“Annual Testimony of the Secretary of the Treasury on the State of the International Financial System”
Key Topics & Takeaways
- Volcker Rule: Treasury Secretary Steve Mnuchin noted the adverse effects of Volcker on market liquidity and highlighted the Treasury’s recommendations from its first report in response to the “core principles” Executive Order. Mnuchin added that he is “actively” working through the Financial Stability Oversight Council (FSOC) to see where he can get “consensus” to “fix” the rule.
- Tax Reform:Mnuchin expressed his desire to transition from a worldwide to a territorial tax system and broaden the tax base. He noted that most internationally active companies pay “significantly” less taxes because they can defer income and hold profits overseas. Separately, Mnuchin acknowledged the importance of preserving the tax-exempt status for municipal bonds.
- China Equity Caps: Rep. Ed Royce (R-Calif.) expressed his appreciation that the Administration raised the foreign ownership (equity) caps during the U.S.-China Comprehensive Economic Dialogue. Mnuchin clarified that the Administration “expect[s the equity caps] to be increased” without regard for how the Chinese will “react” to that demand. He added that it would be unacceptable for the cap to be raised incrementally, stating that he wants “no cap” at all.
Rep. Jeb Hensarling (R-Texas), Chairman, House Financial Services Committee
In his opening statement, Hensarling stated that the U.S. financial system needs major improvements. He noted the sluggish American economic recovery, which he attributed to the economic policies of former President Obama. He lamented that the U.S. dropped to 17th in the Heritage Foundation’s Index of Economic Freedom. Hensarling expressed the importance of addressing the regulatory burden posed by the Dodd-Frank Act and leveling the playing field for American companies.
Rep. Maxine Waters (D-Calif.), Ranking Member, House Financial Services Committee
In her opening statement, Waters stated that the Treasury and Financial Crimes Enforcement Network (FinCEN) are well positioned to investigate President Trump’s alleged financial entanglement with Russia, and claimed that the American public needs to learn about possible collusion with Russia during the presidential election. She noted that the Secretary did not respond to her request for all copies of financial records pertaining to business ties with Russia and Trump. Waters also expressed her concern about the Treasury’s report in June and stated that the report contains “deeply harmful” recommendations.
Rep. Andy Barr (R-Ky.)
In his opening statement, Barr stated that he is looking forward to positive changes at the Financial Stability Oversight Council (FSOC). He urged Treasury Secretary Steve Mnuchin to address the Federal Reserve’s 4.5 trillion-dollar balance sheet, which he claimed slows down the American economic recovery. Barr also applauded the Treasury’s first report in response to President Trump’s “core principles” Executive Order, stating that the recommendations will allow banks to lend more and help bolster the economic recovery.
The Honorable Steven Mnuchin, Secretary, U.S. Department of the Treasury
In his testimony, Mnuchin stated that the Treasury is using its leadership role to ensure international financial institutions, such as the International Monetary Fund (IMF), remain cost effective and is pressing IMF to address global economic imbalances. Mnuchin congratulated the passage of H.R. 10, the Financial CHOICE Act. He then highlighted the Department’s report on ways to improve the financial regulatory framework in response to the “core principles” Executive Order, noting that the report recommends eliminating regulatory overlap, tailoring capital requirements by the size of banks, fixing the “costly” Volcker Rule, and making the Consumer Financial Protection Bureau (CFPB) more accountable. Mnuchin underscored the importance of housing finance and tax reform, stating that the U.S. has one of the highest and most complicated business tax systems. Additionally, he expressed his goal to significantly cut middle income tax and simplify the tax code. Mnuchin also expressed his appreciation for the Committee’s efforts to combat terrorism and illicit finance.
Question and Answer
Rep. Carolyn Maloney (D-N.Y.) highlighted her bill that would require beneficial owners to be disclosed in order to improve transparency and compliance with “know-your-customer” (KYC) requirements. Mnuchin noted the concern amongst European authorities and Group of 7 (G-7) leaders about potential unlevel playing field issues if they strengthen beneficial ownership disclosure requirements and the U.S. does not. He expressed his intent to work on a bipartisan “solution,” but noted that this is a “complicated issue.” He also underscored the importance of ensuring changes in beneficial ownership are disclosed (as opposed to solely disclosing beneficial ownership when a company is incorporated), and added concerns about the Treasury Department being the “ultimate depository” of that information.
