Thank you, Secretary Yellen. I support the issuance of this report and want to highlight a few key issues.
First, the report outlines some of the risks posed by the financial sector’s increasing reliance on Big Tech cloud service providers. Financial institutions are looking to move more data and core services to the cloud in coming years. The operational resilience of these large technology companies could soon have financial stability implications. A material disruption could one day freeze parts of the payments infrastructure or grind other critical services to a halt.
The FSOC should evaluate whether certain existing tools, like the Dodd-Frank Act’s systemically important financial market utility authority, could enhance our oversight of these massive cloud providers.1
Second, the report highlights the FSOC’s work on digital assets. The FSOC’s digital asset report and the Annual Report highlight the risks of intertwining the crypto ecosystem and the traditional financial system.2 The current separation has preserved financial stability this year. The FSOC should decide next year on whether to proceed with a designation process for stablecoin activities under our Dodd-Frank Act Title VIII authority.3 This determination would subject financial institutions engaging in stablecoin activities to greater regulatory oversight.
Through the stablecoin inquiry, it has become clear that nonbank peer-to-peer payments firms serving millions of American consumers could pose similar financial stability risks. These firms issue runnable deposit-like liabilities and invest in riskier, less liquid assets. People often maintain balances and treat the account like a quasi-bank account. The funds may not be protected by deposit insurance and the failure of such a firm could lead to millions of American consumers becoming unsecured creditors of the bankruptcy estate, similar to the experience with FTX. Our patchwork state money transmitter laws were not designed to ensure the long-term stability of these types of firms.4
Finally, the report outlines the FSOC’s work on hedge funds. I’m concerned that the next Long Term Capital Management or Archegos is lurking in the shadows. The average leverage for certain major fund strategies is over 25-to-1. These funds may control hundreds of billions of dollars of assets and have trillions of dollars in derivatives exposures. They face no leverage limits or direct supervision and are deeply interconnected with global systemically important banks. In addition, we have almost no data on family offices like Archegos. These funds are increasingly behaving like hedge funds and can be massive. The FSOC should coordinate with the Office of Financial Research to close this data gap.
We issued a number of reports this year that have set the stage for action. Thank you to all the staff who worked on this report.