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House Financial Services Committee CARES Act Oversight Hearing

House Financial Services Committee

“Oversight of the Treasury Department’s and Federal Reserve’s Pandemic Response”

Tuesday, June 30, 2020

Key Topics & Takeaways

  • Federal Reserve Lending Facilities: Asked whether the Fed is considering the use of additional metrics beyond EBITDA for the Main Street program so nonprofits and small businesses are able to fully participate, Powell said the Fed has considered this and is looking at a range of options to examine cashflow and financial resources more broadly. Asked whether the Fed is considering further lowering the minimum loan threshold, Powell said they are not considering that yet but may in the future, although the Fed making very small loans would be logistically difficult.
  • Paycheck Protection Program: Asked if the administration supports extending the program, Mnuchin said he supports additional legislation in this area and has had conversation with the Senate Small Business Committee on how to repurpose the remaining funds, particularly to extend funds to businesses that have been hardest hit by the pandemic.
  • Stress Tests: Powell noted that the banking system is very strong and is engaging in forbearance and making loans. He continued that to preserve that strength, the Fed has stopped share repurchases and increases in dividends to preserve the level of capital in the system. Asked for further clarity on why banks will have to resubmit their capital plans in addition to being subjected to an off-cycle supervisory stress test later this year, Powell responded that the stress test the banks passed was written before the pandemic, so the Fed developed three alternative sensitivity analyses: a V-shaped recovery, U-shaped recovery, and a “serious double-dip.” He said that these were not used to evaluate individual firms, but rather the broad range of institutions. Asked by Wagner why the Fed would lock up additional capital now when banks most need to provide credit and liquidity to support economic recovery, Powell said that the Fed is not looking to raise capital standards during the crisis.

Witnesses

Opening Statements                   

Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters noted that the pandemic continues to have a “terrible impact,” particularly on communities of color that have been disproportionately affected by both the virus and resulting economic impact. She continued that during the 2008 financial crisis, there was a similar disproportionate impact and unequal recovery, saying that these communities cannot endure another unequal crisis. She called on federal agencies and Congress to do everything possible to ensure history does not repeat itself. Waters noted that Secretary Mnuchin has used his authority to provide community development financial institutions (CDFIs) and minority depository institutions (MDIs) greater access to the Paycheck Protection Program (PPP), including by setting aside $10 billion for them to lend. She also highlighted that Chairman Powell worked to reduce the minimum loan size for the Main Street Lending Facility and to increase the length of loans. Waters concluded that the CARES Act has provided important relief to families and communities, but as the pandemic strengthens, so must relief efforts.

Ranking Member Patrick McHenry (R-N.C.)

In his opening statement, McHenry said that the Federal Reserve (Fed) and Treasury took decisive action to prevent a worse economic catastrophe, though there is much work left to be done. He said that now that programs are up and running, it is important to be forward-thinking to return the country to the roaring economy it was in before the health crisis. He said that the role of Congress is to assess the effectiveness of these programs and will need key programmatic data and transparency in order to do so, thanking Mnuchin for his forthrightness with the information the committee has requested. McHenry noted the PPP saved millions of jobs and highlighted that Powell has built public confidence in the Fed.

Rep. Al Green (D-Texas)

In his opening statement, Green highlighted that the recently released mortgage data demonstrated that unequal access to credit on the basis of race and ethnicity remains in the U.S., calling on those with the authority to take action in this area acknowledge the problem exists in order to address it.

Rep. Andy Barr (R-Ky.)

In his opening statement, Barr thanked the witnesses for their continued efforts to combat the effects of the shutdown. He highlighted that Congress acted decisively via the passage of the CARES Act and other legislation to mitigate further damage to the economy, keep people employed, and ensure the economy can emerge from the pandemic strong.

Testimony

The Honorable Steven Mnuchin, Secretary, U.S. Department of the Treasury

In his testimony, Mnuchin expressed his commitment to ensuring Americans get back to work and the economy continues to recover from the pandemic. He said that although unemployment remains historically high, there are signs that conditions will improve significantly this year, noting that the PPP is keeping tens of millions of employees connected to their jobs. He highlighted that the Small Business Administration (SBA) has approved 4.8 million small business loans in all 50 states and Treasury has provided $200 billion to support the Fed’s lending facilities, which have helped unlock markets and promote access to much-needed liquidity. He expressed his desire to continue to work with Congress on further legislation and committed to implement CARES Act programs with transparency and accountability.

The Honorable Jerome Powell, Chair, Board of Governors of the Federal Reserve System

In his testimony, Powell said that beginning in March, the virus and the forceful measures used to control its spread induced a sharp decline in economic activity and a surge in job loss. He said the data is beginning to show a resumption of economic activity as businesses begin to reopen, saying the economy has entered an important new phase earlier than expected. He noted that despite these positive signs, however, more than 20 million Americans have lost their jobs and this rise in unemployment has disproportionately affected lower wage workers, women, African Americans and Hispanics. Powell said the path forward is uncertain and depends in large part on the country’s ability to control the virus, and a full recovery is unlikely until people feel it is safe to engage in a broad range of activities. Powell explained that the Fed is strongly committed to using all tools available for as long as it takes to provide relief and stability to ensure the recovery is as strong as possible and to limit lasting damage to the economy. He said the Fed’s actions fall into four categories: 1) stabilizing Treasury and agency mortgage-backed securities (MBS) markets; 2) money market and liquidity funding measures; 3) direct efforts to support the flow of credit in the economy; and 4) targeted regulatory measures to support those efforts. Powell noted the creation of 11 facilities to support liquidity, funding and the flow of credit. He committed that the Fed would continue to use its lending powers until the nation is solidly on the road to recovery.

