House Appropriations on Treasury Budget with Sec . Lew
House
Appropriations Subcommittee on Financial Services and General Government
Budget
Hearing with Secretary Jack Lew
Wednesday,
March 16, 2016
Key
Topics & Takeaways
- Non-Bank SIFI Designation Process: Reps.
Crenshaw (R-Fla.) and Yoder (R-Kan.) expressed concern about the lack of
transparency in the non-bank SIFI designation process at the Financial
Stability Oversight Council (FSOC). Lew defended the process,
explaining that there is a “great deal of visibility” in the
designation process and explained that it is “not a mystery” as to why
some firms were designated. Lew added that the scope of SIFI
designation investigations is limited to some of the largest non-bank
firms in the world and he reminded members that it is “not [the FSOC’s]
job to decide what the size of the firm should be.”
-
Assistance for Puerto Rico: Secretary Lew expressed
appreciation for Speaker Ryan’s commitment for Congress to help provide a solution
for Puerto Rico’s debt crisis by late March, but he reiterated that the “time
to act is now.” While he recognized that “different interests have to be
balanced,” he cautioned that without a mechanism to orderly resolve the debt
crisis, Lew claimed that the inability of Puerto Rico to fulfill its debt
obligations would ultimately “destroy” the territory’s economy.
- Data Localization in TPP: Rep.
Herrera Beutler (R-Wash.) articulated concerns about the data localization
provisions applicable to the financial services sector in the Trans-Pacific
Partnership (TPP). Lew explained that he is actively working to address
prudential regulators’ concerns to ensure they have access to important
information without requiring data localization. Still, he argued that the TPP
is “locked” and claimed there is very limited opportunity to make changes to
the agreement (or bring to fruition a side agreement). Lew expressed
optimism that this debate would inform future trade agreements such as the
Transatlantic Trade and Investment Partnership (T-TIP) and other trade
agreements.
-
Market Liquidity: Crenshaw noted that
representatives of the Federal Reserve have acknowledged that there is a link
between the post-crisis regulatory framework and the decline in market
liquidity, and asked whether that was by design or an unintended consequence.
Lew cast doubt that the linkage is as clear as some have argued it is, and
noted several factors leading to an evolution in the structure of fixed income
markets. Lew explained that he will continue to examine whether
unintended consequences have materialized but claimed that many individuals
have made conclusions “prematurely” about the effect of regulation on market
liquidity. For instance, Lew referenced the analysis
carried out by the joint regulatory agencies on the October 2014 flash crash
and argued that the data did not support the conclusion that this volatility
was driven by regulations.
Speakers
-
Jack Lew, Secretary, U.S.
Treasury Department
Opening Remarks
Chairman Ander Crenshaw (R-Fla.)
In
his opening remarks, Chairman Crenshaw expressed concern about the debt
generated by President Obama’s budget request, explaining that the national
debt is an economic burden that must be “paid by our
grandchildren.” Crenshaw noted that the Federal debt exceeds $20
trillion for the first time in U.S. history, despite predictions by
Treasury Secretary Jack Lew during his tenure as the director of the Office of
Management and Budget (OMB) that the U.S. would be debt free by 2013. Crenshaw
highlighted that the Treasury Department is requesting a “massive” 12 percent
increase year on year, rather than “making some tough choices.”
Referring
to the Treasury’s request for $110 million to fund a cybersecurity enhancement
project, Crenshaw suggested that the Administration was requesting “new funding
for an old problem.” He also expressed particular concern about the Financial
Stability Oversight Council’s (FSOC’s) process for designating non-banks as
systemically important financial institutions (SIFIs). Crenshaw also recalled
the language included in the omnibus spending package passed last year, which
required the Securities and Exchange Commission’s (SEC’s) Division of Economic
and Risk Analysis to assess the combined impact of Basel III, the Volcker Rule,
and other financial regulations on access to finance and market liquidity.
Ranking
Member José Serrano (D-N.Y.)
