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JONES, GARCIA LEAD LETTER TO TREASURY SECRETARY JANET YELLEN CALLING FOR THE RESTORATION OF SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTIONS

June 7, 2021

Jones, García, and 13 of their Democratic colleagues highlight the threat posed by climate change to the stability of our financial institutions

WASHINGTON, DC — Today, Congressmen Mondaire Jones (D-NY) and Jesús G. "Chuy" García (D-IL) led 13 of their Democratic colleagues in urging Treasury Secretary Janet Yellen to restore and expand the designation of Systemically Important Financial Institutions (“SIFIs”) in order to rebuild a more stable and inclusive economy. In their letter, the lawmakers emphasize the existential threat of climate change, especially to the stability of our financial institutions. 

“We write to highlight that essential to rebuilding a more stable and inclusive economy is strengthening the Financial Stability Oversight Council (“FSOC”), most notably restoring the FSOC’s framework for designating nonbank financial companies as systemically important and expanding the Council’s use of this vital tool,” write the lawmakers. “Our economy increasingly faces unprecedented risks and challenges due to climate change, which makes restoring and expanding the designation of Systemically Important Financial Institutions (“SIFIs”) all the more essential.”

In addition to Rep. Jones and Rep. García, the letter is signed by Reps. Mark Takano (CA-41) Raúl M. Grijalva (AZ-03), Eleanor Holmes Norton (DC-AL), Nanette Diaz Barragán (CA-44), Alexandria Ocasio-Cortez (NY-14), James P. McGovern (MA-02), Ritchie Torres (NY-15), Cori Bush (MO-01), Adriano Espaillat (NY-13), Marie Newman (IL-03), Rashida Tlaib (MI-13), Ayanna Pressley (MA-07), and Jared Huffman (CA-02). 

“For the FSOC to fulfill its statutory mandate and successfully respond to emerging threats to financial stability, undoing the damage of the Trump Administration is essential,” continued the lawmakers. “This includes repealing the 2019 SIFI designation guidance and restoring SIFI designations to those firms de-designated under Secretary Mnuchin. But these changes, while necessary, are insufficient to address the risks to the economy that lie ahead, most notably the risks posed by climate change. Absent a SIFI designation, a range of nonbank financial institutions will be overly vulnerable to climate-related risks and other threats to general financial stability.”

The full text of the letter is below and can be found here.

Dear Secretary Yellen,

Congratulations on your confirmation as Secretary of the Treasury Department. We look forward to working with you to rebuild a stronger, fairer, and more resilient economy as we recover from the COVID-19 pandemic. 

We write to highlight that essential to rebuilding a more stable and inclusive economy is strengthening the Financial Stability Oversight Council (“FSOC”), most notably restoring the FSOC’s framework for designating nonbank financial companies as systemically important and expanding the Council’s use of this vital tool. Our economy increasingly faces unprecedented risks and challenges due to climate change, which makes restoring and expanding the designation of Systemically Important Financial Institutions (“SIFIs”) all the more essential. 

During the Trump Administration, under the leadership of former Secretary Mnuchin, the FSOC was purposefully weakened to advance an explicitly anti-regulatory agenda. Secretary Mnuchin’s top priority after taking charge of the FSOC in 2017 was rescinding the designations of the three nonbank SIFIs, in effect deregulating these large, complex, and interconnected firms. In addition to de-designating the existing nonbank SIFIs, Secretary Mnuchin proposed policy changes designed to make it nearly impossible for future administrations to designate new SIFIs. As you noted in your May 2019 opposition letter, “these steps – in design and in practice – would neuter the designation authority. Though framed as procedural changes, these amendments amount to a substantial weakening of the post-crisis reforms.” In December 2019, the FSOC adopted these changes, transitioning to a toothless activities-based approach whereby the FSOC can designate an institution as systemically important only as a last resort. 

Under the 2019 rule change, the FSOC is also required to evaluate the likelihood that a financial institution would experience material financial distress before designating the firm as a SIFI. Of course, there is no metric or methodology that reliably predicts material financial distress with the type of foresight needed to mitigate impact on the economy. This approach runs counter to the purpose of the SIFI designation, meant to prevent financial distress in firms before they present systemic risks.

