makers or intermediaries in the secondary market. Treasury securities are widely held and actively traded by public and private institutions, particularly financial institutions.
▶ 0:28:56The Treasury market has grown significantly in recent years with 28 trillion dollars in Treasury securities outstanding today, which is more than double the total from 2016 of 13.9 trillion. This growth trend is likely to continue. While the market has expanded significantly, the capacity for dealers to intermediate has become increasingly constrained by the application of additional capital and credential requirements. One example is a supplementary leverage ratio ratio.
▶ 0:29:25The SLR and other leverage requirements are intended to be risk agnostic back stops to risk based capital requirements. However, they do create binding constraints for some large dealer banks, reducing their capacity to intermediate the treasury markets. Another is the original Basel 3 proposal's fundamental review of the trading book which would dis disincentivize banks from marketmaking in US treasuries. Additionally, proposed revisions to the GIB searchcharge would inhibit liquidity in the Treasury futures market.
▶ 0:29:54Today, US Treasury transactions are either settled bilaterally or centrally cleared. The SEC finalized a rule in December of 2023 on the clearing of US Treasury securities, which will require most market participants to centrally clear eligible cash and repo transactions. We at SIFMA remain steadfast in our efforts to operationalize the clearing mandate.
▶ 0:30:17Over the past year, SIFMA has been working with its members both buy and sell side and other market participants to develop standardized documentation, policies, and procedures to facilitate the transition to mandated central clearing. At the same time, SIFMA and its member firms were gratified to see SEC acting chairman UEA extend the implementation date for mandated central clearing of treasury securities and repo. This additional time will help ensure a smooth transition and avoid disruption.
▶ 0:30:46We also think the SEC could make certain technical fixes to the rule that I'll cover in greater detail in my written remarks. I'll close where I started. The US Treasury market remains the most important financial market in the world. Any reform of the Treasury market should enhance liquidity, market resiliency, and preserve the capacity of dealers and other market participants to meet the growing demand for and supply of Treasury securities. Thank you. Gentleman yields back. The chair now recognizes Mr.
▶ 0:31:15Romelia, you are recognized for 5 minutes for your oral remarks, please. Chairman Lucas, Ranking Member Vargas, members of this task force, thank you very much for the opportunity to testify today. US Treasury market is the deepest mo most liquid liquid in the world has been stated, most important changes are coming to it in the form of mandatory requirements to centrally clear Treasury securities. ISA supports these measures. We also support several important regulatory initiatives that will be fundamental to their success.
▶ 0:31:45These initiatives include first uh changes to the supplemental leverage ratio. This should be modified to ensure banks have the balance sheet capacity to provide intermediation and client clearing services in the US Treasury market including during periods of stress. Second, the Basel 3 endgame and searchcharge for globally systemic banks or the GI must be revised to remove any unnecessary and disproportionate tax on clearing.
▶ 0:32:09Third, margining and capital treatment of client clearing exposures must be revised to reflect the actual risk of clients overall portfolio. Fourth, and finally, it's important that policy makers, market infrastructure providers, and market participants continue to work together to address the various operational, legal, and regulatory issues related to the implementing the clearing mandate. Now, let me briefly describe each of these initiatives. First, the SLR.
▶ 0:32:35At the height of the global pandemic in April of 2020, concerns about bank intermediation capacity prompted the Federal Reserve to temporarily exclude US treasuries from the SLR calculation. That's because the SLR serves as a non-risisksensitive constraint on banks that can impede their ability to act as intermediaries, particularly in times of stress. Last year, I sent a letter to the US banking agencies requesting that this exemption be introduced on a permanent basis.
▶ 0:33:02The SLR is not part of the Basel Endgame package, so we would need a separate consultation to amend it. We were pleased to hear that Federal Chairman Powell acknowledged this in his February testimony before this committee. That changes are necessary, as well as comments by Secretary Besson and Reserve Governor Bowman drawing attention to this issue as well. A second capital issue uh is the impact of the US Basel 3 endgame rules and the search charge on GIPS.
▶ 0:33:28It has long been clear that these measures as currently proposed are inappropriately calibrated. Nowhere is this more evident than when it comes to clearing. Analysis by ISDA and SIFMA has shown that the Basel proposals and the GI search charge would increase capital on USGB client client clearing business by more than 80%. This punitive tax is completely at odds with the policy objectives to promote the use of central clearing.
▶ 0:33:53It is not aligned with risk and would bring economic viability of the client clearing business into question precisely at the wrong time. A third issue is the efficient clearing of US treasuries by clients that requires the amount of margin posted to reflect the actual risk of client exposures across their entire portfolio. Capital requirements must also reflect this actual risk.
▶ 0:34:15To achieve this, margin offsets across treasury securities and futures transactions need to be extended to the client positions as well as they are currently for clearing members. The offsetting risk they need to be recognized when banks determine their exposure to clients under the US capital framework. Without such recognition, bank capital requirements will overstate the risk in a client's portfolio. Fourth, ISD and its members support the Treasury clearing and believe that it's critical that the markets are able to implement the clearing mandates in a safe and efficient manner.
▶ 0:34:45The committee's continued review of the implementation timelines can help do that. Good progress is being made in many areas. ISDA, for example, has published the analysis of very clear various clearing models, conducted multiple education seminars and conferences, and is collaborating with others, including SIFMA, to develop appropriate client documentation. But clearing models and clearing house offerings are still under development and will require regulatory approvals to test and test once they are finalized.
▶ 0:35:14Then thousands of counterparties around the world will need to agree to these new terms. In closing, let me reiterate our view that has given us that given the pivotal role that US treasuries play in the derivatives and final financial markets, we need to ensure that capital and margin rules, support treasury market liquidity, appro appropriately reflect risk and facilitate clearing. We urge policymakers to address necessary corrections and bank capital regulations to ensure that the effective implementation of the clearing mandate.
▶ 0:35:42Work to deliver the required legal and operational solutions is already underway, but there is plenty more to do in terms of addressing these issues. ISD and our members are committed to doing our part to make sure that the market continues to function smoothly and effectively. I'd like to thank the financial services committee and this task force for their attention to this critically important matter. Thank you very much. Thanks, sir. Dr. Forbes, you're recognized for five minutes. Thank you for inviting me to testify.