Mnuchin clarified that he has no intention of prioritizing payments if Congress fails to raise the debt limit in a reasonable timeframe, adding that the Treasury should “honor all of its commitments.” Mnuchin stated that he believes the Treasury can continue funding the government through the end of September, based on information currently available.
Financial Stability Oversight Council (FSOC)
Rep. Blaine Luetkemeyer (R-Mo.) expressed dismay at the “arbitrary process” that the FSOC uses to designate financial institutions as systemically important. He highlighted his bill, the Systemic Risk Designation Improvement Act, which he said uses a risk-based system instead of the 50 billion-dollar asset threshold. Mnuchin expressed his preference for the higher designation threshold, and stated that it would allow the Federal Reserve to then make its own designation determination based on risks.
Mnuchin stated that cybersecurity is a “major concern” and “one of our biggest, biggest risks.” He explained that the Treasury is working with regulators on harmonization, aiming to “consolidate” resources to avoid overlapping cybersecurity requirements applied to banks.
Housing Finance Reform
Mnuchin emphasized the importance of undertaking housing reform and stated the need to ensure “quality” mortgages can be kept on banks’ balance sheets if they want to do so.
In response to Rep. Ed Royce (R-Calif.), Mnuchin underscored the importance of creating liquidity for the housing finance market without offering taxpayer guarantees. He stated that he is “determined to find a solution” and added that leaving the government-sponsored enterprises (GSEs) in conservatorship “makes no sense.”
Mnuchin noted the adverse effects of Volcker on market liquidity and highlighted the Treasury’s recommendations from its first report in response to the “core principles” Executive Order. Mnuchin added that he is “actively” working through the FSOC to see where he can get “consensus” to “fix” the rule. He added that he is working with the regulatory agencies to amend the rule to ensure it is workable, but agreed to work with Congress to make further changes. He also later stated that he would support full repeal of Volcker if that is what Congress wanted to do.
China Equity Caps
Royce expressed his appreciation that the Administration raised the foreign ownership (equity) caps plaguing U.S. financial institutions in China during the U.S.-China Comprehensive Economic Dialogue. Mnuchin clarified that the Administration “expect[s the equity caps] to be increased” without regard for how the Chinese will “react” to that demand. He added that it would be unacceptable for the cap to be raised incrementally, stating that he wants “no cap” at all.
Margin & Inter-Affiliate Swaps
In response to Rep. Frank Lucas (R-Okla.), Mnuchin agreed that the margin requirements for inter-affiliate swaps are inconsistent between Commodity Futures Trading Commission (CFTC) rules and the banking regulators, as well as Asian and EU regulators. Mnuchin agreed to work with the Committee in addressing these inconsistencies and foreshadowed that the issue will be addressed in the Treasury’s upcoming report on capital markets (its second in response to the Executive Order on “core principles” for regulating the financial system).
Mnuchin expressed his desire to transition from a worldwide to a territorial tax system and broaden the tax base. He noted that most internationally active companies pay “significantly” less taxes because they can defer income and hold profits overseas. Mnuchin also acknowledged the importance of preserving the tax-exempt status for municipal bonds.
When asked by Rep. John Delaney (D-Md.) whether international tax reform could be coupled with infrastructure reform, Mnuchin demurred, arguing that doing so would make it “more complicated.” He added that the Administration aims to set forth its infrastructure spending plan shortly.
Rep. Robert Pittenger (R-N.C.) noted that he is working with Senator John Cornyn (R-Texas) to introduce a bill to strengthen the Committee on Foreign Investments in the U.S. (CFIUS) review process on inbound investments, to counter “well-coordinated efforts by the Chinese” to acquire technologies with potential military applications. Mnuchin stated that he takes his role on CFIUS “very seriously,” adding that there are “obvious changes” needed, such as to ensure CFIUS reviews cover joint-ventures.
Supplementary Leverage Ratio
Rep. Keith Rothfus (R-Pa.) expressed concern that the unique aspects of custody banks have not been considered in the rulemaking for the Supplementary Leverage Ratio (SLR), adding that his bill, H.R. 2121, the Pension, Endowment, and Mutual Fund Access to Banking Act, would address this issue. Mnuchin noted that he is “very focused” on this issue, and stated that it “doesn’t seem to make sense” that banks would have to turn away cash in a future financial crisis as a result of this flawed rule.
Additional information about this event can be accessed here.