Sen. Warren calls on Yellen, FSOC to do more to shore up regional banks

Sen. Elizabeth Warren, D-Mass., questions Treasury Secretary Janet Yellen during the Senate Banking, Housing, and Urban Affairs Committee hearing titled The Financial Stability Oversight Council Annual Report to Congress, in Dirksen Senate Office Building in Washington May 10, 2022 in Washington, DC.

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WASHINGTON — Sen. Elizabeth Warren is sounding alarm bells about the future of regional banks in a new letter Thursday to Treasury Secretary Janet Yellen and a top advisory group for bank regulators. 

In the letter to Yellen, obtained exclusively by CNBC, Warren addresses the secretary in her capacity as chair of the Financial Stability Oversight Council, and asks her and the council to investigate several looming threats to banks.

“I urge you to take strong action to address the alarming fallout from high interest rates and protect the safety of our financial system,” Warren writes.

The request follows an August announcement by Moody’s that it was downgrading 10 regional banks, and putting another 17 banks either under review or changing their outlooks from stable to negative. 

The message conveyed by the downgrades, Warren writes, “lends new urgency to FSOC’s role.”

At the core of Warren’s concerns are the Fed’s interest rate hikes, enacted to help curb soaring inflation rates that peaked last summer before cooling off over the past year. The Massachusetts senator has been an outspoken critic of the increases, warning Federal Reserve Chairman Jay Powell and others that higher interest rates will ultimately hurt working Americans, even if they appear to exert downward pressure on inflation.

In the letter, Warren argues that the rising rates helped trigger three market shift that are now threatening the banking system: a decline in the value of banks’ bond portfolios, losses in commercial real estate and losses in the leveraged lending market. She also takes aim at specific banks.

“I am concerned that financial institutions may not be adequately managing these risks particularly in light of reports that banks are planning huge shareholder payouts,” she writes. “Wells Fargo, for example, just approved a new $30 billion share buyback program.These payouts would deplete capital and raises significant concerns that the banks will be even less resilient to these threats.”

Warren requests more information from Yellen about what actions the Financial Stability Oversight Council has taken to “to monitor the risks associated with the Fed’s interest rate hikes” and asks whether they will release an assessment on the risks to the financial system.

Despite the pointed critique of Wells Fargo, the concern for banks’ balance sheets is notable coming from Warren, who is traditionally viewed as no friend of the banking industry. Since arriving in Washington more than a decade ago, Warren has spearheaded the creation of one of the financial sector’s most aggressive watchdog agencies, the Consumer Financial Protection Bureau.

Yet the letter is also the latest in a series of public statements from Warren challenging the Biden White House from the political left on a variety of issues. They include openly challenging Powell’s interest rate hikes, demanding more information about the Biden administration’s drug pricing policies, and questioning bank merger approvals granted earlier this year.

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