HFSC Hearing on FSOC

House Financial Services Committee

“The Annual Report of the Financial Stability Oversight Council”

Tuesday, February 6, 2018

Key Topics & Takeaways

  • Non-Bank SIFI Designation: Mnuchin stated the FSOC is focused on an activities-based approach, improving the transparency of the designation process, as well as providing an “off-ramp” for non-banks to reduce their risk.
  • Volcker Rule: Mnuchin expressed support for a lead agency in rule-writing and interpretation, with other agencies playing a “supporting role,” as well as for H.R. 4790, which would relieve banks under $10 billion from the Volcker Rule.
  • Cybersecurity: Mnuchin stated that protecting the U.S. financial infrastructure is a “critical concern,” and stated the FSOC is working to ensure regulators are working together, pooling resources, and developing the proper public-private partnerships to exchange information and best practices, as well as conducting tabletop exercises to prepare for a cyber event.

Witnesses

Opening Statements

Rep. Jeb Hensarling (R-Texas), Chairman, House Financial Services Committee

In his opening statement, Hensarling emphasized that after eight years of “failed” economic policies, wages are growing and “consumer optimism abounds,” and that the economy is strong and getting stronger. Hensarling noted that unemployment is at a 17-year low, wages are growing at a rate of 2.9 percent, two million Americans are getting back to work, and the economy is experiencing three percent growth. Hensarling highlighted the impact of tax reform and economic growth on the financial services sector, noting that companies have announced increased wages, bonuses, and investments. Hensarling said that tax reform alone will not unleash the U.S.’s “full economic potential,” and there is much work left to be done at FSOC, including their work monitoring market developments, mitigating risks, and designating systemically important financial institutions (SIFIs).

Rep. Maxine Waters (D-Calif.), Ranking Member, House Financial Services Committee

In her opening statement, Waters stated that FSOC plays a “key role” in the stability of the U.S. economy, and expressed her concern that the administration is “determined to remove all non-bank SIFIs from FSOC supervision, regardless of the threats they pose to the economy.” Waters continued that the Democratic committee members had a number of outstanding questions for the Secretary, including inquiries regarding national security matters, Russian sanctions, and President Trump’s finances.

Rep. Blaine Luetkemeyer (R-Mo.)

In his opening statement, Luetkemeyer noted that there has been significant progress made on tax and regulatory reform, but there is still more work to do to improve the efficiency of the regulatory regime. Luetkemeyer stated he is a “firm believer in meaningful regulation,” but regulation must be responsible and tailored, urging FSOC to “promote financial stability through analytical, not arbitrary, processes.”

Rep. Dan Kildee (D-Mich.)

In his opening statement, Kildee highlighted the water crisis in his hometown of Flint, Mich. as “an example of what happens when we fail, as a society, to invest in older industrial cities.” Kildee criticized the recently enacted tax reform legislation, saying it will “hurt many of these communities” and is being used to justify cuts to programs “necessary to the revitalization of these already struggling places.” Kildee emphasized the need for a plan to revitalize and reinvest in industrial communities transitioning into new economies.

Rep. Bill Huizenga (R-Mich.)

In his opening statement, Huizenga highlighted how tax reform will help young entrepreneurs grow the U.S. economy and “achieve the American dream.” Huizenga noted that entrepreneurs in his district will now have the ability to increase wages, hire more staff, and serve more customers, and that Congress must work to ensure hardworking families “have the opportunity to save and invest and have a better future.”

Testimony

The Honorable Steven T. Mnuchin, Secretary, United States Department of the Treasury

In his testimony, Mnuchin stated that one of his top priorities as Treasury Secretary is sustained economic growth as an element of “maintaining a resilient financial system,” noting that the last year has seen two straight quarters of three percent or higher gross domestic product (GDP) growth. Addressing the FSOC’s annual report to Congress, Mnuchin emphasized that the report recommends relevant agencies “address regulatory overlap” and modernize outdated regulations, as well as tailor regulations to suit the “size and complexity” of financial institutions. Mnuchin highlighted the risks the FSOC is monitoring, including cybersecurity and the need for “sustained attention” on cyber risks. Mnuchin commended Congress for its work on regulatory reform, tax reform, and the modernization of the Committee on Foreign Investment in the United States (CFIUS), saying that he looked forward to continuing to work with Congress on other issues, including the debt ceiling, “threats from malicious actors,” and housing finance reform.