▶ 0:36:12This task force is an important addition to the oversight provided by Congress. A well functioning Treasury market and effective monetary policy are both critical foundations of US economic prosperity and unfortunately both are facing challenges even before the volatility of the last few days. So this is an important time to reinforce what has worked well as well as to consider how to address these new fragilities. In my written testimony, I address four related points.
▶ 0:36:39First, the importance of the US Treasury market and monetary policy to households, businesses, and the government. Second, the role of the Treasury market for monetary policy. Third, growing risks to the Treasury market. And fourth, growing challenges for monetary policy. For my oral comments today, I'll only cover one of those points, developments and risks in the US Treasury market. But first, let me briefly summarize my background. I'm an economist and my primary role since receiving my PhD is as a professor at MIT Sloan School of Management.
▶ 0:37:08My academic research addresses questions in monetary policy, financial regulation, capital flows, financial crisis, contagion, um, usually from a multi-country perspective. I've also taken several leaves for policy service, including at the US Treasury Department, as a member of the White House's Council of Economic Adviserss, and more recently on the Bank of England's monetary policy committee. When not in public service, I've also been involved in a number of advisory committees and consultant roles.
▶ 0:37:35But today, I'm speaking to you in my personal role as an economist and a professor. So now, let me turn to today's topic. There are many complex networks we take for granted in our daily lives. From our health to the electricity grid, when one component malfunctions, the disruptions can be severe. The same applies to the US Treasury market. The market is critically important to fund the government and it is the benchmark for other borrowing costs.
▶ 0:38:02A less efficient treasury market increases not only borrowing costs for the government but also for mortgages, car loans, and bank loans for your constituents. The Treasury market is also central to implementing monetary policy. Well, as we've heard from almost every speaker today, the Treasury market is the deepest and most liquid financial market in the world. Cracks have recently appeared. Most notable was in March of 2020 when the market became dysfunctional. Some of the underlying fragilities have only worsened since.
▶ 0:38:33So let me highlight four related developments. First is the increased scale of Treasury issuance. The US budget debt deficit is forecast by the CBO to be almost $2 trillion this year under current law. This must be financed with new debt issuance and a growing share of existing debt is in short-term T bills which need to be rolled over every year. This combination makes the US Treasury market much more vulnerable to shocks even if they're just short-lived.
▶ 0:39:02Second is the more limited ability of broker dealers to intermediate between buyers and sellers in the Treasury market. As we've already heard about from the other um people today, the capacity of this middleman has simply just not kept up with the increased size of the treasury market. And this limited capacity could lead to illiquidity, less efficient pricing, volatility, and spikes in borrowing costs. Third is changes in who is purchasing US government debt and how they're doing it.
▶ 0:39:31Foreigners are purchasing less, balanced by US institutions purchasing more. Many of these US institutions are hedge funds and asset managers that are not simply buying and holding treasuries, but using a combination of repurchase agreements, futures, derivatives, and hedging strategies combined with high leverage. These developments have benefits and costs. But one risk is that these highly leveraged investors are more prone to the fire sales that trigger market dysfunction.
▶ 0:39:59Fourth, and finally, is shifts in geopolitical alliances and the increased restrictions on trade and financial flows. This could over time reduce the demand for US dollars and treasuries. To date, the dollar and treasury market is still dominant undoubtedly because all the other alternatives have their own challenges. Nonetheless, if foreigners do become more concerned about potential losses, which could occur from high inflation, dollar depreciation, new taxes on their holdings, or restrictions on their ability to buy and sell.
▶ 0:40:29This could trigger sudden sales, a sharp dollar depreciation, and increased borrowing costs for our constituents. That's not enough to worry about. Monetary policy also faces an additional set of challenges. Disruptions to trade and supply chains will increase both inflation and unemployment. And central bank independence is under pressure in many countries around the world.
▶ 0:40:50An independent central bank will not be able to avoid painful economic adjustments, but can stabilize inflation more quickly, limit the extent of price increases, and require fewer job losses. So to conclude, we are at a historic moment. The global trade and financial architecture is being transformed. Periods of transition create opportunities, but can also aggravate underlying risks and vulnerabilities.
▶ 0:41:16The risks to the Treasury market are particularly large today given the sharp increase in debt and other developments I've highlighted. And any disruptions in the Treasury market will impede the ability of the Fed to stabilize inflation, support employment with moderate long-term interest rates. So the committee's work today has become even more important, more important than just the two and a half months ago when you were formed. I look forward to your questions. Thank you, Dr. Dr. Lang. You're recognized for five minutes for your oral testimony.
▶ 0:41:49you. I appreciate I appreciate the opportunity to appear today. I will focus on Treasury market resilience and its importance for monetary policy and financial stability. The Treasury market, as others have said, is key to financing our government at lowest cost to the taxpayer. It is an important channel for a Federal Reserve monetary policy.
▶ 0:42:16It provides the benchmark risk-free yield curve globally and it is a key source of safe assets and is used by many financial firms to manage liquidity risk. The Treasury market serves these critical functions because it is the deepest and most liquid market in the world. But that cannot be taken for granted. Electronic trading has increased and principal trading firms represent most of the trading in electronic interdeer markets.
▶ 0:42:43Traditional securities dealers have pulled back from marketmaking after capital standards and riskmanagement practices were strengthened after the global financial crisis and treasury debt continues to grow. And the investor base is more price sensitive as private funds with leverage and redemption pressures have increased their holdings while the share held by foreign official entities who are less price sensitive has fallen.
▶ 0:43:11The Treasury market dysfunction at the onset of the COVID pandemic in March 2020 illustrates these risks. Without liquidity, treasury prices fell and interest rates rose sharply. An unusual move since investors would typically flee to safe haven treasuries in this type of situation.
▶ 0:43:31And market functioning was restored only after the Federal Reserve itself began purchasing huge amounts of Treasury securities to provide liquidity and to ensure the effective transmission of monetary policy. Fortunately, the Fed purchases to restore market functioning were aligned with its monetary policy objectives at the time to stimulate the economy and raise inflation to its 2% target.
