House Financial Services Committee Hearing with Treasury Secretary Mnuchin

House Financial Services Committee

“Promoting Financial Stability? Reviewing the Administration’s

Deregulatory Approach to Financial Stability.”

Thursday, December 5, 2019

 

Key Topics & Takeaways

  • Repo Markets: Mnuchin said that the spikes were due to many different factors, partially regulatory, partially a reserves issue, and partially due to Treasury payments. He said he has met with Federal Reserve (Fed) Chair Jay Powell and the New York Fed about these concerns. Mnuchin stated that SOFR will not have a big impact as it is a rate that cannot be manipulated, is highly liquid, and can be calculated.
  • LIBOR Transition: Mnuchin said that he is working with industry, the SEC as well as other regulators to achieve a smooth transition. He added that this is a top concern for him and that he may come back to Congress with further recommendations for potential legislation. Mnuchin added that potential legislation might need to address concerns of fallback language.
  • Risks in the Financial System: Mnuchin stated that climate change is not an area of his expertise and not one he believes is under the jurisdiction of the FSOC, but he is willing to take it back to the FSOC and discuss. He stated that debt restructuring is an area that will need to be addressed over time and that areas of how transaction cost affects overall liquidity must be considered when releasing volume data around the Treasury markets. Overall, Mnuchin said much of the risk to the financial system in the U.S. is being monitored, and his major concerns are regarding cybersecurity, structural issues, the transition away from LIBOR, housing finance and regulatory reforms. He also stated that the FSOC reduced staff and budget to be more efficient with taxpayer money.
  • Tax: Mnuchin stated that an FTT would impact mutual fund holders and would be detrimental to various aspects of liquidity. He said it would hurt pensions, 401k’s, and potentially lead to tax evasion and increase in the federal debt. Mnuchin said that GILTI has helped prevent tax havens and ensure U.S. companies are taxed fairly.
  • USMCA: Mnuchin said he hopes it passes Congress by years end and that it would be a terrific win for U.S. growth and trade certainty. He said the agreement would modernize trade and lead to an excess of 50 basis points to the U.S. gross domestic product (GDP).

 

Witness

Opening Statements

Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters expressed concern about the Trump administration’s actions, which she believes do not promote financial stability in eliminating consumer, investor and economic protections. She emphasized the devastating impact of the 2008 crisis and said she is committed to ensuring the mistakes of the past are not repeated. Waters stated the importance of the creation of the Financial Stability Oversight Council (FSOC) and emphasized the role it plays in both identifying and mitigating risks in the economy as well as providing enhanced oversight. She continued that the Trump administration’s supervision of non-banks transitioning to an activities-based approach could potentially ignore the risks of large financial institutions. Waters also expressed concerns regarding the reduction of staff and budget at the Office of Financial Research (OFR), the tax cuts, and growing risks in areas such as climate change, leveraged lending and cybersecurity.

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

In his opening statement, McHenry stated that the FSOC’s oversight authority is important for financial security and stability. He expressed his concerns about the transition from the London Inter-Bank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR), recent repo market actions, and a “nefarious” Financial Transaction Tax (FTT). McHenry opinioned that he would like Mnuchin to testify on the impacts of an FTT.

Rep. Greg Meeks (D-N.Y.)

In his opening statement, Meeks stated that he would like to see Treasury and Congress work to map out and build contingency plans for risks to the financial stability of the U.S.

Rep. Blaine Luetkemeyer (R-Mo.)

In his opening statement, Luetkemeyer expressed his eagerness to hear how the FSOC would address Current Expected Credit Losses (CECL), the repo market, LIBOR transition, financial technology (FinTech) and cybersecurity.

Testimony

The Honorable Steven Mnuchin, Secretary, U.S. Department of the Treasury, and Chair, Financial Stability Oversight Council

In his testimony, Mnuchin discussed the FSOC’s 2019 annual report. He stated the report provides Congress with an analysis of financial and regulatory trends, an assessment of potential risks to stability, and recommendations to enhance the integrity, efficiency, competitiveness and stability of the financial markets. Mnuchin highlighted the performance of the U.S. economy since December 2018, stating that U.S. growth exceeds G7 trading partners, unemployment is at a 50-year low, rising wages, low corporate and consumer default rates and stable financial conditions. He continued that the 2019 report highlights cybersecurity risks as one of the most important issues for the FSOC, regulators and the private sector. Mnuchin called for government and industry updates and increased sharing of best practices to treat cybersecurity as a national and economic priority. Mnuchin added that the report provides market participants with a strong message to prepare for the transition away from the LIBOR and makes recommendations for participants to formulate and execute transition plans and for new instruments to include LIBOR fallback language. Mnuchin encouraged regulators to evaluate the effects of new financial products and services, including potential risks from digital assets and distributed ledger technologies. He added that the FSOC will continue to promote consistent regulatory approaches to identify and address potential risks while promoting innovation. Mnuchin concluded that Treasury would continue to work on meaningful housing finance reform to foster competition, protect taxpayers from future bailouts and facilitate a smooth transition for the government-sponsored enterprises out of conservatorship.

Question & Answer

Leveraged Lending

Reps. Carolyn Maloney (D-N.Y.), Alexandria Ocasio Cortez (D-N.Y.), Andy Barr (R-Ky.), Meeks and Waters asked about the risks that leveraged lending and collateralized loan obligations (CLO’s) pose to financial stability. Mnuchin said that leveraged lending is an area Treasury is very focused on and monitors under the activities-based approach. He said that most of the risk has moved into the CLO market away from leveraged lending, and that the FSOC is closely monitoring the issue. He noted that currently, it is not viewed as a threat to stability. Mnuchin continued that the activities-based approach includes areas such as hedge funds and their impact in liquid markets.

