Senate Banking Committee Hearing on FSOC Annual Report

Senate Committee on Banking, Housing, and Urban Affairs

“The Financial Stability Oversight Council Annual Report to Congress”

Tuesday, January 30, 2018

Key Topics & Takeaways

  • Housing Finance: Mnuchin fielded questions from multiple Senators about housing finance reform, stating that he “fundamentally believes” in the importance of the 30-year mortgage, and that private capital can play a larger role in the housing finance system, agreeing that any government guarantee should be at the security, and not the entity, level.
  • Infrastructure: When asked about funding for a possible administration infrastructure proposal, Mnuchin stated that Federal, state, and private money would all be necessary to fund an infrastructure package.
  • Non-Bank SIFI Designation: Mnuchin agreed that FSOC should provide clear guidelines to regulated firms about the factors considered when designating SIFIs, and accompanying steps firms can take that could lead to de-designation.

Witnesses

Opening Statements

Sen. Mike Crapo (R-Idaho), Chairman, Senate Committee on Banking, Housing, and Urban Affairs

In his opening statement, Crapo stated that the Financial Stability Oversight Council (FSOC) has provided numerous recommendation and identified a number of potential emerging threats to financial stability. Crapo highlighted that one key priority is revisions to the housing finance system, noting that Congress and Treasury should work together to ensure taxpayer protection and access to credit. Crapo also highlighted cybersecurity risks in the financial services sector as an area requiring greater attention due to the growing scale and scope of cyber attacks and data breaches. Crapo then discussed FSOC’s systemically important financial institution (SIFI) designation process, saying that the process must be “transparent, objective, and measurable” and the FSOC should provide clarity on how companies can shed such designations.

Sen. Sherrod Brown (D-Ohio), Ranking Member, Senate Committee on Banking, Housing, and Urban Affairs

In his opening statement, Brown expressed concern that not all American families have recovered from the financial crisis, and that household debt is climbing. Brown noted that workers build wealth with their “hard-earned paychecks,” and building a secure middle-class life is “as tough as ever.” Brown criticized provisions in the recently passed tax reform legislation, highlighting that future generations will see $1 trillion in new deficits. Brown expressed concern about proposed changes to consumer protection and financial stability rules that will “make the risk and severity of the next crisis much greater,” and that FSOC rules are “only as powerful as its members’ willingness to use them.”

Testimony

The Honorable Steven T. Mnuchin, Secretary, United States Department of Treasury

In his testimony, Mnuchin stated that one of his top priorities as Treasury Secretary is sustained economic growth as an element of “maintaining a resilient financial system,” noting that the last year has seen two straight quarters of three percent or higher GDP growth. Addressing the FSOC’s annual report to Congress, Mnuchin emphasized that the report recommends relevant agencies “address regulatory overlap” and modernize outdated regulations, as well as tailor regulations to suit the “size and complexity” of financial institutions. Mnuchin highlighted the risks the FSOC is monitoring, including cybersecurity and the need for “sustained attention” on cyber risks. Mnuchin commended Congress for its work on regulatory reform, tax reform, and the modernization of the Committee on Foreign Investment in the United States (CFIUS), saying that he looked forward to continuing to work with Congress on other issues, including the debt ceiling, “threats from malicious actors,” and housing finance reform.

Question & Answer
Housing Finance
Crapo noted that housing finance is his highest priority, and asked how private capital can play a larger role in the housing finance system. Mnuchin replied that he “fundamentally believes” in the importance of the 30-year mortgage, and that he is open-minded to many solutions including protecting taxpayers by having substantial private capital and risk in front of any government guarantee or support.

Sen. Bob Corker (R-Tenn.) asked a series of questions to Mnuchin about possible housing finance reform legislation. Mnuchin agreed that any government guarantee should be at the security, and not the entity, level; Mnuchin agreed that private capital should stand in front of a government guarantee; and Mnuchin also said that any guarantor should not threaten the broader financial system in the event of its failure. Mnuchin declined to provide detail on possible administrative actions that Treasury (or the Trump Administration) would take towards the GSEs in the event that Congress does not pass housing finance reform legislation, citing market fallout concerns, and said his “strong preference” is for Congress to pass a long-term, bipartisan solution.

Sen. Pat Toomey (R-Pa.) disagreed with the idea that a government guarantee is necessary to preserve the 30-year fixed rate mortgage, noting that many mortgages are paid off in less time, and that certain 30-year fixed rate products exist in private, non-guaranteed markets.

Sen. Catherine Cortez-Masto asked Mnuchin when Treasury would address the “affordable rental housing crisis” that she described as hurting Nevada residents. Mnuchin would only say that he looked forward to working with Congress on affordable housing issues.

Infrastructure

Mnuchin fielded several questions from the Committee about a possible administration infrastructure proposal. Most of these questions concerned funding for infrastructure, and Mnuchin said that Federal, state, and private money would all be necessary to fund an infrastructure package. Mnuchin provided no additional details on possible infrastructure legislation. Sen. John Kennedy (R-La.) asked if the revenue generated by the repatriation of funds from overseas as a result of tax reform could be utilized for infrastructure. Mnuchin replied that Treasury is looking at these funds from a tax perspective, and will look to Congress for appropriations, but has no objection to the idea.