▶ 0:43:58It is possible, however, that the Fed may confront the need to purchase Treasury securities at a time that it would conflict with its dual mandate, and avoiding this conflict underscores the importance of regulatory reforms to strengthen Treasury market resilience. I'll turn now to some key reforms to strengthen resilience which are detailed in my written testimony.
▶ 0:44:22There have been some significant accomplishments under the umbrella of the inter agency working group on treasury market surveillance. More data on transactions and on hedge funds are now being disclosed and new data are being collected on an opaque but key segment of the repo market where dealers finance their clients. Treasury initiated a buyback program to allow dealers to sell securities to Treasury to help free up balance sheets.
▶ 0:44:50And the Fed put in place two standing facilities, including one to finance Treasury repo, which could encourage dealers to invest in capacity to make markets and support liquidity in times stress. Partial progress has been made in other areas. Of special importance is the SEC's role to mandate more central clearing of treasuries and repo.
▶ 0:45:13Central clearing is used for other assets and can reduce risk by standardizing risk management requirements and increase capacity for intermediation through multilateral netting. There are many complicated operational accounting and regulatory issues to resolve and industry groups are actively engaged and committed to addressing them. They recently received an extension of the deadlines for one year, but they should not delay further.
▶ 0:45:41Changes should be considered to the supplementary leverage ratio, the SLR, put in place following the global financial crisis. The SLR requires banking firms to hold the same amount of capital for riskless reserves at the central bank as they would for risky assets. One change would be to exclude central bank reserves from the SLR calculation. but importantly with an adjustment so that there would not be a reduction in total bank capital.
▶ 0:46:09Finally, to reduce surges in selling in periods of stress, open-end bond funds should be required to reduce significant liquidity mismatches which force treasury sales and supervisors should prevent excessive leverage of hedge funds in trades such as the cast futures basis trade that can force rapid unor disorderly unwinds of positions. These reforms as well as others in the IAWG workstreams are complimementaryary and interconnected.
▶ 0:46:39Any one on its own would not be enough to significantly increase the resilience of Treasury markets in stress periods, especially as the amount of Treasury debt continues to increase. Thank you. I'd be happy to take your questions. Thank you, doctor. And after consulting with the ranking member of the task force, we are now uh 14 and a half minutes into a 15minute vote.
▶ 0:47:03Last the indulgence of the panel and the task force will stand at ease until this and the proceeding vote and then let's return for questions. Task force stands at ease.
▶ 1:40:46The task force uh will now reconvene and we'll turn to our members for questions. The chair now recognizes himself for five minutes for questions. Mr. Malia, as you know, this week the SEC will likely get new leadership. The incoming chair will inherit issues that have significant consequences for the swaps market, like the clearing rule.
▶ 1:41:07What are the outstanding questions that warrant the chairman's immediate attention before the industry is able to fully implement the rule in time for the deadlines next year? I'll give you a nice question. Thank you, Mr. Chairman. Um, well, we're pretty confident that uh Mr. Atkins is going to be able to hit the ground running as an experienced uh SEC commissioner from a previous role and colleagues around him to support him.
▶ 1:41:32Uh the SEC is very focused on this rule and will and should be able to address this in a in a very reasonable and immediate way. There are a couple of SEC changes that we would recommend. There's some issues around inter affiliate rules, uh some accounting rules that to really make this effective. Um there's some more information in our in my testimony that could articulate that.
▶ 1:41:55But we need them as a partner in terms of the implementation to make sure that they approve the various rule books for the DTCC, CME and ICE which are the the competing uh uh clearing houses. They need to make sure that the the rest of the rules are there to facilitate clearing and encourage it. Uh they've been very good up until now. The goal of all of this is to make sure we have deep and liquid markets.
▶ 1:42:20We also need to make sure that we have the delivery of cost-effective clearing and that also includes cross productduct netting solutions and operational changes that need to be implemented. And then on the industry side working with them to make sure we have the appropriate timetables to imple implement the operational changes to integrate clearing and custody and the legal agreements to support uh the various clearing uh regimes that are going to be made Turning to you Dr. lang.
▶ 1:42:49I continue to urge the regulators to permanently exclude US treasuries from the supplemental leverage ratio and the enhanced supplement leverage ratio. Near riskless assets like treasury should not be a balance sheet burden to hold like our current regulatory regime treats them. Would you expand on your written testimony? Should the regulators change the SLR or ESLR much like they did temporarily in 2022? Thank you for your question.
▶ 1:43:19Um I do believe the capital requirement that is not risksensitive should be adjusted. I would support excluding reserves at the central bank which are riskless. I have not supported excluding treasuries because they have interest rate risk. Um, also I think it's important to adjust but not in a way that would reduce the total amount of capital.
▶ 1:43:48So, Bank of England and the ECB have used different formulations, but they have adjusted these SLR ratios in ways to not penalize holding riskless assets while at the same time not um reducing Thank you. As a committee chairman during the implementation of the DoddFrank swap regime, I understood the value of gathering perspectives from a wide range of stakeholders.
▶ 1:44:18Mr. Whiff, as former chair of TMPG, how important is it for the Treasury, the Fed, the SEC to engage with industry? Why does the market benefit uh when all parties collaborate? Thank you, chairman.
▶ 1:44:35Uh the view on this is that every important uh moment critical moment in the in the development of the treasury market has involved exactly that which is which is a a public private work where the industry can sort of lay out the problems regulators can address it in in a more practical way. So whether it be the original initiation of clearing the expansion of that what we see today from the SEC all these things are evolving.
▶ 1:44:58I think when we when we go through some of the important moments over over the last you know several decades whether it be the flash rally whether it be the uh all these events that the industry and the regulatory community have addressed these issues and have come to very practical solutions in some cases. TMPG in 2008 following uh obviously the global financial crisis and an incredible amount of settlement fails and settlement fails obviously are one of the key accelerants to issues during times of stress.
▶ 1:45:28Settlement fails create counterparty credit risk. Counterparty credit risk creates a series of events and liquidations and and serves to accelerate issues. TMPG put in place a fails charge which actually reduced fails by 90 or 95% settlement fails.