Serrano
noted that the Treasury Department plays a “broad and important role” in the
U.S. economic policy and urged continued leadership to address Puerto Rico’s
debt crisis. While he expressed support for the technical assistance that
Treasury is providing to Puerto Rico to help balance its books and improve its
economy, Serrano maintained that “more needs to be done by Congress”
to mitigate a crisis due to the “appalling” humanitarian toll it is
taking. Serrano commended the Treasury Secretary for his proposal to extend the
earned income tax credit (EITC) to families in Puerto Rico.
Finally,
Serrano explained that the budget for the Internal Revenue Service (IRS) is 19
percent below the fiscal year 2010 figure, which he argued makes it
significantly more difficult for the agency to go after “tax cheats” and
restore the fiscal health of the country.
Rep.
Hal Rogers (R-Ky.), Chairman of the full Committee
Rogers
explained that reducing the national debt is critical to long term economic and
national security. While he praised the Committee’s work to reduce
discretionary spending by about $195 billion over the past few years, Rogers
explained that mandatory spending, including debt interest, has continued to
increase during that period. Still, Rogers explained that the President’s budget
proposes spending and tax increases, which would result in the U.S. spending
more money on interest payments on the national debt than on national security
by 2020, he claimed.
Testimony
In
his prepared
remarks, Lew noted that the economy has exhibited a “record breaking
streak of private sector job creation” since last year, and claimed that
it continues on a sound fiscal path. He argued that the budget deficit as a
share of gross domestic product (GDP) fell from roughly 10 percent to less than
3 percent over the past seven years, and maintained that the Administration put
the U.S. back on a path toward fiscal sustainability. Lew explained that this
year’s budget includes “critical investments” in: 1) both domestic
and international security measures, including those necessary to combat the
Islamic State of Iraq and Syria (ISIS); 2) the IRS so it can enhance customer
service, improve privacy protections, and increase enforcement of current laws
to “root out abusive tax schemes” and enforce the Foreign Account Tax
Compliance Act (FATCA); and 3) cybersecurity infrastructure to improve the
Treasury’s “ability to protect against and respond to cyberthreats” as well as
safeguard data held across the department.
Further,
Lew explained that the FY2017 budget outlined by Treasury includes key
investments in “evidence-based programs for small businesses and distressed
communities,” including Puerto Rico. While he expressed appreciation for
the technical assistance authority provided in the omnibus funding bill last
year, Lew encouraged Congress to act “with the pace that this crisis requires”
to enhance financial oversight and offer access to restructuring tools. He
added that expanding the EITC to Puerto Rico would increase employment in the
island’s real economy.
Question and Answer
FSOC’s SIFI Designation Process
Crenshaw
expressed concern about the lack of transparency in the non-bank SIFI
designation process at FSOC, and asked whether the Secretary agreed that it is
more important to “mitigate risk” by having the regulator pinpoint specific
risks and allowing firms to de-risk or cure that problem, rather than designating
a firm as systemically important. Lew explained that the FSOC designates a firm
as systemically important, when necessary, to ensure it is subject to scrutiny
in line with the level of risks that it poses to financial stability. He
further argued that the FSOC has taken additional steps to provide more
information to companies in the designation process, and claimed that “they
know exactly what the analysis is.”
Lew
added that the scope of SIFI designation investigations is limited to 10
non-bank financial firms that are “amongst the largest, in the world;” and he
reminded the Subcommittee that some non-bank financial firms contributed to the
root cause of the financial crisis. Lew argued that the authority should
not be seen as a risk to small institutions “that don’t present the kinds of
risks that FSOC is meant to address.” He added that the analysis is
performed “well and very prudently” and maintained that the regulators are “in
a better place now” because they have more visibility into the risks that may
be posed by non-bank financial institutions.
Crenshaw
maintained that asset managers do not pose the same kinds of risks as banks or
other financial institutions, and asked why the Secretary would not codify the
transparency requirements passed by Congress last year to give them some
comfort in the designation process. Lew again argued that there is a
“great deal of visibility” in the designation process and explained
that it is “not a mystery” as to why some firms were designated. As designated
firms choose to restructure or otherwise materially change their business
structures, Lew maintained that the core business of the firms would be
reviewed by FSOC annually if those transactions go forward. Lew explained
that it is “not [the FSOC’s] job to decide what the size of the firm should
be.” He also expressed concern about adding further procedural
constraints on the designation process – which he claimed already takes four
years – that would undermine the FSOC’s ability to make “timely” designations.