Question & Answer

Federal Reserve Lending Facilities

Committee members including Reps. Ann Wagner (R-Mo.), Brad Sherman (D-Calif.), Bill Posey (R-Fla.), Lacy Clay (D-Mo.) and Barr asked various questions about the Fed’s Main Street Lending Facility. Powell said that about 300 banks large and small have begun the lender registration process. He noted that some banks are reporting a lower demand from borrowers so far.

Asked whether that Fed is considering the use of additional metrics beyond EBITDA for the Main Street program so nonprofits and small businesses are able to fully participate, Powell said the Fed has considered this and is looking at a range of options to examine cashflow and financial resources more broadly.

Asked whether the Fed is considering further lowering the minimum loan threshold, Powell said they are not considering that yet but may in the future, although the Fed making very small loan would be logistically difficult.

Waters asked whether the Fed is exploring ways to broaden access to the municipal facility, particularly for the territories. Powell replied that the Fed is taking a serious look at the issue. He noted the territories are not investment-grade rated, which is the minimum standard for access to the municipal facility, so the Fed is reviewing its credit standards to determine if adjustments should be made.

Rep. Frank Lucas (R-Okla.) asked how the commercial paper market responded to the creation of the Commercial Paper Funding Facility and whether it would be expanded to include Tier 2 issuers. Powell said that the commercial paper market has substantially healed and largely, but not completely, returned to normal function. He said the Fed is not currently considering broadening the facility, though it is an option should the situation deteriorate.

Paycheck Protection Program

Reps. Scott Tipton (R-Colo.), Nydia Velazquez (D-N.Y.), Waters and McHenry asked questions about the PPP. Asked by Waters if the administration supports extending the program, Mnuchin said he supports additional legislation in this area and has had conversations with the Senate Small Business Committee on how to repurpose the remaining funds, particularly to extend funds to businesses that have been hardest hit by the pandemic.

Stress Tests

McHenry and Wagner asked about the results and next steps of the Fed’s recent stress testing. Powell noted that the banking system is very strong and is engaging in forbearance and making loans. He continued that to preserve that strength, the Fed has stopped share repurchases and increases in dividends to preserve the level of capital in the system. Powell explained that the Fed ran three sensitivity analyses to assess the overall strength of the system in the face of these downside cases and found that most firms are sufficiently capitalized for these scenarios. He noted that the Fed is asking banks to resubmit their capital plans and will examine the results again.

Wagner asked for further clarity on why banks will have to resubmit their capital plans in addition to being subjected to an off-cycle supervisory stress test later this year. Powell responded that the stress test the banks passed was written before the pandemic, so the Fed developed three alternative sensitivity analyses: a V-shaped recovery, U-shaped recovery, and a “serious double-dip.” He said that these were not used to evaluate individual firms, but rather the broad range of institutions. Asked by Wagner why the Fed would lock up additional capital now when banks most need to provide credit and liquidity to support economic recovery, Powell said that the Fed is not looking to raise capital standards during the crisis.

Commercial Mortgage-Backed Securities Market

Rep. Bill Posey (R-Fla.) asked about the status of the commercial mortgage-backed securities (CMBS) market. Mnuchin replied that one of the problems with that market is its very strict contractual obligations, saying this is one of the reasons why the next legislative package should consider additional funding for the hardest hit industries.

Credit Risk Transfer

Rep. Blaine Luetkemeyer (R-Mo.) noted that FHFA recently re-proposed the capital framework for Fannie Mae and Freddie Mac that takes a “more punitive approach” to certain types of credit risk transfer (CRT), asking the witnesses whether they agree that it is appropriate for the enterprises to receive meaningful capital credit for sound CRT transactions with sound counterparties. Mnuchin agreed that they should receive relief and should be encouraged to do CRTs with credit-worthy counterparties. Powell agreed, noting the Fed is doing a careful review of the capital proposal.

Current Expected Credit Losses (CECL) Accounting Standard

Luetkemeyer asked whether the implementation of CECL should be delayed. Mnuchin said that option should be seriously considered, noting that the Treasury is currently conducting a study on CECL. Powell agreed.

NRSROs

Luetkemeyer asked about the nationally recognized statistical rating organizations (NRSROs) and their involvement with the Fed’s lending facilities. Powell explained that because the facilities were set up quickly, they initially only worked with the “big three.” He noted that the Fed recently expanded to additional NRSROs and this is an ongoing process.

Racial Disparities

Reps. Gregory Meeks (D-N.Y.) and Green asked about racial discrimination and disparities. Mnuchin and Powell agreed that discrimination is a boundary for economic success and that there is discrimination against borrowers of color. Mnuchin also agreed that investment in diverse communities is critical.

Municipal Finance Markets

Rep. Steve Stivers (R-Ohio) asked for an overview of the state of the municipal finance markets. Powell said the Fed is seeing a lot of “healing” in the markets, and although they have not returned to where they were in February, progress is being made.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.