▶ 1:45:43Also over time following the flash rally, the Treasury Market Practices Group worked together with the Fed to lay out a series of maps that that that serve to highlight where there were potential points of failure in the clearance and settlement system of the US Treasury market and and many of the things that we've seen that have come out of the SEC have leveraged some of that work to really identify where those problems are and laid out end to end.
▶ 1:46:06And I also think that when we think about the treasury market completely and we talk about liquidity, liquidity really is is certainly obviously the ability for buyers and sellers to meet in large size and moves move positions when they need to. The other part of this is that finality of settlement is critical and the robust clearing and settlement structure which is only enhanced by further uh further central clearing is incredibly important.
▶ 1:46:30So if we think about all the major events and major enhancements we've seen, they've exactly gone down that path which is input from industry along with practical outcomes from the regulatory community. Absolutely. Thank you. And my time has expired. The chair now recognizes the ranking member of the task force, Mr. Vargas, for five minutes of questions. Thank you very much, Mr. Chairman. Again, I want to thank the panel. I apologize for our tardiness. We did try to get back here as soon as we could. So, thank you again for your patience.
▶ 1:46:56Uh, I would be remissed if I didn't ask about tariffs and the chaos in the markets. Sunday, walking from a church that I go to, from the entrance of the church to my car, I had three different families stop me and ask about their 401ks that are now becoming 201ks because they've lost so much money.
▶ 1:47:19One family in particular are retired and the chaos that they see and the investment that they've seen throughout their lives going down so rapidly has got them terrified. So I have to ask I mean the ca you know we we heard today about stability full faith in credit United States all this stuff and at the same time right now the markets are going crazy and Americans are incredibly fearful of what they see. Would anyone like to comment on the issue?
▶ 1:47:49I mean, this I think this is very important. I know that it's not exactly on point and I'll ask some more questions about exactly what we're here today, but I have to ask this because again, it's the question on everybody's mind. Dr. or Mr. Lang, would you like to Uh, thank you for the question.
▶ 1:48:06Um the tariffs are attacks on imports and an increase in tariffs in the size and the breadth and to the very high levels that we are seeing historically high levels is really a massive tax increase and a major disruption to the economy.
▶ 1:48:31So I think we are seeing the effects of the unexpected increase in the high levels in the stock market in the volatility prices are falling the Treasury yield curve the long end is rising the Treasury yield curve is steepening and corporate borrowing costs are rising. So I do think tariffs will increase prices.
▶ 1:48:56It will slow the economy and we are creating ourselves a stagflation scenario. And one of the things that concerns me is the independence too of the Fed here because now even on Friday we hear the president saying on on um social truth social saying cut interest rates Jerome and stop playing politics.
▶ 1:49:18I see that as a great danger when you have the president of the United States speaking in that way and through that medium to the Fed chair. I I find that what what problems do we have when we don't have a central bank that's independent? Dr. Forbes, can you comment on that? Thank you for asking. That's a very important point. We know that the immediate effect of tariffs is prices are going to go up. Uh as uh Dr.
▶ 1:49:45Lang said the tariffs are just so big, companies can't absorb it, prices are going up, and then as people realize they can't buy as much because things are more expensive, they're going to be buying less. That means demand will be falling, companies will sell less, and we could see increased unemployment. So, there's a hope the Fed can then step in and stabilize the system, lower interest rates, and help support jobs. But that's going to be tricky in an environment of higher prices. The Fed can help, but the Fed will be much more effective is if it is independent.
▶ 1:50:14Uh we have a long history and experience in other countries. If the Fed is not independent, inflation expectations go up. It can be much harder to bring inflation down. I mean, look at Turkey, which undermine the independence of the Fed. We had inflation above 50% for two years in a row. And I and I do hope that this information is getting to the president and the administration because I think it's going to be a disaster if if he goes down this route. I do want to ask though um Mr. Riff about you talked about the full faith and credit of the United States and the mandated central clearing.
▶ 1:50:43spoke a little bit about that the added time that's been given. How important is that? Because we also heard that at the same time they shouldn't delay it any further. Could you comment that? Certainly obviously you know this is the most important market in the world and we talk about periods of volatility which you know which we've recently seen. What's what's important is the ability to transmit risk from buyers and sellers.
▶ 1:51:04that's important uh critically important is that buyers of Treasury who are seeking to find that risk-free asset at that time actually get those deliveries of those of those securities. That's it's critical and I think you know we stress a lot about the robust infrastructure. We stress a lot about the importance of central clearing but by reducing that traffic in these periods of high volatility we're able to see the market function and obviously the full faith and credit of the United States government is is is paramount. Well, thank you very much. I apologize my time is up. I did have a question for Smiley.
▶ 1:51:35I apologize. But again, I thank the chair and I yield back my 10 seconds. Gentleman yields back. The chair now recognizes the gentle from Arkansas, Mr. Hill, who is also chairman of the full committee for five minutes. Mr. Chairman, thank you, Chairman Lucas, and thanks for this great panel, and I think we all just need to take our breath about asking this panel to comment on on equity markets when the equity selloff is down to where it was a year ago.
▶ 1:52:02And I think everybody believes that the equity markets were particularly overbought during the run-up to the election. So uh but sticking to the subject at hand, the CBO is projecting that in we'll pass the historic level of debt to GDP in 2029 and that it'll be be 156% by 2055. Mr. Whiff, uh increase in government debt results from persistently large deficits.
▶ 1:52:30That's concern to both sides of the aisle here. But since the pandemic, Congress has not been very successful in doing anything about that. What happens when the primary dealers run out of capacity to absorb US Treasury debt? I think this this speaks back back to the uh the discussion about the supplementary leverage ratio and the ability for the primary dealer community to intermediate uh large positions, to intermediate during times of uh of normal times and during stressful times.
