July 26, 2017

Senate Appropriations Subcommittee on Financial Services and General Government – “Review of the FY2018 Budget Request for the U.S. Department of the Treasury”

Key Topics & Takeaways

  • Regulatory Reform: Sen. James Lankford (R-Okla.) asked what actions Congress can take to help relieve the burden on community banks, as well as how to help community banks comply with the Qualified Mortgage rule. Treasury Secretary Steve Mnuchin replied that raising the $50 billion threshold would be beneficial to community banks, as it will allow them to continue to grow, adding that the idea has bipartisan support. He continued that the qualified mortgage exemption should be looked as part of any housing reform bill, stressing his commitment to a long-term solution for Fannie Mae and Freddie Mac rather than keeping them in a conservatorship. 
  • Tax Reform: Sen. Richard Durbin (D-Ill.) asked about the current tax system and its impact on economic growth, to which Mnuchin replied that the U.S. corporate tax system is “one of the highest in the world,” leading to companies leaving money offshore. He explained that the main priority in tax reform is to change to a territorial system so money returns to the U.S. and can be reinvested into things like infrastructure. Mnuchin also explained that Treasury is having “active discussions” on immediate expensing and that they are “very focused on this issue,” but that no decisions have been made.
  • MiFID II: Sen. Jerry Moran (R-Kan.) noted his discussion with Securities and Exchange Commission (SEC) Chairman Jay Clayton about the negative impact of the EU’s Markets in Financial Instruments Directive II (MiFID II) regulation on the ability for a U.S. firm to provide investment research, and asked for Mnuchin’s commitment to work with the EU and SEC on the issue. Mnuchin replied that Treasury is “happy to help” create a solution.

Witness

Opening Statements

In her opening statement, Subcommittee Chairman Shelley Moore Capito (R-W.Va.) said the Department of the Treasury has an important mission to promote economic growth and stability. Capito stated that Treasury works to safeguard American financial systems, which is essential for creating economic opportunity. Capito highlighted the Internal Revenue Service’s (IRS’s) role in administering tax laws, stating that taxpayers must have faith that the IRS will do its job and protect the privacy and personal information of citizens.

In his opening statement, Subcommittee Ranking Member Christopher Coons (D-Del.) expressed concerns that the proposed budget would undermine the Treasury Department’s ability to fulfill its roles, and the reduction in funding would result in staff cuts that would “drain the best and brightest” from the department. Coons said that the IRS is one of the most visible and “impactful” agencies for the American public, dealing with hundreds of millions of contacts with taxpayers each year, and stated concerns about how funding reductions could contribute to the IRS failing to meet constituent needs. Coons expressed his commitment to reaching a funding agreement in the committee and continuing to work toward resolutions.

Testimony

The Honorable Steven Mnuchin, Secretary, U.S. Department of the Treasury
In his testimony, Mnuchin stated the Administration’s commitment to using taxpayer money to improve the lives of Americans. Mnuchin stated the budget proposal makes “prudential reductions” that do not diminish the department’s ability to operate. Mnuchin addressed the top priorities of the department, including cybersecurity programs, creating sustained economic growth, tax reform, comprehensive regulatory reform, and trade. Mnuchin stated the department’s intention to use its array of economic and financial tools to address national security concerns, and plans to improve and further develop programs critical to the safety and stability of the nation.

Question & Answer

Regulatory Reform
Capito asked what the biggest challenge for regulatory reform is, to which Mnuchin described the first Treasury report on banks and credit unions, as well as the three forthcoming reports in capital markets, asset management, and financial technology (FinTech)/cybersecurity. He explained that the biggest challenge is regulatory overlap and ensuring regulators are working together.

Sen. James Lankford (R-Okla.) asked what actions Congress can take to help relieve the burden on community banks, as well as how to help with the QM rule. Mnuchin replied that raising the $50 billion threshold would be beneficial to community banks, as it will allow them to continue to grow, adding that the idea has bipartisan support. He continued that the qualified mortgage exemption should be looked at in addition to housing reform, stressing his commitment to a long-term solution for Fannie Mae and Freddie Mac rather than keeping them in a conservatorship.

Cybersecurity
Capito asked about the importance of cybersecurity at Treasury, and Mnuchin replied that it is a “significant” issue, adding that he brings technology experience to Treasury. He added that he prioritized technology spending in Treasury’s budget request.