Rep.
Kevin Yoder (R-Kan.) explained that designating mutual funds as SIFIs could
have a “pretty significant impact” on the retirement savings of millions of
Americans. He highlighted a Wall Street Journal article
indicating that the designation of a mutual fund as a SIFI could result in a 25
percent reduction in investors’ returns over a lifetime of saving. Yoder
cautioned that such designation determinations could actually make
constituents’ retirement accounts more at risk (and not less). Lew
explained that the FSOC is examining asset managers’ activities (rather than
firms) to understand whether they may pose systemic risks. He also highlighted
the SEC’s draft rules that may impact the FSOC’s approach. However, Lew
maintained that the migration of “enormous amounts of resources into mutual
funds or hedge funds” may create financial stability risks.
Serrano
asked for more detail on the Treasury Department’s efforts to provide technical
assistance to Puerto Rico. Lew explained that the law passed last year
allows the Treasury Department to assign technical advisors to Puerto Rico, who
help design solutions and build the capacity of Puerto Rican policymakers to
resolve the underlying issues that led to the debt crisis. However, Lew
maintained that technical assistance, alone, cannot solve the problem of
insolvency. He urged Congress to act now before Puerto Rico misses its
bond payments in May and July. While Lew expressed appreciation for
Speaker Paul Ryan’s (R-Wis.) commitment to resolve the situation by late March,
he reiterated that the “time to act is now.” To that end, Lew explained
that the Treasury Department has been assisting Congressional committees that
aim to address the crisis. Lew recognized that “different interests have
to be balanced” but cautioned that without a mechanism to orderly resolve the
debt crisis, the inability of Puerto Rico to fulfill its debt obligations would
ultimately “destroy” the territory’s economy.
Combating
Financing of Terrorism
Rep.
Mike Quigley (D-Ill.) asked for an update on the department’s efforts to combat
the financing of terrorism. Lew explained that the Treasury Department
has maintained non-nuclear sanctions against Iran even after it complied with
the terms of the U.S.-Iran Nuclear Agreement. Lew maintained that Iran still
engages in sinister activities including providing support for terrorism, which
the Treasury actively aims to combat.
Community
Banks and the CFPB
Rep.
Amodei (R-Nev.) expressed concern about the “rapid decline” in a number of
community banks since the enactment of the Dodd-Frank Act, which he argued is
also attributed to the Consumer Financial Protection Board (CFPB). Amodei
asked why the CFPB promulgates rules based on a one-size-fits-all approach
since community banks are a lifeline for everyday Americans and their closure
can result in total loss of credit in some rural and small markets. Lew agreed
that community banks are very important to local communities but countered that
the pattern of consolidation began before the financial crisis. He also
argued that consumer protection issues are not size-specific, and that capital
requirements are not the same for community banks as they are for large
institutions. However, Lew cautioned that “a lot of large financial
institutions” present themselves as small banks when they are not. For
instance, he explained that proposals to change the SIFI designation threshold
to $500 billion does not represent small banks’ needs.
Rep.
Herrera Beutler (R-Wash.) articulated concerns about the data localization
provisions in the Trans-Pacific Partnership (TPP), and asked what the Treasury
Department is doing to work with the U.S. Trade Representative and other
financial regulators to resolve the issue. Lew explained that, as a general
principle, the Treasury has opposed data localization provisions in trade agreements,
because it often acts as a barrier to trade and makes it more expensive for
American firms to do business in overseas markets. Still, he explained
that this issue is “difficult” and urged caution because “prudential regulators
need access to information in a timely way,” particularly in a crisis when they
need information from international regulators. Lew explained that he is
actively working to address prudential regulators’ concerns without requiring
data localization.
With
that said, Lew argued that the TPP is “locked” and claimed there is very
limited opportunity to make changes to the agreement. He acknowledged
that it is possible to have a side agreement, though cautioned that it would be
difficult to bring to fruition with eleven participating economies.
Still, Lew expressed optimism that this debate would inform future trade
agreements such as the Transatlantic Trade and Investment Partnership (TTIP)
and other trade agreements. Lew closed by stating that the data localization
issue is a complicated issue so he prefers to be “cautious rather than
overly optimistic” about the possibility of resolving it.