▶ 1:52:59and ensuring that the the infrastructure around the market post trade is is sufficient to handle what are greater and greater volumes and we discussed this in the opening and the same holds true here which is regardless of the size we have to ensure that the infrastructure around the US treasury market remains robust central clearing is one of the answers the supplementary leverage ratio can certain by reducing that to any degree will allow those bank intermediaries and primary dealers to provide that that that period of
▶ 1:53:29uh that ability to intermediate during times of stress to prevent uh to prevent some of those outcomes and to at least be somewhat of a uh to to limit volatility to some degree by being able to step in and intermediate without without running the large capital that comes with. Thank you, March. In January, the Fed stated that it was considering slowing down the pace of its balance sheet reduction due to concerns about reserve balances around the debt limit negotiations.
▶ 1:53:56In March, the Federal Reserve followed through and reduced the pace of QT despite one governor dissenting. Professor Forbes, should the Fed have adjusted the pace of balance sheet reduction and attribute it to due to debt sealing negotiations? That sounds kind of political to me. What do you I I was worried about that. I am sympathetic to the Fed wanting to slow down the pace of QT, especially as before they stated they wanted to slow the pace to be able to run it off as much as possible.
▶ 1:54:25I think shrinking the balance sheet is a worthy goal. It reduces the cost to the Fed and the goal should be to reduce it as much as possible, but it should not be tied to fiscal policy, the government. So, one of the the rules of church and state is uh should not monetary policy should not be affected by fiscal discussions. Yeah, I agree with that.
▶ 1:54:44Um but regardless of how big or small the balance sheet is, the size does interact with the Fed's functioning and is maintaining a large sheet impeding the functioning of the market as some would argue has occurred in Japan.
▶ 1:55:01In other words, will shrinking the balance sheet too quickly impede the functioning of the market or uh and what risk are we if it just stays this enormous percentage of GDP since no one will define how many excess reserves we actually need to have. I'm sure you would tell the committee the exact number how many reserves we need? Most definitely not. And I'm sure that the number changes too based on the market environment which has changed quite a So shrinking the balance sheet is a goal.
▶ 1:55:29uh if you have too large a balance sheet as Japan did that can impede market functioning in and of itself. If the government owns too much of the market it's not efficient and that's why the the Japan actually had to then shift from buying government bonds to buying corporate bonds to buying equities um because it was impeding the market. So it's good to get out but it's good to get out slowly because if you do quantitative tightening reduce the balance sheet too quietly you could cause stresses to emerge and you want to the goal is to reduce it slowly enough that you don't cause those stresses to emerge. Yeah. Thank you.
▶ 1:55:58Former Under Secretary Lang, so nice to see you. Thank you for being back before the committee. Can you shed some light on what happens in other countries? For example, Canada was able to more quickly shrink its balance sheet. Is there something we can learn from Canada or UK or New Zealand or Sweden and how they uh modify their balance sheet size as a percentage of the economy? Um, so I'm not I'm not that Thank you for the question.
▶ 1:56:26And I'm not that familiar with how they operated their operations. I think in the US we have a very uh market capital marketsoriented system that interacts with the reserves at the banks in ways that make it unique and need to sort of address these issues on their own. Um but there are some lessons to learn but I would need to get back to you. Good.
▶ 1:56:53Guess if the panel could reflect on that, just send us your answers in in writing and we appreciate your time today. And I yield back to the chair. Gentleman's time expires. He yields back. The chair now recognizes a gentle woman from California, Miss Waters. Also, the ranking member of the full committee for five. Thank you very much. Um, I'm going to direct this to Dr. Lane. First, I want to thank you for your public service both at the Federal Reserve and most recently at the Treasury.
▶ 1:57:21uh under secretary for domestic finance during the Biden administration and I certainly appreciate the work that you did on several fronts including stable coins. Unfortunately, the Republicans seem more interested in allowing Trump and Elon Musk to enrich themselves while they write the rules of the road for everyone else.
▶ 1:57:43On the issue of our treasury market and monetary policy, Trump has launched a trade war against the rest of the world, including countries that used to be our friends. And by doing so, is raising the price of goods on hardworking families. Powell has said uh this will make inflation and unemployment go up. Do you agree with Um yes.
▶ 1:58:11Uh uh ranking member Waters, I do agree with the um premise the the prediction that tariffs this increase both the size of the increase and the level have been very unexpected and will be very disruptive and we will have inflation and much slower demand. So I think we have created a scenario where which is much more difficult for our economy.
▶ 1:58:40I would I would add that I think there are some longer term concerns as well. I believe we've we are undermining our global leadership position and that coming back to Treasury markets raises the risk of undermining the attractiveness of US financial assets. something that we enjoy the there are significant privileges to that and I am concerned about losing that privilege.
▶ 1:59:11I'm curious about um all the tra tariff war that has been created here and I'm looking at the countries and what he has assessed little African country called loto 50% what does that mean I'm not familiar with how they calculated the tariffs um I would say I don't agree with the goal goal of making every
▶ 1:59:41bilateral trade relationship be a zero deficit. But even stipulating that is the goal. As I understand it, some of the size and increase in tariffs that they did calculate uh were based on formulas that perhaps were not used correctly and were miscalculated. that that's an area that trade experts um are better equipped to answer.
▶ 2:00:11Well, I know that you have been um uh talking somewhat today about the uh impact all of this is going to have on the Treasury market. Uh will you explain what impact it will really have on the Treasury market and monetary um the tariffs. The tariffs.
▶ 2:00:34So, as I mentioned in my um testimony, the market functioning um raises risk to monetary policy if the Federal Reserve feels that it is needed to intervene and purchase securities at a time when monetary policy itself would want to tighten because inflation
▶ 2:01:05is high. um that raises some significant conflicts in terms of the Fed's role for managing crises and responding to market functioning events in treasuries and its monetary policy and I in my in my oral statement suggested that that is one of the reasons behind why it is so important and critical that Treasury market
▶ 2:01:37uh be strengthened. It is strong. It needs It can be stronger and we need to keep working at that. Uh while um Trump has made these horrendous moves now, I understand he's thinking about pulling them back. What's going on? Somebody help us out. Big booms, big publicity.
▶ 2:02:03And now is he trying to put everybody in a position where they have to negotiate with him? They have to come with to him and he can get something whatever it is he wants. Does anybody understand this stuff? Well, you got seven, eight seconds. No, we're out of time. I yield back the balance of You're out of time, Chair. The gentle lady yields back. The chair now recognizes the gentleman from Nebraska, Mr. Flood, who is chair of the subcommittee on Housing and Insurance for five minutes.
