U.S. Senators Jeanne Shaheen (D-NH) and John Barrasso (R-WY) today sent a letter to United States Treasury Secretary Timothy Geithner calling for a detailed study of the exposure of U.S. financial institutions to Europe. Shaheen and Barrasso urged Geithner to lead the study through the Office of Financial Research to evaluate the eurozone's impact on the U.S. economy and markets.
"Europe continues to matter a great deal to the U.S. economic engine and our prospects for growth," said Shaheen, the Chair of the Senate Foreign Relations Subcommittee on European Affairs "As events unfold in Europe, we need a clear picture of the exposure of U.S. financial institutions to the eurozone so that we can avoid frozen credit for small businesses and consumers."
"Americans have witnessed the financial instability in Europe and continue to wonder how it will impact our country and our economy," said Barrasso, Ranking Member on the Senate Foreign Relations Subcommittee on European Affairs. "The United States needs to clearly identify our risks and vulnerabilities in order to limit the fallout from the eurozone crisis here at home. The more information we have, the more power we'll have to help protect American jobs and investments."
Shaheen and Barrasso have both been strong voices in Senate Foreign Relations Committee on understanding the implications of the eurozone crisis. They have hosted two hearings together in the Senate on the transatlantic economy and the financial crisis in Europe, repeatedly highlighting that the uncertainty in Europe has served to slow the American economy.
Below is the full text of the letter sent from Senators Shaheen and Barrasso.
October 10, 2012
The Honorable Timothy F. Geithner
U.S. Department of the Treasury
1500 Pennsylvania Avenue NW
Washington, D.C. 20220
Dear Secretary Geithner:
The ongoing developments in the European Union's economic and monetary union known as the "eurozone" continue to weigh heavily on the global economy and the ability of American businesses to create jobs in the United States. Europe represents a critical market for American goods and services, and the health of the European economy has a direct impact on the availability of credit for consumers and businesses in the United States. As the debate on the future of the eurozone continues to evolve, we are troubled by the repercussions that this ongoing regional instability -- from countries that combined make up our single largest trading partner -- will have on our own tenuous economic recovery.
The 2008 financial crisis showed the importance of understanding the link between the health of our financial institutions and our economy. We feel that it is essential for us to understand the exposure of U.S. financial institutions to the eurozone as events develop. We believe that the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) are well suited for this very purpose. We urge your attention to this issue as soon as possible.
A recent report by the OFR lists a European sovereign debt crisis as a risk to our financial stability, but describes the direct exposure of U.S. financial institutions to Europe as "relatively small." Considering the value of derivatives contracts and opacity in derivatives markets, however, we must question whether that statement masks a much more complex and hazardous situation. Without a detailed analysis of U.S. institutional exposure to the eurozone, it is difficult to envision and fully understand the outcome of potential negative scenarios in Europe.
We urge you, as head of the FSOC, to direct OFR to complete a detailed study of our financial system's exposure to the eurozone and to evaluate impacts on U.S. markets of possible outcomes from this crisis. In particular, we feel it is important to understand the exposure of financial institutions based on their derivatives contracts. As we have unfortunately learned, excessive exposure to losses from derivatives contracts can pose real risks to financial institutions and the health of credit markets.
Should the eurozone crisis deepen, policymakers and regulators will need to know the specific vulnerabilities of our financial institutions to shocks in Europe. Such information will help us consider whether to take precautionary measures to shield our financial system against a deepening eurozone crisis while informing policy decisions that Congress must make over the coming months.
We have heard consistently that the best way for the United States to help Europe is to get our own fiscal house in order and minimize any uncertainty in the global economy. Already, the threat of sequestration and expiring tax cuts has begun to raise concerns and uncertainty at home and abroad. As Congress and the Administration consider these important issues, it is critical that we fully understand them in the context of the eurozone crisis and the global economy.
We look forward to working with you on this matter.