Treasury Minority Banks Mentorship Program

Reps. Joyce Beatty (D-Ohio), Al Green (D-Texas), and Meeks asked about Treasury’s mentorship program. Mnuchin said the idea is to have minority-owned banks partner with large institutions to help seek out resources and guidance in running a bank. He said he looks forward to continuing working on this program and is happy to work on potential legislation with Congress to scale efforts.

Repo Markets

Reps. Ed Perlmutter (D-Colo.), Maloney, and McHenry asked about the recent spikes in the repo market and if SOFR will be volatile. Mnuchin said that the spikes were due to many different factors, partially regulatory, partially a reserves issue, and partially due to Treasury payments. He said he has met with Federal Reserve (Fed) Chair Jay Powell and the New York Fed about these concerns. Mnuchin stated that SOFR will not have a big impact as it is a rate that cannot be manipulated, is highly liquid, and can be calculated.

LIBOR Transition

Reps. Brad Sherman (D-Calif.), David Scott (D-Ga.), Rashida Tlaib (D-Mich.), John Rose (R-Tenn.) and McHenry asked about the transition from LIBOR to SOFR. Mnuchin said that he is working with industry, the SEC as well as other regulators to achieve a smooth transition. He added that this is a top concern for him and that he may come back to Congress with further recommendations for potential legislation. Mnuchin added that potential legislation might need to address concerns of fallback language.

Risks in the Financial System

Reps. Bill Posey (R-Fla.), Roger Williams (R-Texas), Sean Casten (D-Ill.), Trey Hollingsworth (R-Ind.), Emanuel Cleaver (D-Mo.), Bill Foster (D-Ill.), Katie Porter (D-Calif.), and Ocasio Cortez, asked Mnuchin to address areas of current, or future, potential risk to the financial system. Mnuchin stated that climate change is not an area of his expertise and not one he believes is under the jurisdiction of the FSOC, but he is willing to take it back to the FSOC and discuss. He stated that debt restructuring is an area that will need to be addressed over time and that areas of how transaction cost affects overall liquidity must be considered when releasing volume data around the Treasury markets. Overall, Mnuchin said much of the risk to the financial system in the U.S. is being monitored, and his major concerns are regarding cybersecurity, structural issues, the transition away from LIBOR, housing finance and regulatory reforms. He also stated that the FSOC reduced staff and budget to be more efficient with taxpayer money.

Tax

Rep. Ann Wagner (R-Mo.) asked about the impact of an FTT. Mnuchin stated that it would impact mutual fund holders and would be detrimental to various aspects of liquidity. He said it would hurt pensions, 401k’s, and potentially lead to tax evasion and increase in the federal debt.

Rep. Denny Heck (D-Wash.) asked Mnuchin how the tax cuts have materialized. Mnuchin stated that with wage growth and low inflation, the U.S. economy remains the only economy in the world with significant economic growth, and taxpayers see the benefits from these tax cuts.

Rep. Cindy Axne (D-Iowa) asked about the impact of Global Intangible Low-Taxed Income (GILTI). Mnuchin said that GILTI has helped prevent tax havens and ensure U.S. companies are taxed fairly.

USMCA

Reps. Frank Lucas (R-Okla.), David Kustoff (R-Tenn.), Williams and Barr asked about the USMCA. Mnuchin said he hopes it passes Congress by years end and that it would be a terrific win for U.S. growth and trade certainty. He said the agreement would modernize trade and lead to an excess of 50 basis points to the U.S. gross domestic product (GDP).

Global Concerns

Reps. Anthony Gonzalez (R-Ohio), and Sherman raised concerns about China and the World Bank, while Scott asked about Brexit. Mnuchin said that the World Bank’s objective with the China program could help address capital allocation concerns about China and should have bipartisan consensus. He said the World Bank, International Monetary Fund (IMF), and G-7 partners support debt transparency and are in agreement that China should play by common rules. Mnuchin said that the U.K. needs to resolve Brexit one way or the other and that such resolution must be coordinated.

Volcker Covered Funds

Reps. Posey and Gonzalez asked about the FSOC consideration of changes to the covered funds’ definition. Mnuchin said that a healthy banking system with de-risked banks is critical to the economy. He expressed hopes to work with regulators to provide more market liquidity, especially on this issue over the next 90 to 120 days with a notice and comment period.

Digital Currencies and Cybersecurity

Rep. Luetkemeyer asked Mnuchin for his thoughts about the LIBRA proposal. Mnuchin said that he is fine with Facebook creating a digital payment system, but that they must fully comply with the Bank Secrecy Act (BSA) and anti-money laundering (AML) policies. He added that the Fed does not need to issue digital currency and how they are working on a faster payments system.

Reps. Barry Loudermilk (R-Ga.) Lucas, Williams and Kustoff asked about the FSOC’s plans for cybersecurity and other data concerns. Mnuchin said that it is a top priority and one that the industry needs to be well prepared to address. He said this would require coordinated efforts between private companies, public companies, Treasury, regulators and intel communities with data sharing components. He added that data localization is an area to be considered in a federal framework.

Housing Reform

Reps. Jim Himes (D-Conn.) and Ocasio Cortez asked about risks in the housing market. Mnuchin said that he does not have much concern about risk, but there is significant visibility of government-sponsored enterprise (GSE) exposure. He said that the Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) could review non-bank loan criteria and the quality of their loan underwritings.

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