▶ 2:02:33Thank you, Mr. Chairman. As of January 2025, China was the number two foreign holder of Treasury securities with about 760 billion worth. That represents about 2.6% of our outstanding debt. Given China's role as a major holder of Treasury securities, I'm interested in how a broader decoupling scenario with China would affect Treasury markets. Dr.
▶ 2:03:00Forbes highlighted some of the challenges that could face Treasury markets in the coming years given the consistent and persistent issuance of debt in the face of ongoing deficits in her testimony. We're also seeing current efforts to confront China directly on trade, something that could either lead to better trade deals for America in the future or it could expedite a potential scenario. To Mr. Whiff, uh Mr. Omala, Dr. Forbes, here's the question.
▶ 2:03:30If we move into a bipolar world more similar to what we saw during the Cold War with the US and Russia, where some countries align themselves to the US and the others to China, could that have broader implications for our Treasury markets in relation to foreign purchases of US debt? Let's start with you, Mr. Web. I'm I'm trying to I'll stick to the plumbing of the Treasury market.
▶ 2:03:57I'm not sure I I'm can speak on the policy, but I think when we when we envision an environment like that, it's it's just incredibly important that we have a robust functioning treasury market regardless of who the buyers are at any point. And I think getting back to the, you know, to the supplementary leverage ratio, it does create economic disincentives for bank dealers to hold lower returning assets. And because of that, when we get to a point where we may have imbalances, uh the primary dealer community plays in a very important role.
▶ 2:04:26Uh and so I think as we focus on this with wherever volatility comes from, wherever imbalance comes from, it's incredibly important I think that we we focus on on the ability for intermediaries to to play their role and we ensure that uh that we have a very robust clearance settlement infrastructure around the US Treasury market. Thank you, Mr. Malia. I would agree with that statement.
▶ 2:04:52um the supplemental leverage ratio could be a big relief in terms of enabling US banks and and those who are aligned with US interest in supporting the Treasury market to uh fully support that and make it sure it's liquid. Um beyond that I I would hope that we have as much transparency into the activities of foreign governments trading these products. Dr. forms.
▶ 2:05:15So I talk about this with some more numbers in my testimony, but at a high level, if China steps back in foreigners step back from buying our treasuries, that would have been a very big concern in the 2000s because then foreigners were a major part of the demand for our treasury market. They have stepped back. Right now, foreigners own roughly 30% of our treasury market, which is well down from over 50% a couple decades ago. So that means we are less vulnerable if foreigners do not demand as many of our treasuries.
▶ 2:05:42But in the flip side of that is we are now much more reliant on highly leveraged investors and other US institutions that have bought treasuries through more complicated transactions which could increase vulnerabilities through other channels. In a scenario where we continue rapid deficit spending and we lose significant buyers of our debt due to broader geopolitical trends. Are we in a position to find new demand for our debt from other sources to offset loss demand from countries that stop purchasing US debt? Dr.
▶ 2:06:12Forbes, what do you think? Yes. So, we have seen the shift. Less foreign demand for our treasuries, more demand from US financial institutions, hedge funds, asset managers, etc. Um, it has compensated for that. But we also still need foreign inflows to find our current account deficit. And what's also been interesting is foreigners are buying less of our debt. They're putting more money in our equity market and they're buying more shares of our companies. So again, every lot of different factors to balance out. Mr.
▶ 2:06:40Malia, I think I think some of the concern I would have around this if the US cannot move its debt, it's going to have to repric it to a higher level to sell it, encouraging encouraging more participants to come into the market, and that's only going to make our problem worse. Last question. Uh, do you feel that we're prepared for a scenario where the US is decoupled from China and the world is realigned on these bipolar lines? Mr. Whiff, what do you think? I don't think I'm prepared to answer on foreign policy.
▶ 2:07:10I'll let Dr. Forbes try I'll I'll focus on the economics, not the foreign policy or security side on and pure economics. If we decouple from China, it does mean items will be more expensive. Uh in the 2000 2010s, there were a lot of challenges, problems with adjustment, but part of what kept inflation low was the fact we did buy items from where they were made more cheaply, a lot of which was China. Thank you very much. With that, I yield back, Mr. Chairman. Gentleman yields back.
▶ 2:07:40The gentleman from Illinois, Mr. Casten, who's also vice chairman of the full committee, is now recognized for five minutes. Thank you, Mr. Chair. Um, thank you all for being here. This is um I've really been looking forward to this hearing for a while. This is one of the more interesting ones we've had in a while, and you're all living up to my Um, Miss Lang, I had uh on Friday I had breakfast with a mutual friend, um, former colleague of yours, Brett Neman, um, who's now back at University of Chicago.
▶ 2:08:07And, um, yes, we were having a good time catching up as old friends, and then he told me he had to run off to write an op-ed. I don't know if did you have a chance to see the op-ed he wrote in the New York Times. I think you'd alluded to it in your conversation with Miss Waters a moment ago. Yeah, I I did not see the op-ed, but I also saw him last week. Yeah. Good. Um, I knew I liked you. Um, so in this op-ed he mentioned what you had alluded to with uh ranking member Waters that his research was cited as a basis for some of the Trump tariffs.
▶ 2:08:37and he was very clear that he that's actually a mislication of his research. But that as he looked at the impact of tariffs back in the last round of Trump tariffs to what degree producers raise their price in response to tariffs he found that for every dollar increase in tariffs producers raised their price by about 95 and that in the math where they claim to use this value they plugged in 0.25 25 and his point which he shared with me and in this article was that if you accept the logic of their tariffs on the face which he does not
▶ 2:09:07they're four times too high but in any event inflationary and and I I say that because I I wonder you'd alluded to this in your opening remarks you've alluded to this a couple times I struggle to understand what happens if US fiscal policy is aggressively inflationary and the Fed has a mandate to bring infl inflation down and as you said the tools are out of sync. Does the Fed have any tools? I mean I mean you know Dr.
