July 12, 2018

House Financial Services Committee “The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System”

Key Takeaways

  • Tariffs: Members on both sides of the aisle asked Mnuchin about the tariffs placed on China and whether they could cause a global recession. Mnuchin repeatedly stressed that there are no current indicators that the tariffs are impacting the global economy but that Treasury continues to monitor the situation.
  • Client Margin: On whether capital rules have inhibited clearing and if the supplemental leverage ratio (SLR) should be updated to offset client margin, Mnuchin agreed and said he is discussing this with other regulators.
  • TLAC and the TCJA: Mnuchin stated he is “extremely aware” that there is concern that total loss absorbing capacity (TLAC) requirements directly conflict with the Tax Cuts and Jobs Act (TCJA) requirements on the taxation of dividends from foreign companies. Mnuchin said that he understands there is a conflict and Treasury is hoping to fix it without legislation, but that Congressional assistance may be needed. 

Witness

Opening Statements

Chairman Jeb Hensarling (R-Texas)

In his opening statement, Hensarling stated that “most Americans are enjoying the very best economy of their entire lifetime.” Hensarling credited President Trump, but stated that all economic gains could be lost in a trade war. He then noted the harmful impact tariffs have on the economy. Hensarling spoke on the retaliatory tariffs of the EU, Canada, Mexico, and China, noting that our trading partners have more to lose due to their export-dependent economies. Hensarling called on the Trump administration to unite with our allies against China, and those who do not follow World Trade Organization (WTO) guidelines.

Ranking Member Maxine Waters (D-Calif.)

In her opening statement, Waters stated that she was surprised to learn that the administration agreed to back up a $13 billion capital increase for the World Bank and International Finance Corporation (IFC). Waters expressed her concerns about the actions of the Trump administration, likening it to “waging a trade war.” Waters stated that there will be consequences of the trade policy, including layoffs and potential business shutdowns. Waters concluded that the US Chamber of Commerce is warning that 2.6 million jobs are at a risk due to retaliatory tariffs.

Rep. Gwen Moore (D-Wis.)

In her opening statement, Moore thanked Secretary Mnuchin for responding to her letter on the recent transfer from the Universal Service Fund (USF) to the Treasury. She noted there are “outstanding issues” surrounding the USF, important to both urban and rural constituents who rely on services. Moore said she looked forward to hearing an explanation of the regulations, resources, and staff put in place to ensure the Federal Communications Commission’s (FCC) continued use of the fund to expand telecommunications access. She expressed concern about lost interest on the transferred funds, which were moved out of an interest-bearing private account.

Testimony

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

In his testimony, Secretary Mnuchin discussed the National Advisory Council on International Monetary and Financial Policies’ (NAC) report to Congress along with other current priorities of the Treasury Department. He noted how the NAC report highlights the important role of international financial institutions (IFIs) in promoting global macroeconomic growth, supporting the development of markets for US businesses, advancing US security priorities, and alleviating poverty. He pointed to the Treasury’s continued role in supporting relevant IFI reforms to help meet these objectives. Mnuchin noted that the U.S. believes the IMF is adequately funded in anticipation of its quinquennial review of quotas. He highlighted the “strength of the US economy,” lauding President Trump’s economic agenda of tax cuts and regulatory reform, pointing out record levels of optimism among businesses and consumers. The Secretary voiced support for the bipartisan effort to modernize the Committee on Foreign Investment in the United States’ (CFIUS) review process and its inclusion in the National Defense Authorization Act. He emphasized a commitment to helping guide financial organizations towards practices more aligned with free markets and US national interests.

Questions & Answers

Trade Agreements

Hensarling noted the modified trade agreement with Korea and asked if this will be a template for future modifications of bilateral/multilateral agreements. Mnuchin replied that President Trump is focused on “free and fair” trade and that there is no specific model for other trade agreements.

Hensarling then noted a recent CNBC survey that reported 65 percent of major U.S. company CFOs fear that the current U.S. trade policy will have a negative impact over the next six months. Mnuchin replied that the administration is monitoring the situation but that he has not seen a negative impact on the economy yet.

Members on both sides of the aisle asked Mnuchin about the tariffs placed on China and whether they could cause a global recession. Mnuchin repeatedly stressed that there are no current indicators that the tariffs are impacting the global economy but that Treasury continues to monitor the situation.

Waters commented that the tariffs are creating a trade war, to which Mnuchin replied that a “modest” amount of tariffs have been placed on China in an attempt to create a level playing field for companies and stop forced technology transfer, and that they continue to monitor the impact on the U.S. economy. Rep. Emanuel Cleaver (D-Mo.) asked if Mnuchin believed that trade wars were ever effective, referencing the Smoot-Hawley Tariff Act of 1930. Mnuchin replied that there is no trade war, just trade disputes, and that the administration is very focused on renegotiating fair trade deals. Mnuchin also said that the Smoot-Hawley Act had contributed to the Great Depression and that they were monitoring the current situation very closely. In response to a questions on tariffs from Rep. Ed Royce (R-Calif.), Mnuchin said that the Administration has been advocating for no tariffs, barriers or subsidies.

Sanctions

Rep. Andy Barr (R-Ky.) cautioned Mnuchin not to “take the foot off the sanctions pedal” for North Korea yet, citing “belligerent rhetoric” coming from the country, to which Mnuchin replied that there are no plans to loosen the sanctions as they have been effective.

Rep. Stephen Lynch (D-Mass.) explained that after withdrawing from the Joint Comprehensive Plan of Action (JCPOA), Treasury’s Office of Foreign Assets Control (OFAC) will be in charge of reinstituting sanctions for any allies that do business with Iran, to which Mnuchin replied that OFAC has already reactivated the sanctions. Rep. Claudia Tenney (R-N.Y.) also inquired about Iran sanctions, and Mnuchin declined to answer with specifics.