For the FSOC to fulfill its statutory mandate and successfully respond to emerging threats to financial stability, undoing the damage of the Trump Administration is essential. This includes repealing the 2019 SIFI designation guidance and restoring SIFI designations to those firms de-designated under Secretary Mnuchin. But these changes, while necessary, are insufficient to address the risks to the economy that lie ahead, most notably the risks posed by climate change. Absent a SIFI designation, a range of nonbank financial institutions will be overly vulnerable to climate-related risks and other threats to general financial stability.

Under the Paris Climate Agreement, President Biden has committed the United States to a 50% reduction in greenhouse gas emissions by 2030 in an effort to limit global temperature increase to 1.5°C, consistent with the United Nations IPCC Special Report. Accomplishing this goal will require rapid, dramatic changes to multiple sectors of the economy, which could threaten financial stability if not managed properly. Failing to accomplish this goal will have dire implications for financial stability. We know that even if we succeed in limiting the increase in global temperature to 1.5°C, we have already set irreversible changes to our environment into motion.

Increases in global temperature will undoubtedly have destabilizing impacts on our financial system and our economy at large. The physical effects of climate change, including extreme weather events, could significantly impair the value of an array of real and financial assets and the institutions who own or have financial exposure to them. The increase in frequency and severity of wildfires, floods, hurricanes, and droughts will disrupt supply chains, compress corporate profits, drive up insurance claims, reduce the availability of insurance, and generally limit the ability of affected borrowers to repay debt. Additionally, we cannot expect our economy to remain insulated from the geopolitical risks associated with reduced crop yields, food and water insecurity, and climate-driven migration. 

In addition to these physical risks, our financial system is also vulnerable to what Federal Reserve Governor Lael Brainard has characterized as “transition risks: the risks associated with the transition to a policy framework that curtails emissions.” The past year has dramatically highlighted these transition risks, as sudden changes in demand for fossil fuels led to a sharp uptick in corporate bankruptcies. In January, S&P placed 13 major oil and gas companies on a negative credit risk because of risks from “energy transition.”

To manage the risks to financial stability posed by climate change, as well as all future risks to financial stability, we believe the FSOC must aggressively use the SIFI designation tool to ensure that all insurance companies, mortgage companies, leveraged hedge funds, private equity firms, asset managers, and other nonbank financial companies that meet at least one of the two statutory thresholds under the Dodd-Frank Wall Street Reform and Consumer Protection Act are subjected to appropriate regulation and oversight.

There are currently zero nonbank SIFIs designated by the FSOC, despite the movement of assets and risk to the nonbank financial sector and the largest and best telegraphed economic risk of our lifetime rapidly approaching. The success of Secretary Mnuchin in weakening the FSOC made clear the lack of resilience that the current SIFI designation framework has to anti-regulatory efforts from an administration or within the FSOC itself. Legislative proposals exist to strengthen the FSOC’s ability to designate firms as systemically important, and we believe the Biden Administration should endorse such proposals and work with Congress to permanently strengthen the Council. However, the current FSOC can and, we believe, should restore the SIFI designation framework and use it to meaningfully improve the resiliency of the financial system to climate change and other future financial stability threats.

Thank you for your attention to this issue. We look forward to working with you to mitigate the threats to financial stability posed by climate change and strengthen the FSOC so it is fully equipped to fulfill its mandate. 

About Mondaire: Mondaire Jones is the 34-year-old Congressman from New York’s 17th District, serving Westchester and Rockland Counties. He serves on the House Judiciary, Education and Labor, and Ethics Committees and is the first openly gay, Black member of Congress. A product of East Ramapo public schools, Mondaire was raised in Section 8 housing and on food stamps in the Village of Spring Valley by a single mother who worked multiple jobs to provide for their family. He later graduated from Stanford University, worked at the Department of Justice during the Obama Administration, and graduated from Harvard Law School. He is a co-founder of the nonprofit Rising Leaders, Inc. and has previously served on the NAACP’s National Board of Directors and on the board of the New York Civil Liberties Union. Most recently, Mondaire worked as a litigator in the Westchester County Law Department. In November, Mondaire was unanimously elected by his colleagues to be the Freshman Representative to Leadership, making him the youngest member of the Democratic House leadership team. In December, Jones was appointed a Deputy Whip of the Congressional Progressive Caucus and became a Co-Chair of the LGBTQ Equality Caucus. Mondaire was born and raised in Rockland and resides in Westchester.

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