▶ 2:09:37Forbes you'd mentioned that sort of you know sure eventually we get huge unemployment and finally the Fed's tools work. If we want to avoid that point does the Fed have any tools or do we just fight with each other with our monetary and our fiscal policy for the foreseeable future? I think um a stagflation type scenario which one could see as a likely outcome from the tariffs um are ones that is one that the Fed is not well equipped to handle.
▶ 2:10:07The Fed manages aggregate demand and this is one can think of this as a supply shock. So think of it as an increase in oil prices that just a big increase in oil prices such as we saw in and monetary policy can't fix can't adjust that.
▶ 2:10:30They can adjust it only if the higher prices work into inflation expectations but then then their policy is to raise rates which will not support economic growth. um that it is not a scenario in which monetary policy is designed. So I I hope we're all on a very bipartisan basis as scared as I am by that answer. Um Mr.
▶ 2:10:53Whip, I wonder if if we accept that premise, how should markets respond, right? if if if the Fed tools and treasuries are responding and I wonder specifically when we saw the equity collapse last week, we saw, you know, huge shifts in Treasury pricing as you'd expect if you know domestic folks were pulling money out of equities and going into treasuries. But if I'm reading the numbers right, we had we had 15 months of foreign net purchases of treasuries prior to November.
▶ 2:11:24And in the in the Treasury data that's come out since November, which I think is only through January, foreigners have been net sellers of treasuries, primarily Canadians. Obviously, something politically happened in November. Are you seeing at a granular level that those trends through January are continuing? Are we seeing a rebalancing? And is is there some explanation for rebalancing other than the election in November? Or is there something else that's driving that shift in trend?
▶ 2:11:52I think what we've seen uh over the last several days certainly during this period of volatility is that you know uh from a central clearing perspective the DTCC currently clears has about 10 trillion in clearing. So the market the market volatility we've seen and the and the volumes we've seen are being reasonably well managed across that infrastructure.
▶ 2:12:11But regardless of where uh really where where the volume the the uh the velocity of markets or the uh or the volatility comes from the critical piece is that the markets remain open and and they remain available. And I think but I guess because I'm tight on time what I'm trying to understand because I don't I don't want to draw a line that's not there. Presumably we know that that foreign buyers were selling treasuries prior to the tariff shock. We know that after the treasury shock some buyers moved from equities into treasuries.
▶ 2:12:39Are those buyers domestic primarily or is this tariff shock and this conflict in US policy moving foreigners out of US markets generally? I don't have that information for you. I'll be happy to get back to you. Okay. I would love to see that. Thank you. I yel back. Gentleman's time is expired. Uh the gentleman from Indiana, Mr. Stzman, is recognized for five minutes. Thank you, Mr. Chairman, and thank you to the panel for being here uh today. Um I'd like to um ask Mr. Wim a couple questions.
▶ 2:13:08I appreciate your your testimony and your charts and uh the information that's in um documentation here and I really want to focus on the debt of the federal government because to me I believe that's the greatest has the greatest will have the greatest impact and is the greatest threat to the United States and other parts of the world.
▶ 2:13:30I mean, we've seen what's happened over the past couple of days with a realignment from the tariffs and the uh what President Trump is doing bringing people to the table to um restructure our trade policy around the world. I believe that can be fixed over a period of time may take a little bit because there's a real shock to the system, but a debt collapse would be almost catastrophic. Would you agree with that?
▶ 2:13:58C certainly when we talk about the Treasury market obviously the full faith and credit of the United States government is is is needs needs to always always be top priority and that means markets need to function and one of the things I think is important to mention here as well again going back to the SLR is we always we always need a well functioning US Treasury repo market as well because it's also another shock absorber for these big moves of securities across the market uh and allows I think financing to be provided uh to people who are buying securities as Well,
▶ 2:14:28so uh overall again it it does comes back to uh the SLR to central clearing and I think the ability for the markets to withstand the type of volatility we've seen over the past several days and to be available always. Yeah. And and I want to comment on something that Dr. Forbes said too about foreign investment you buying more US equities versus US treasuries. I mean at some point it's both going to come to a head, right? I mean they do rely a bit on each other.
▶ 2:14:57you know, our our equity markets are depending on a solid US federal government. Correct. Dr. Forbes, would you want to comment on that? Uh, yeah. No, we as long as we run a trade deficit, which we do right now. It's it's been worse in the past, but it's still about four and a half% of GDP. We have to fund that by capital inflows from abroad. It's just math. It's economics. Before more of that funding came through bonds. Now, more is through equities.
▶ 2:15:24Um and if that funding dries up, we will see an increased cost of our debt and treasury yields will raise will rise. Um Mr. Ray Deio was here a couple of weeks ago and spoke to members of Congress and uh he uh of course has experience around the globe with failing governments. And the question was asked, you know, can we restructure our debt? And he actually paused for a moment and said, I don't think so.
▶ 2:15:53I I mean, and that's pretty sobering to the fact that we're at that point where our bond holders, our debt holders wouldn't restructure US federal government debt at this point. And he he gave some solutions and direction saying we should at least have 4% revenue growth, 4% spending cuts and 1% reduction in interest rates if possible. uh Secretary Treasury or the Treasury Treasury Secretary Scott Bass had a similar plan of 333.
▶ 2:16:22Um and and I know you probably would all agree to those. You all are kind of nodding your heads, but to get Congress to to do that seems to be the the hurdle today. Um I hope not. I hope we can get through that. But you know, are those is that the right direction? And does that help the long-term health of not only the United States but other parts of the world? Anybody want to comment on that?
▶ 2:16:47So I think um I I would agree with you um representatives the uh the deficit in fiscal year 2024 was 6.4%. a very high number given the economy was near full employment and the trajectory for the deficit given the aging population is is not the right direction.
▶ 2:17:11I think any tax and spending considerations that Congress and the president are working on need to consider the impact on uh the debt trajectory. Uh I do think we're in that kind of situation and from a risk management perspective which is um where I sat um recently the concern could be when investors view the path as unsustainable and demand
▶ 2:17:41start to demand higher interest rates that itself increases the deficit and you know you can get a a a spiral that is concern concerning. So I think uh the previous administration did propose a budget with some deficit reduction uh that was not passed.