Beutler
asked what the Treasury is doing to promote a coordinated approach to
cybersecurity among agencies across financial services sector to avoid each
regulator coming up with their own solution. Lew countered that there is
a “broad embrace” of the National Institute of Standards and Technology (NIST)
framework to ensure that regulators do not adopt conflicting standards.
However, he explained that how the NIST framework is applied in a supervisory
approach may lead to “inherent” differences because each authority has its own
supervisory parameters and goals. Lew explained that he asked his Deputy,
Sarah Bloom Raskin, to take the lead in coordinating cybersecurity efforts
across departments to promote the adoption of best practices. While he
agreed that the goal is to have a single standard for cybersecurity, he
explained that the Treasury Department is unable to “impose” its standards on
prudential regulators.
Market
Liquidity
Crenshaw
noted that representatives of the Federal Reserve have acknowledged that there
is a link between the post-crisis regulatory framework and the decline in
market liquidity, and asked whether that was by design or an unintended
consequence. Lew cast doubt that the linkage is as clear as some have argued it
is, and noted several factors leading to an evolution in the structure of fixed
income markets. Lew explained that he will continue to examine whether
unintended consequences have materialized but claimed that many individuals
have made conclusions “prematurely” about the effect of regulation on market
liquidity. For instance, Lew referenced the analysis
carried out by the joint regulatory agencies on the October 2014 flash crash
and argued that the data did not support the conclusion that this volatility
was driven by regulations.
Treasury
RFI
Yoder
asked whether the Treasury Department’s Request for Information (RFI) focuses
on particular areas within the market. Lew explained that the report on
the October 2014 Treasury market volatility outlines the types of questions
that they seek on the evolving Treasury market structure. Lew added that
this is an important exercise for the Treasury staff to understand the plumbing
of the financial markets, how the system is evolving, and whether the tools
used in the past to ensure healthy market liquidity are appropriate and
effective.
Additional
information about this event can be accessed here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:General,Hearing Summaries Agency:House Appropriations Committee,Publish Year:2016
House
Appropriations Subcommittee on Financial Services and General Government
Budget
Hearing with Secretary Jack Lew
Wednesday,
March 16, 2016
Key
Topics & Takeaways
- Non-Bank SIFI Designation Process: Reps.
Crenshaw (R-Fla.) and Yoder (R-Kan.) expressed concern about the lack of
transparency in the non-bank SIFI designation process at the Financial
Stability Oversight Council (FSOC). Lew defended the process,
explaining that there is a “great deal of visibility” in the
designation process and explained that it is “not a mystery” as to why
some firms were designated. Lew added that the scope of SIFI
designation investigations is limited to some of the largest non-bank
firms in the world and he reminded members that it is “not [the FSOC’s]
job to decide what the size of the firm should be.”
-
Assistance for Puerto Rico: Secretary Lew expressed
appreciation for Speaker Ryan’s commitment for Congress to help provide a solution
for Puerto Rico’s debt crisis by late March, but he reiterated that the “time
to act is now.” While he recognized that “different interests have to be
balanced,” he cautioned that without a mechanism to orderly resolve the debt
crisis, Lew claimed that the inability of Puerto Rico to fulfill its debt
obligations would ultimately “destroy” the territory’s economy.
- Data Localization in TPP: Rep.
Herrera Beutler (R-Wash.) articulated concerns about the data localization
provisions applicable to the financial services sector in the Trans-Pacific
Partnership (TPP). Lew explained that he is actively working to address
prudential regulators’ concerns to ensure they have access to important
information without requiring data localization. Still, he argued that the TPP
is “locked” and claimed there is very limited opportunity to make changes to
the agreement (or bring to fruition a side agreement). Lew expressed
optimism that this debate would inform future trade agreements such as the
Transatlantic Trade and Investment Partnership (T-TIP) and other trade
agreements.
-
Market Liquidity: Crenshaw noted that
representatives of the Federal Reserve have acknowledged that there is a link
between the post-crisis regulatory framework and the decline in market
liquidity, and asked whether that was by design or an unintended consequence.