Question & Answer

Housing Finance

Hensarling highlighted that if Congress fails to act on housing finance reform, the President gets to appoint a new director of the Federal Housing Finance Agency (FHFA), who will serve a five-year term with “broad, sweeping powers” that include discontinuing the Home Affordable Refinance Program (HARP), suspend contributions to the Housing Trust Fund, and choose not to enforce statutory housing goals.

Rep. Joyce Beatty (D-Ohio) asked what role any future reforms to housing finance should play in affordable housing. Mnuchin replied that he believes the 30-year mortgage is important to the economy and the liquidity of housing, but also believes taxpayers should be properly protected. Mnuchin continued that he believes affordable housing is important, and how it is paid for is something that should be addressed as part of any housing finance reforms.

Rep. Ruben Kihuen (D-Nev.) discussed the “foreclosure crisis” that led to 60,000 foreclosures nationwide, and asked what reforms Congress should engage in to prevent predatory lending. Mnuchin said banks should originate loans that borrowers can afford and underwrite them properly, which was the “biggest problem” in the housing crisis.

Non-Bank SIFI Designation

Several Representatives asked about FSOC’s designation process for non-bank SIFIs. Mnuchin stated the FSOC is focused on an activities-based approach, improving the transparency of the designation process, as well as providing an “off-ramp” for non-banks to reduce their risk. Mnuchin said that FSOC should rely on information from the entity’s primary regulator, and that FSOC does not currently utilize the Federal Reserve’s indicator score, but should consider it. Additionally, Mnuchin agreed with Rep. Bruce Poliquin (R-Maine) that stress tests for non-bank financial institutions should be eliminated.

Cryptocurrencies

Mnuchin received numerous questions throughout the hearing about cryptocurrencies. Rep. Ann Wagner (R-Mo.) asked if cryptocurrencies should be regulated. Mnuchin replied that the main concern is to ensure that anyone engaging in cryptocurrency business can be monitored from the Bank Secrecy Act (BSA), anti-money laundering (AML), and “Know Your Customer” rule standpoints. Mnuchin stated he views FSOC’s role as a coordinator of the various regulator responses to cryptocurrencies, highlighting that FSOC has set up a subcommittee to examine the issue.

Cybersecurity

A number of Representatives inquired about FSOC’s work on cybersecurity. Mnuchin stated that protecting the U.S. financial infrastructure is a “critical concern,” and stated the FSOC is working to ensure regulators are working together, pooling resources, and developing the proper public-private partnerships to exchange information and best practices, as well as conducting tabletop exercises to prepare for a cyber event.

Consolidated Audit Trail (CAT)

Rep. Warren Davidson (R-Ohio) expressed concern about the consolidated audit trail (CAT) being launched without a Chief Information Security Officer (CISO) in place and the recent data breach at the Securities and Exchange Commission (SEC), asking if Treasury had plans to coordinate the “functional areas” under its oversight to address cybersecurity. Mnuchin replied that there are common guidelines within Treasury and its bureaus, and Treasury is coordinating with other agencies to ensure they are following the administration’s guidelines on cybersecurity.

Volcker Rule

Mnuchin received multiple questions about the Volcker Rule, and stated he would support one agency taking the lead in rule-writing and interpretation, with other agencies playing a “supporting role” to foster better coordination and better leadership.

Huizenga stated the Volcker Rule has had a “chilling effect” on market liquidity and financial institutions. Mnuchin said Treasury is working with regulators to have “better definition” around the rules.

Rep. French Hill discussed his legislation, H.R. 4790, to improve regulatory harmonization and implementation, which would relieve banks under $10 billion from the Volcker Rule, for which Mnuchin expressed his support.

CFIUS

Rep. Dennis Heck (D-Wash.) asked about efforts to modernize CFIUS, thanking Mnuchin for his “constructive” work on the issue. Heck stated one of the key components of the success of CFIUS is ensuring it is appropriately resourced, to which Mnuchin responded he will work to ensure CFIUS has the resources it needs to do its job. Heck also asked why Treasury believes CFIUS modernization should address joint ventures as a “particularly concerning gap” in CFIUS authorities. Mnuchin replied that “to the extent a company is able to structure a joint venture to get around the current CFIUS legislation, that defeats the intent of the law.”

Sanctions

Mnuchin fielded several questions on sanctions during the hearing, particularly focused on the lack of Administration action on the recently-passed Countering America’s Adversaries Through Sanctions Act. Mnuchin defended the delay in new sanction implementation, saying he believed the intelligence assessments regarding Russian interference and that “there will be sanctions” following Treasury’s classified report on Russian nationals. Mnuchin stated that Treasury has produced a thorough analysis that will be utilized to pursue future actions and the process was “ongoing.”

For more information on this hearing, please click here.