House Financial Services Committee Hearing with Treasury Secretary Mnuchin
House Financial Services Committee
“The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System”
Tuesday, April 9, 2019
Key Takeaways
- Sanctions: Mnuchin said Treasury has not lifted sanctions on Russian oligarchs nor had any conversations with them. In response to a question on the role U.S. financial institutions play in enforcing sanctions, Mnuchin replied that they are “critical” in enforcing them, adding that it is a benefit that the U.S. is the reserve currency, and agreed with McHenry that it is also a benefit that U.S. financial institutions conduct international trade. Asked by Rep. Trey Hollingsworth (R-Ind.) about threats to current U.S. system, Mnuchin said the most effective way to protect the U.S. financial system is through sanctions.
- USMCA: Asked for an update on the USMCA agreement, Mnuchin responded that U.S., Mexico and Canada trade is very important to U.S. economy, and he hopes to bring an agreement to Congress soon. Asked by Rep. Roger Williams (R-Texas) what obstacles are holding back the economy, Mnuchin said that although the economy is in good shape, renegotiating trade agreements is the single biggest factor. Rep. Warren Davidson (R-Ohio) noted the expansion of financial services coverage in the USMCA, which Mnuchin called “quite significant” and a “model” to use in other agreements.
- Beneficial Ownership: Rep. Carolyn Maloney (D-N.Y.) asked if her draft bipartisan legislation on beneficial ownership is “headed in the right direction.” Mnuchin replied that he generally believes it is and that he hopes it can be accomplished on a bipartisan basis in the House and Senate, stressing the need to solve the issue. Luetkemeyer stated he would prefer for Treasury to create a rule on beneficial ownership rather than Congress codifying it and asked if Mnuchin would support such rulemaking. Mnuchin responded that specifics need to be worked out on this issue and he would have to further discuss with the committee.
Witness
Opening Remarks
Rep. Maxine Waters (D-Calif.), Chairwoman
In her opening statement, Waters expressed concern that the International Development Association (IDA), through its new Private Sector Window (PSW), is transferring $2.5 billion to the World Bank’s private sector investment arm, the International Finance Corporation, and is subsidizing private firms selected without competition and on the basis of unsolicited proposals. She said the PSW is in conflict with World Bank principles that call for subsidies to be justified, transparent, competitively-based, focused on impact, and guarded against rent-seeking opportunities. Waters said if Treasury cannot stop these transfers or provide transparency, Congress will not prioritize the Treasury’s general capital increase request. Waters also expressed her desire for Mnuchin to answer questions about Treasury not enforcing certain sanction policies and delisting companies associated with certain individuals.
Rep. Patrick McHenry (R-N.C.), Ranking Member
In his opening statement, McHenry said he would like the Secretary to consider and address the potential impacts on U.S. derivative markets, cross-border trading in financial services and insurance contracts due to the uncertainty of Brexit. He noted Germany’s economic slowdown and the possible impacts to U.S. markets, including the increase in systemic risk. McHenry also expressed concern about China’s economic slowdown, China opening its markets to global investment, and how it will impact global trends. He noted the importance of working with Treasury to address these global threats and to implement and enforce the Committee on Foreign Investment in the U.S. (CFIUS) reforms to maintain global market balance.
Rep. Steve Stivers (R-Ohio), Committee Member
In his opening statement, Stivers said he would like to re-authorize, reform and strengthen the Export-Import (Ex-Im) Bank, stating that the U.S. is already at a disadvantage compared to China and that the agency helps provide balance and supports job creation. Stivers also expressed his desire to address other global concerns, including the Bank Secrecy Act.
Witness
The Honorable Steven T. Mnuchin, Secretary, U.S. Department of the Treasury
In his testimony, Mnuchin said that according to the World Economic Forum’s competitiveness report, the U.S. is the most competitive economy in the world for the first time in ten years, thanks in part to the Tax Cuts and Jobs Act (TCJA) and the resulting investment, expanded business operations, and career opportunities for Americans. Mnuchin urged Congress to support the U.S.-Mexico-Canada Agreement (USMCA), which would help create higher standards for intellectual property (IP) protections, stronger support for small and mid-sized businesses, encourage manufacturing, and open global markets for U.S. agriculture. He noted progress is being made in U.S.-China trade negotiations to rebalance the U.S. economic relationship with China. Mnuchin stated Treasury’s commitment to implementing the Foreign Investment Risk Review Modernization Act (FIRRMA) to increase national security through modernization of the CFIUS risk review process to combat financial crimes and bad actors. Mnuchin mentioned the Treasury’s work with the G7, G20, World Bank, and International Monetary Fund (IMF) to foster debt transparency to reduce crises risks for developing countries and said that overall resources provided by the IMF are currently adequate to accomplish its goals. Mnuchin noted Treasury’s request to authorize the planned share purchase of the North American Development Bank and to work closely with Mexico to improve economic conditions, and requested Congress authorize general capital authorization increases for the Treasury.