Lew cast doubt that the linkage is as clear as some have argued it is, and
noted several factors leading to an evolution in the structure of fixed income
markets. Lew explained that he will continue to examine whether
unintended consequences have materialized but claimed that many individuals
have made conclusions “prematurely” about the effect of regulation on market
liquidity. For instance, Lew referenced the analysis
carried out by the joint regulatory agencies on the October 2014 flash crash
and argued that the data did not support the conclusion that this volatility
was driven by regulations.
Speakers
-
Jack Lew, Secretary, U.S.
Treasury Department
Opening Remarks
Chairman Ander Crenshaw (R-Fla.)
In
his opening remarks, Chairman Crenshaw expressed concern about the debt
generated by President Obama’s budget request, explaining that the national
debt is an economic burden that must be “paid by our
grandchildren.” Crenshaw noted that the Federal debt exceeds $20
trillion for the first time in U.S. history, despite predictions by
Treasury Secretary Jack Lew during his tenure as the director of the Office of
Management and Budget (OMB) that the U.S. would be debt free by 2013. Crenshaw
highlighted that the Treasury Department is requesting a “massive” 12 percent
increase year on year, rather than “making some tough choices.”
Referring
to the Treasury’s request for $110 million to fund a cybersecurity enhancement
project, Crenshaw suggested that the Administration was requesting “new funding
for an old problem.” He also expressed particular concern about the Financial
Stability Oversight Council’s (FSOC’s) process for designating non-banks as
systemically important financial institutions (SIFIs). Crenshaw also recalled
the language included in the omnibus spending package passed last year, which
required the Securities and Exchange Commission’s (SEC’s) Division of Economic
and Risk Analysis to assess the combined impact of Basel III, the Volcker Rule,
and other financial regulations on access to finance and market liquidity.
Ranking
Member José Serrano (D-N.Y.)
Serrano
noted that the Treasury Department plays a “broad and important role” in the
U.S. economic policy and urged continued leadership to address Puerto Rico’s
debt crisis. While he expressed support for the technical assistance that
Treasury is providing to Puerto Rico to help balance its books and improve its
economy, Serrano maintained that “more needs to be done by Congress”
to mitigate a crisis due to the “appalling” humanitarian toll it is
taking. Serrano commended the Treasury Secretary for his proposal to extend the
earned income tax credit (EITC) to families in Puerto Rico.
Finally,
Serrano explained that the budget for the Internal Revenue Service (IRS) is 19
percent below the fiscal year 2010 figure, which he argued makes it
significantly more difficult for the agency to go after “tax cheats” and
restore the fiscal health of the country.
Rep.
Hal Rogers (R-Ky.), Chairman of the full Committee
Rogers
explained that reducing the national debt is critical to long term economic and
national security. While he praised the Committee’s work to reduce
discretionary spending by about $195 billion over the past few years, Rogers
explained that mandatory spending, including debt interest, has continued to
increase during that period. Still, Rogers explained that the President’s budget
proposes spending and tax increases, which would result in the U.S. spending
more money on interest payments on the national debt than on national security
by 2020, he claimed.
Testimony
In
his prepared
remarks, Lew noted that the economy has exhibited a “record breaking
streak of private sector job creation” since last year, and claimed that
it continues on a sound fiscal path. He argued that the budget deficit as a
share of gross domestic product (GDP) fell from roughly 10 percent to less than
3 percent over the past seven years, and maintained that the Administration put
the U.S. back on a path toward fiscal sustainability. Lew explained that this
year’s budget includes “critical investments” in: 1) both domestic
and international security measures, including those necessary to combat the
Islamic State of Iraq and Syria (ISIS); 2) the IRS so it can enhance customer
service, improve privacy protections, and increase enforcement of current laws
to “root out abusive tax schemes” and enforce the Foreign Account Tax
Compliance Act (FATCA); and 3) cybersecurity infrastructure to improve the
Treasury’s “ability to protect against and respond to cyberthreats” as well as
safeguard data held across the department.