Banking Regulatory Relief Legislation (S.2155)

Many of the Committee Democrats opposed to S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, used portions of their time to criticize the bill and asked Mnuchin to justify his support for it.

Sen. Elizabeth Warren (D-Mass.) described the size and scope of the financial entities that stand to receive regulatory relief from increasing the SIFI threshold, and noted that these entities collectively hold approximately $4 trillion in assets. Warren also noted that these entities received $50 billion in direct assistance during the 2008 financial crisis. Warren also noted that Countrywide only had $200 billion in assets in 2007, and under the SIFI regime proposed by S.2155, would have been exempted from FSOC oversight. Warren asked Mnuchin repeatedly to justify his support for that legislation in light of those facts. Mnuchin argued that the financial institutions who will receive regulatory relief from S.2155 are already closely regulated by prudential regulators and will continue to be regulated by them going forward. Mnuchin also argued that many of these banks, which are regional banks, do not pose a threat to the financial system in the event of failure. Mnuchin repeatedly noted that the legislation is bipartisan and that “it is up to Congress” to raise or adjust the FSOC’s SIFI thresholds.

Numerous Committee Republicans, and several Committee Democrats, expressed support for S.2155 and asked Mnuchin to discuss aspects of the bill that he approved of. Toomey, Heitkamp, Tillis, and others all supported the bill.

Non-Bank SIFI Designation
In addition to questions regarding S.2155, Mnuchin fielded numerous questions about the non-bank SIFI designation process and possible reforms to it. Mnuchin agreed with Sen. Tim Scott (R-S.C.) that FSOC should provide clear guidelines to regulated firms about the factors considered when designating SIFIs, and accompanying steps firms can take that could lead to de-designation. Sen. Tom Cotton (R-Ark.) and Sen. Brian Schatz (D-Hawaii) also asked about the transparency of the SIFI designation process. In response to questions from Rounds, Mnuchin declined to provide feedback on possible legislative reforms to FSOC. Mnuchin also noted that the de-designation of AIG came after the company “significantly” reduced their risk profile, and that legal factors played a role in de-designating MetLife and Prudential.

Cryptocurrencies

Mnuchin fielded several questions about cryptocurrencies during the hearing. Sen. Mike Rounds (R-S.D.) asked if cryptocurrencies pose a threat to financial stability. Mnuchin did not believe that they did, though he noted that a new FSOC subcommittee is examining cryptocurrencies and pointed out that cryptocurrencies create anti-money laundering concerns. Sen. Jack Reed (D-R.I.) also asked about the possibility of cryptocurrencies supporting criminal and terrorist activities, and Mnuchin informed the committee that Treasury works closely with the CIA on cryptocurrency issues. Mnuchin also said that a main concern of Treasury is an absence of effective cryptocurrency regulations in other countries.

Cybersecurity

Several Senators posed questions to Mnuchin about cyber risks to the financial sector and Treasury’s ability to counter cyber threats. Crapo asked if there were specific “gaps or shortfalls” in cyber protections today, to which Mnuchin replied there are no specific gaps, and that Treasury has sufficient resources to monitor possible threats. Mnuchin noted that cybersecurity is an area that requires constant advancement, an emphasis on private-public partnerships, and intelligence sharing. He also said he would not hesitate to ask Congress for additional cybersecurity resources.

Sanctions

Mnuchin fielded several questions on sanctions issues during the hearing. Many of the questions were combative and from Democratic Senators regarding the lack of Administration action on the recently- passed Countering America’s Adversaries Through Sanctions Act. Mnuchin defended the delay in new sanction implementation, saying “there will be sanctions” in the future and said he stood ready to discuss the classified aspects of the Treasury’s report on Russian nationals with Senators in a private setting. Mnuchin stated that Treasury has produced an “extremely thorough analysis” that will be utilized to pursue future actions. Mnuchin declined to give a timeline for when new sanctions would be implemented.

Mnuchin also fielded several questions about North Korea sanctions (and possible Chinese circumvention of these sanctions) and said that North Korea is the single most pressing issue currently facing the Treasury Department.

Butch Lewis Act

Several Committee Democrats asked Mnuchin if he supported S.2147, the Butch Lewis Act, which would provide funds to struggling multiemployer pension plans. Mnuchin declined to support the bill, though he expressed interest in working with the Committee on possible legislation.

Tax Reform
Several Democratic Senators criticized the recently enacted Tax Cuts and Jobs Act. Sen. Bob Menendez (D-N.J.) critiqued the elimination of the state and local tax (SALT) deduction, and the IRS advisory that did not allow taxpayers to deduct their prepaid property taxes. Sen. Van Hollen (D-Md.) stated that the tax reform legislation resulted in a “net tax reduction” for the upper class, and that many middle income workers in Maryland will see a tax increase.

Sen. Dean Heller (R-Nev.) applauded the tax reform legislation, saying that in a recent town hall, small business owners said they were planning to expand their business and provide bonuses and pay raises. Mnuchin replied that he expected sustained economic growth of three percent or higher over the next several years, as well as wage inflation for the average American worker.

For more information on this hearing, please click here.