Q&A
Sanctions
Waters noted that administration associates have been accused of lifting sanctions against Russia and asked if Mnuchin has had any conversations with Russian oligarchs, to which he replied he has not lifted sanctions on them nor had any conversations. Rep. Madeleine Dean (D-Pa.) asked Mnuchin to explain why Treasury had delisted sanctioned Russian companies. Mnuchin responded that the company approached Treasury and was able to negotiate a deal that transferred the majority share ownership of the sanctioned oligarch, adding that majority shares will not be retained by him or his family.
In response to a question from McHenry on the role U.S. financial institutions play in enforcing sanctions, Mnuchin replied that they are “critical” in enforcing them, adding that it is a benefit that the U.S. is the reserve currency, and agreed with McHenry that it is also a benefit that U.S. financial institutions conduct international trade. Asked by Rep. Trey Hollingsworth (R-Ind.) about threats to current U.S. system, Mnuchin said the most effective way to protect the U.S. financial system is through sanctions.
Rep. Brad Sherman (D-Calif.) asked about sanctions against North Korea, and whether Mnuchin would sanction large Chinese banks. Mnuchin would not comment on specific sanctions, but that sanctions on North Korea are pushing them to negotiate.
Tariffs
Rep. Gregory Meeks (D-N.Y.) asked if “slapping” tariffs on U.S. allies has been “overly disruptive” and if they serve a purpose when negotiating with Mexico and Canada. Mnuchin replied that he is pleased with the agreement the U.S has with Mexico and Canada, and that when it comes to tariffs on China, they have been effective in getting the country to start negotiating.
Brexit
McHenry asked what Treasury and other regulators are doing to prepare for a disorderly Brexit. Mnuchin replied that over the last few months he has been working closely with the Financial Stability Oversight Council (FSOC) and appropriate regulators to ensure U.S. financial institutions are ready for a hard Brexit. McHenry asked how recent conversations between the UK government and EU relate to Treasury activities, to which Mnuchin replied he is not privy to those conversations but that he encourages the UK and EU to “have a resolution that works,” adding that a hard Brexit is a “very realistic outcome.” Mnuchin continued that Treasury has been coordinating with the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) on this. In response to a question from Rep. Blaine Luetkemeyer (R- Mo.), Mnuchin said that U.S. banks are better capitalized and the US economy is stronger than Europe, making it difficult to compare the two banking systems and consider Brexit’s impacts.
Global Systemically Important Banks (G-SIBs)
McHenry asked how the U.S. financial system is doing right now. Mnuchin replied that “broadly, it’s very well-capitalized,” has de-risked “significantly,” and is “in very good shape,” but added that “the unknown unknowns are what we worry about.”
Stivers asked whether U.S. enforcement and sanctions would be effective if the U.S. did not have global banking institutions and had to rely on global entities. Mnuchin said they would not, stating the U.S dollar and strength of U.S. financial institutions are important for enforcement mechanisms.
Community and Regional Banks
McHenry asked about the impact of Dodd-Frank’s regulatory burden on the financial system, to which Mnuchin replied it has had “quite [a] significant” impact, adding that last year he worked on Dodd-Frank reforms with the House and Senate. He stressed the importance of a “robust” regional and community bank system so there is not a smaller number of banks in the system.
Beneficial Ownership
Rep. Carolyn Maloney (D-N.Y.) discussed previous appearances from Mnuchin before the committee over the past two years where they discussed beneficial ownership and that he has stated the need to “figure [it] out,” asking if her draft bipartisan legislation is “headed in the right direction.” Mnuchin replied that he generally believes it is and that he hopes it can be accomplished on a bipartisan basis in the House and Senate, stressing the need to solve the issue. Luetkemeyer stated he would prefer for Treasury to create a rule on beneficial ownership rather than Congress codifying it and asked if Mnuchin would support such rulemaking. Mnuchin responded that specifics need to be worked out on this issue and he would have to further discuss with the committee.
Export-Import Bank
Rep. Bill Huizenga (R-Mich.) asked about reforms to the Ex-Im Bank, specifically for the President to negotiate the elimination of export subsidies and what progress Treasury has made. Mnuchin said he and Ambassador Lighthizer are very involved in export subsidy discussions as it is a top priority, and the U.S. has engaged in significant conversations at the G7 and G20 to make progress. Rep. Emanuel Cleaver (D-Mo.) said it is important to submit a reauthorization request now, to which Mnuchin responded that it is going through an interagency process and Treasury is actively supporting it.
USMCA
Huizenga asked Mnuchin for an update on the USMCA agreement. Mnuchin responded that U.S., Mexico and Canada trade is very important to U.S. economy, and he hopes to bring an agreement to Congress soon. Asked by Rep. Roger Williams (R-Texas) what obstacles are holding back the economy, Mnuchin said that although the economy is in good shape, renegotiating trade agreements is the single biggest factor. Rep. Warren Davidson (R-Ohio) noted the expansion of financial services coverage in the USMCA, which Mnuchin called “quite significant” and a “model” to use in other agreements.
China
Clay asked if investors should have confidence in the Chinese banking system, to which Mnuchin replied that “there are well-capitalized” banks and “some that have significant problems,” adding that “their system is highly leveraged.”