Further,
Lew explained that the FY2017 budget outlined by Treasury includes key
investments in “evidence-based programs for small businesses and distressed
communities,” including Puerto Rico. While he expressed appreciation for
the technical assistance authority provided in the omnibus funding bill last
year, Lew encouraged Congress to act “with the pace that this crisis requires”
to enhance financial oversight and offer access to restructuring tools. He
added that expanding the EITC to Puerto Rico would increase employment in the
island’s real economy.
Question and Answer
FSOC’s SIFI Designation Process
Crenshaw
expressed concern about the lack of transparency in the non-bank SIFI
designation process at FSOC, and asked whether the Secretary agreed that it is
more important to “mitigate risk” by having the regulator pinpoint specific
risks and allowing firms to de-risk or cure that problem, rather than designating
a firm as systemically important. Lew explained that the FSOC designates a firm
as systemically important, when necessary, to ensure it is subject to scrutiny
in line with the level of risks that it poses to financial stability. He
further argued that the FSOC has taken additional steps to provide more
information to companies in the designation process, and claimed that “they
know exactly what the analysis is.”
Lew
added that the scope of SIFI designation investigations is limited to 10
non-bank financial firms that are “amongst the largest, in the world;” and he
reminded the Subcommittee that some non-bank financial firms contributed to the
root cause of the financial crisis. Lew argued that the authority should
not be seen as a risk to small institutions “that don’t present the kinds of
risks that FSOC is meant to address.” He added that the analysis is
performed “well and very prudently” and maintained that the regulators are “in
a better place now” because they have more visibility into the risks that may
be posed by non-bank financial institutions.
Crenshaw
maintained that asset managers do not pose the same kinds of risks as banks or
other financial institutions, and asked why the Secretary would not codify the
transparency requirements passed by Congress last year to give them some
comfort in the designation process. Lew again argued that there is a
“great deal of visibility” in the designation process and explained
that it is “not a mystery” as to why some firms were designated. As designated
firms choose to restructure or otherwise materially change their business
structures, Lew maintained that the core business of the firms would be
reviewed by FSOC annually if those transactions go forward. Lew explained
that it is “not [the FSOC’s] job to decide what the size of the firm should
be.” He also expressed concern about adding further procedural
constraints on the designation process – which he claimed already takes four
years – that would undermine the FSOC’s ability to make “timely” designations.
Rep.
Kevin Yoder (R-Kan.) explained that designating mutual funds as SIFIs could
have a “pretty significant impact” on the retirement savings of millions of
Americans. He highlighted a Wall Street Journal article
indicating that the designation of a mutual fund as a SIFI could result in a 25
percent reduction in investors’ returns over a lifetime of saving. Yoder
cautioned that such designation determinations could actually make
constituents’ retirement accounts more at risk (and not less). Lew
explained that the FSOC is examining asset managers’ activities (rather than
firms) to understand whether they may pose systemic risks. He also highlighted
the SEC’s draft rules that may impact the FSOC’s approach. However, Lew
maintained that the migration of “enormous amounts of resources into mutual
funds or hedge funds” may create financial stability risks.
Serrano
asked for more detail on the Treasury Department’s efforts to provide technical
assistance to Puerto Rico. Lew explained that the law passed last year
allows the Treasury Department to assign technical advisors to Puerto Rico, who
help design solutions and build the capacity of Puerto Rican policymakers to
resolve the underlying issues that led to the debt crisis. However, Lew
maintained that technical assistance, alone, cannot solve the problem of
insolvency. He urged Congress to act now before Puerto Rico misses its
bond payments in May and July. While Lew expressed appreciation for
Speaker Paul Ryan’s (R-Wis.) commitment to resolve the situation by late March,
he reiterated that the “time to act is now.” To that end, Lew explained
that the Treasury Department has been assisting Congressional committees that
aim to address the crisis. Lew recognized that “different interests have
to be balanced” but cautioned that without a mechanism to orderly resolve the
debt crisis, the inability of Puerto Rico to fulfill its debt obligations would
ultimately “destroy” the territory’s economy.
Combating
Financing of Terrorism
Rep.
Mike Quigley (D-Ill.) asked for an update on the department’s efforts to combat
the financing of terrorism. Lew explained that the Treasury Department
has maintained non-nuclear sanctions against Iran even after it complied with
the terms of the U.S.-Iran Nuclear Agreement. Lew maintained that Iran still
engages in sinister activities including providing support for terrorism, which
the Treasury actively aims to combat.