▶ 2:18:02I think in this current administration, you know, considerations for both tax and spending need to uh be uh have this front of mind. Thank you, Mr. Chair. I yield back. Gentleman's time is expired. Uh, if the panel would indulge the chair, I think the ranking member and I would like to ask one more question a piece. And by the way, we appreciate your tolerance while we were in recess at ease until the floor situation was addressed in votes.
▶ 2:18:32Uh, but Mr. Malia, you noted in your written testimony that the Boswell 3 in-game proposal would have significant effects on both the Treasury market and derivative endusers. Can you expand on how it's how important it is for all relevant agencies and regulators to work together? Would it have been helpful for the credential regulators to collaborate with the CFTC and the SEC before proposing a rule like Basel 3?
▶ 2:19:01I think the answer is yes. Uh I think we had an instance with the Basel 3 endgame proposal coming out and the left hand didn't quite know what the right hand was doing. I think the clearing mandate, which is a safer form of management for the treasury market, came through. In the meantime, the endgame proposal has significantly higher capital charges for uh client clearing up to 80%. And so those those two policies aren't aligned at all.
▶ 2:19:27Um we think that the SLR, which is not part of the endgame, should be included in this to make sure that we have deep liquid markets. Um, ISDA and SIFMA put forward a very thorough analysis of the trading book rules that identified a whole host of uh different elements that were goldplated that we think should be risk you know go back to a kind of a risk metric and risk appropriate level uh which we can provide to that to this task force because it's a very thorough analysis of how high the numbers
▶ 2:19:58were and if you bring them down to a more risk appropriate level you'll get a better outcome. Um clearing is one example of that. But uh we have a an area where securities financing transactions where the US is all alone in proposing an 18% increase. We think that's too high. That would affect this market and it's an imbalance with European um partners that did not take the same proposal and put it into their rules. So that's another area as an example that we think uh should be modified as well.
▶ 2:20:26Now, we're encouraged both the the last proposals we were hearing about did seem to recognize this coming out of the Fed, but we have an opportunity to reset the deck here, and we would hope that they go back to a very risk appropriate solution, includes some of these other items, including the SLR reforms and the cross productduct netting reforms, which are very important to make sure we have an efficient clearing market.
▶ 2:20:49Before I turn to my colleague, I would just simply note I've been around long enough that I remind my constituents back home, these issues matter to every person. Whether they realize it or not, they matter to every person. And I've been around long enough for the dotcom boom and bust. I've been around for the shock after 911. Uh the property boom and bubble and bust of 08 and 09. The COVID trauma that set off everything. We have to be prepared for the unexpected.
▶ 2:21:19the things that would seem unmanageable because they happen. And that's why this task force and your input are so critically important. Making sure we can address what may yet come. With that, I yield back the balance of my time and I turn to the ranking member for his question. Thank you very much, Mr. Chair. I appreciate it. And again, I want to thank the witnesses here today. Um, there there's a big disconnect. It's interesting.
▶ 2:21:43Today, one of the things that I heard quite a bit, not only from the panel, but also from my colleagues on the other side, is debt. The issue of the national debt and how it's increasing. And yet, right now, what my colleagues on the other side are attempting to figure out is how to increase that debt by three to four dollars. I I find that amazing, the disconnect between what is said and then what they're attempting to do.
▶ 2:22:11And I think that we are going to see I I think they're going to figure out a way to give billionaires a tax cut that increases the debt by trillions of dollars. And it it is fascinating to me because I've been I got elected in February of 1993. I've been around for a long time, city council, state assembly, state senate, and now Congress. And you do see these cycles and every time it's the same.
▶ 2:22:38hear my colleagues on the other side talk about being fiscal hawks and then when they're in charge, they blow up the debt. They blow up the deficit. In fact, in my lifetime, the only person that's ever balanced it is, of course, who president? Who's that? And a Republican Congress. Yeah, that's right. And it was Bill Clinton. Bill Clinton. He did cuts and he increased taxes. It's the only time it's ever happened that's been balanced in my lifetime that I'm aware of. And yet here we go once again.
▶ 2:23:08What did concern me though in all this conversation, my question to you is, and I wasn't quite aware, as this I should have been, that foreigners are buying less of our debt and more the the groups that have more pressure, more debt leverage, more issues associated with wanting to have liquidity are buying our debt. And again, we can't move our debt, as you said. The only thing we can do is repric it. That concerns me. Concerns me deeply. Could could someone talk about Dr. Forbes? Could you talk about that?
▶ 2:23:39Yeah, it's quite a remarkable shift in our market of how we are financing our debt and it's it's like so many things its pros and cons. When foreigners held a larger share of our debt, especially sovereign wealth funds, foreign central banks, they were pretty sour steady sources of demand. They sort of bought a fixed amount roughly sort of every month, every year. So, it was pretty steady even as markets went up and down and volatility went up and down. So, it was a source of stability.
▶ 2:24:05But then you are relying on foreigners to fund your debt and there could be geopolitical issues, security issues if that support dried up for whatever reason. Now since more of the debt is purchased domestically, we're less vulnerable to if another country wants to sell our debt, which is positive. Also, the fact that more of the uh purchases of our debt are done by these leveraged investors through swaps and trades and derivatives actually means the market is quite liquid and they do do a good job of uh smoothing out small pricing discrepancies. So it does make the market more efficient.
▶ 2:24:35You know, they buy and sell quickly when there's small price moves. But that's the normal time. When there's big price moves, like we've seen the last few days, they are so levered that then small moves that trigger margin calls or people to worry can trigger force sales that then cause much bigger market movements. So we are more vulnerable in that sense. Thank you. Thank you, Mr. Chair. Thank you. And the chair would note the last true fiscal conservative president was Dwight Eisenhower. That's been a long time ago.
▶ 2:25:04I would like to thank all witnesses for the testimony today and without objection all and note that Mr. Stzman will submit written questions to the panel to be answered and I ask for that by unanimous consent. Seeing no objection without objection all members will have five legislative days submit additional questions to witnesses for the chair. The questions will be forwarded to the witnesses for their response. Witnesses please respond no later than May 13. Thank you very much. This hearing is adjourned.