Sanctions
Coons asked about the budget reduction in funding the Office of Terrorist Financing and Financial Crimes and whether the amount proposed is sufficient. Mnuchin replied that he spends half of his time dealing with sanctions, and that he is seeking additional funds for the Terrorist Financing Targeting Center.

Sen. Chris Van Hollen (D-Md.) stressed the need to “move more aggressively” in letting China know that if the country continues to evade international sanctions, they will lose access to the U.S. banking markets. Mnuchin replied that he has had “significant discussions” with the National Security Council and President Trump on the subject, adding that it is a “big issue the President is focused on.” He explained that there are many things that can be done going forward and that the government will continue to use sanctions to the “maximum amount allowable by law.”

Van Hollen then asked if the Administration supports the House-passed bill on sanctions for North Korea, to which Mnuchin replied that he has had no discussions on the legislation with the President.

Sen. John Boozman (R-Ark.) asked what Treasury is doing regarding sanctions against Iran. Mnuchin replied that he wishes there was a better deal in the Joint Comprehensive Plan of Action (JCPOA), but that sanctions work and Treasury will continue to aggressively pursue them.

Community Development Financial Institutions

Coons noted the “strong bipartisan support” for Community Development Financial Institutions (CDFIs) and questioned why it was eliminated in the budget. Mnuchin explained that it was a difficult decision but that he does agree CDFIs play “an important role” in communities. He continued that one area Treasury has recommended for financial reform is to reevaluate the Community Reinvestment Act.

Debt Ceiling
Coons noted the “significant impact” there would be should the government default on its debt. Mnuchin stressed that “U.S. credit is of utmost importance,” and explained that while the government has funding through September, he urges Congress to deal with the debt limit before the August recess.

Lankford asked what “extraordinary measures” will cost taxpayers, to which Mnuchin replied “a significant cost” and repeated the importance of dealing with the debt ceiling as soon as possible.

Tax Reform
Sen. Joe Manchin (D-W.Va.) echoed concerns with the debt limit and asked how the tax reform plan will help economic growth. Mnuchin replied that the Administration is close to releasing a “detailed plan” and noted his belief that it will lead to economic growth.

Sen. Richard Durbin (D-Ill.) asked about the current tax system and its impact on economic growth, to which Mnuchin replied that the U.S. corporate tax system is “one of the highest in the world,” leading to companies leaving money offshore. He explained that the main priority in tax reform is to change to a territorial system so money returns to the U.S. and can be reinvested into things like infrastructure.

Durbin then turned to corporate inversions and criticized President Trump for weakening regulations put in place by former President Obama. Mnuchin replied that Trump is “very focused on fixing the [corporate inversions] problem, not just through regulation, but by changing the tax system.” He added that Trump is aware when factories are moved and will work to ensure American companies stay in the country.

Sen. Steve Daines (R-Mont.) criticized the current tax code for not being competitive and asked how much economic growth is expected by reducing the corporate rate to 20 percent, to which Mnuchin replied that it will be significant. Mnuchin further explained that tax reform is “an enormous part” of achieving three percent growth, adding that regulatory relief and trade are also part of the equation.

Daines explained that the U.S. is the only country with a worldwide tax system that incentives foreign companies and asked where transitioning to a territorial system is in Treasury’s priorities, which Mnuchin stressed that it is “very, very, very high.”

Daines then mentioned that immediate expensing was part of the House Tax Blueprint and how likely it is that the idea will be included in the final tax reform plan. Mnuchin explained that Treasury is having “active discussions” on the subject and that they are “very focused on this issue,” but that no decisions have been made.

Committee on Foreign Investment in the United States
Manchin asked about the Committee on Foreign Investment in the United States (CFIUS), to which Mnuchin replied he takes his responsibilities as the Chairman of CFIUS “seriously,” and then explained that he has examined multiple transactions since taking office. He continued that he has been meeting with Members of Congress to discuss possible changes to CFIUS, to include the possibility of covering joint ventures.

MiFID II
Sen. Jerry Moran (R-Kan.) noted his discussion with Securities and Exchange Commission (SEC) Chairman Jay Clayton about the negative impact of the EU’s Markets in Financial Instruments Directive II (MiFID II) regulation on the ability for a U.S. firm to provide investment research, and asked for Mnuchin’s commitment to work with the EU and SEC on the issue. Mnuchin replied that Treasury is “happy to help” in creating a solution.

For more information on this hearing, please click here.