Community
Banks and the CFPB
Rep.
Amodei (R-Nev.) expressed concern about the “rapid decline” in a number of
community banks since the enactment of the Dodd-Frank Act, which he argued is
also attributed to the Consumer Financial Protection Board (CFPB). Amodei
asked why the CFPB promulgates rules based on a one-size-fits-all approach
since community banks are a lifeline for everyday Americans and their closure
can result in total loss of credit in some rural and small markets. Lew agreed
that community banks are very important to local communities but countered that
the pattern of consolidation began before the financial crisis. He also
argued that consumer protection issues are not size-specific, and that capital
requirements are not the same for community banks as they are for large
institutions. However, Lew cautioned that “a lot of large financial
institutions” present themselves as small banks when they are not. For
instance, he explained that proposals to change the SIFI designation threshold
to $500 billion does not represent small banks’ needs.
Rep.
Herrera Beutler (R-Wash.) articulated concerns about the data localization
provisions in the Trans-Pacific Partnership (TPP), and asked what the Treasury
Department is doing to work with the U.S. Trade Representative and other
financial regulators to resolve the issue. Lew explained that, as a general
principle, the Treasury has opposed data localization provisions in trade agreements,
because it often acts as a barrier to trade and makes it more expensive for
American firms to do business in overseas markets. Still, he explained
that this issue is “difficult” and urged caution because “prudential regulators
need access to information in a timely way,” particularly in a crisis when they
need information from international regulators. Lew explained that he is
actively working to address prudential regulators’ concerns without requiring
data localization.
With
that said, Lew argued that the TPP is “locked” and claimed there is very
limited opportunity to make changes to the agreement. He acknowledged
that it is possible to have a side agreement, though cautioned that it would be
difficult to bring to fruition with eleven participating economies.
Still, Lew expressed optimism that this debate would inform future trade
agreements such as the Transatlantic Trade and Investment Partnership (TTIP)
and other trade agreements. Lew closed by stating that the data localization
issue is a complicated issue so he prefers to be “cautious rather than
overly optimistic” about the possibility of resolving it.
Beutler
asked what the Treasury is doing to promote a coordinated approach to
cybersecurity among agencies across financial services sector to avoid each
regulator coming up with their own solution. Lew countered that there is
a “broad embrace” of the National Institute of Standards and Technology (NIST)
framework to ensure that regulators do not adopt conflicting standards.
However, he explained that how the NIST framework is applied in a supervisory
approach may lead to “inherent” differences because each authority has its own
supervisory parameters and goals. Lew explained that he asked his Deputy,
Sarah Bloom Raskin, to take the lead in coordinating cybersecurity efforts
across departments to promote the adoption of best practices. While he
agreed that the goal is to have a single standard for cybersecurity, he
explained that the Treasury Department is unable to “impose” its standards on
prudential regulators.
Market
Liquidity
Crenshaw
noted that representatives of the Federal Reserve have acknowledged that there
is a link between the post-crisis regulatory framework and the decline in
market liquidity, and asked whether that was by design or an unintended
consequence. Lew cast doubt that the linkage is as clear as some have argued it
is, and noted several factors leading to an evolution in the structure of fixed
income markets. Lew explained that he will continue to examine whether
unintended consequences have materialized but claimed that many individuals
have made conclusions “prematurely” about the effect of regulation on market
liquidity. For instance, Lew referenced the analysis
carried out by the joint regulatory agencies on the October 2014 flash crash
and argued that the data did not support the conclusion that this volatility
was driven by regulations.
Treasury
RFI
Yoder
asked whether the Treasury Department’s Request for Information (RFI) focuses
on particular areas within the market. Lew explained that the report on
the October 2014 Treasury market volatility outlines the types of questions
that they seek on the evolving Treasury market structure. Lew added that
this is an important exercise for the Treasury staff to understand the plumbing
of the financial markets, how the system is evolving, and whether the tools
used in the past to ensure healthy market liquidity are appropriate and
effective.
Additional
information about this event can be accessed here.