Rep. Anthony Gonzalez (R-Ohio) spoke about the Trump administration’s approach to China trade negotiations and his concerns about the U.S. moving forward with bilateral negotiations, and asked if there are allies we could partner with for a more forceful and durable path forward. Mnuchin said multilateral approaches have been unsuccessful in the past and that he believes Lighthizer is making progress.
International Capital Standards for Insurance
Rep. Sean Duffy (R-Wis.) voiced concern about ongoing negotiations regarding the development of international capital standards, noting that Federal Reserve Vice Chair for Supervision Randy Quarles has stated they may not be optimal for U.S. insurance markets. He asked Mnuchin if he will protect the U.S. system in his role on the Financial Stability Board (FSB) and fight to keep U.S. capital standards. Mnuchin replied “of course” and that he hopes the combination of him and Quarles voicing their opposition will help the situation.
Rep Ted Budd (R-N.C.) asked if the International Association of Insurance Supervisors (IAIS) refused to provide the U.S. system formal recognition during the Abu Dubai meeting, would the Secretary be willing force a delay of international capital standards to recognize U.S aggregate capital approaches for a later date to provide regulatory certainty. Mnuchin said he supports a U.S. system and is willing to work with Congress on providing regulatory certainty.
Bank Secrecy Act
Williams asked if Mnuchin is considering adjusting the Currency Transaction Report (CTR) or Suspicious Activity Report (SAR) reporting thresholds, saying the low thresholds create a heavy compliance burden. Mnuchin said he is looking at it carefully and is sympathetic to small community and regional banks. He said with advancements in technology, it is possible to break up illicit activity into many small transactions, so he could not commit to changing the thresholds.
Stivers noted Treasury can determine ways to make reporting more effective, without having to change reporting thresholds, through a central database, and asked what Treasury is doing to make reporting more effective. Mnuchin said SARs reporting is important for all law enforcement and sanction activities and that he is working with the Financial Crimes Enforcement Network (FinCEN) to create a more accurate reporting process.
Ongoing Enforcement Matters
In response to a question from Rep. Wm. Lacy Clay (D-Mo.) regarding actions brought against a financial institution for their role in facilitating suspicious activity, Mnuchin stated that it is inappropriate to comment on ongoing enforcement matters but that he has confidence in the primary regulators “being on top of these issues,” adding that these issues are taken seriously and that he has regular conversations with regulators on this.
Marijuana
Sherman asked if the administration would support allowing legal marijuana-related businesses to access the banking system. Mnuchin said it is a “significant issue” for Treasury, particularly for the IRS, but would not comment on policy. Mnuchin said that until the conflict between state and federal law is resolved, Treasury cannot address the issue without legislative action.
Opportunities Zones
Rep. Joyce Beatty (D-Ohio) referenced the Secretary’s comments on the importance of opportunity zones to benefit distressed communities and asked when rollouts of these opportunity zones would occur, how much money has been allocated to these zones, and how Treasury would ensure gentrification prevention. Mnuchin said capital formation has begun for these zones and many investments are waiting, which could be over $100 billion. Mnuchin said he will work with Congress to create more jobs and opportunities in distressed communities.
Current Expected Credit Losses (CECL)
Luetkemeyer discussed the role of the FSOC in identifying risks to financial stability, referencing FSOC’s former concerns about current expected credit losses (CECL). He said that CECL has not been properly studied and he is concerned about the effects on the Government Sponsored Entities (GSEs) and credit unions, especially for reserve requirements, and asked if Mnuchin supports putting a pause on CECL until further studies are done. Mnuchin said the Treasury is discussing this at FSOC and is working to study it further, expressing his desire for bipartisan reforms to the GSEs.
Housing Finance Reform
Rep. Denny Heck (D-Wash.) asked about benchmarks for reforming Fannie Mae and Freddie Mac, and whether Mnuchin would commit to additional benchmarks, including maintaining at least the current level of support for construction financing by the GSEs and, if standing up a new GSE, committing that small banks and credit unions have a means of laying off their mortgages so they can compete with larger banks who can create their own securitization market. Mnuchin agreed to look into the first suggestion and committed to the second benchmark, saying he supports a level playing field.
Rep. Max Rose (R-TN) asked what Treasury believes GSE reform should look like. Mnuchin said GSE reform should be two-fold: first, there should be a robust system with access to 30-year mortgages without putting taxpayer’s at risk, and second, to avoid transferring risk from Fannie Mae and Freddie Mac to taxpayers via FHFA.
Foreign Investment Risk Review Modernization Act (FIRRMA)
Rep. Andy Barr (R-Ky.) asked how Treasury would ensure the FIRRMA rulemaking focuses on China and other bad actors and not U.S. allies. Mnuchin said he was supportive of the legislation, and it is a priority to execute it. Mnuchin said the regulations will be clear, as Treasury wants to encourage investment while also protecting national security interests.
Leveraged Lending
Barr asked about leveraged lending, to which Mnuchin replied that it is a very important part of the economy and they are working at FSOC to study the issue.
For more information about this hearing, click here.