Regulatory Guidance

Rep. Blaine Luetkemeyer (R-Mo.) noted guidance that has been released by the agency without notice and comment period and asked Mnuchin whether he agrees that “guidance is guidance, rules are rules,” to which Mnuchin agreed. Luetkemeyer then asked if Mnuchin is willing to consider affirmation in future released guidance, and Mnuchin stated that he will bring it up at the next Financial Stability Oversight Council (FSOC) meeting.

BSA/AML and Beneficial Ownership

In response to a question from Luetkemeyer on the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) rules, Mnuchin replied that Treasury is looking at reforming both of them. Luetkemeyer replied that beneficial ownership reporting and the customer due diligence rule should be included in any BSA/AML reform efforts, to which Mnuchin stated that he is willing to help with guidance.

Rep. Carolyn Maloney (D-N.Y.) explained that she introduced legislation on beneficial ownership at the request of law enforcement and stated that the Financial Crimes Enforcement Network (FinCEN) director recently said that companies should have to disclose beneficial owners. Mnuchin replied that he fully supports beneficial ownership reporting and stressed the need to come to a solution on the issue quickly.

Rep. Stevan Pearce (R-N.M.) and Royce echoed Luetkemeyer’s comments, stressing the need for a bipartisan solution, to which Mnuchin agreed and said it should be done in the next six months.

Rep. Tom Emmer (R-Minn.) asked about ways to improve regulatory harmonization on BSA and AML issues, to which Mnuchin replied that Treasury is working on the issue along with FinCEN, the OCC, and the Federal Reserve.

Volcker Rule

Huizenga noted that Treasury and the other regulatory agencies that oversee the Volcker Rule proposed changes that will make it easier to comply with the rule. Mnuchin replied that the changes will provide clarity to institutions and allow for proper execution of the rule.

Orderly Liquidation Authority

Maloney expressed her opposition to repealing the Orderly Liquidation Authority (OLA) and asked Mnuchin if he believes OLA is preferable to restructuring or bailouts. Mnuchin replied that he supports keeping OLA and will speak with her office directly regarding specific changes he would recommend making that may require legislation.

Client Margin

Rep. Frank Lucas (R-Okla.) discussed H.R. 4659, a bill that would require the appropriate Federal banking agencies to recognize the exposure-reducing nature of client margin for cleared derivatives that Luetkemeyer introduced, and questioned whether capital rules have inhibited clearing and asked if the supplemental leverage ratio (SLR) should be updated to offset client margin, to which Mnuchin agreed and said he is discussing this with other regulators.

Housing Finance
Rep. Dennis Ross (R-Fla.) asked where things stand with Treasury implementing a single security initiative undertaken by the Federal Housing Finance Administration (FHFA). Mnuchin explained it is currently being implemented, stressing the need for government-sponsored entity (GSE) reform and his hope that the next Congress will focus on this. Ross then asked if the common securitization platform should be available to all market participants, not just Fannie Mae and Freddie Mac, to which Mnuchin replied that “if other [participants] want to compete with the GSEs, they can.” When asked what is needed for GSE reform, Mnuchin explained there needs to be either an explicit or implicit guarantee that the government will be paid and taxpayers repaid.

Hill questioned why the FHFA is allowing the GSEs to engage in pilot programs that go beyond their secondary mortgage market roles, to which Mnuchin agreed that the GSEs should “stick to their core business.”

Rep. Dave Trott (R-Mich.) asked if Mnuchin supported getting Fannie Mae and Freddie Mac out of the second mortgage and refinancing markets. Mnuchin said he did not support getting them out of the refinancing market, and that to the extent rates go down and homeowners want to refinance, they should not be penalized.

Financial Technology

Rep. Randy Hultgren (R-Ill.) noted that depository institutions have a hard time competing with non-depository institutions, questioning if there is a level playing field when it comes to depositories having to adapt and innovate to new technology. Mnuchin replied that Treasury is working on a Financial Technology (FinTech) report that should be released shortly and will go into these issues.

FIRRMA

Rep. Robert Pittenger (R-N.C.) asked if Mnuchin had any concerns with H.R. 4311, the Foreign Investment Risk Review Modernization Act (FIRRMA), to which Mnuchin responded that he was very happy with the current bill and was committed to helping quickly resolve differences between the House and Senate versions. In response to a question about the role of the Treasury in FIRRMA’s implementation, Mnuchin expressed the Treasury’s active involvement and readiness to start work once the bill is passed by Congress.

SIFI Designation

Rep. Bruce Poliquin (R-Maine) questioned if Mnuchin is willing to give certainty when it comes to the rules and guidelines for non-bank asset managers in an attempt to avoid being designated as systemically important by FSOC, which Mnuchin agreed to.

Rep. Keith Rothfus (R-Pa.) noted that the Financial Stability Board (FSB) is reevaluating their approach to systemic risk, possibility shifting to an activities-based approach, to which Mnuchin replied that FSOC is also shifting towards this approach.

TLAC and the TCJA

Rep. French Hill (R-Ark.) noted there is concern that total loss absorbing capacity (TLAC) requirements directly conflict with the Tax Cuts and Jobs Act (TCJA) requirements on the taxation of dividends from foreign companies, to which Mnuchin replied that he is “extremely aware” of the issue. Mnuchin continued that he understands there is a conflict and Treasury is hoping to fix it without legislation, but that Congressional assistance may be needed.

Moore questioned the President’s surprise at activity like recent stock buybacks and layoffs, given that the tax bill incentivizes such behavior. Mnuchin responded with disagreement, noting significant job formation and wage growth following the tax bill.

For additional information about this hearing, please click here.