[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
PROMOTING FINANCIAL STABILITY? REVIEWING
THE ADMINISTRATION'S DEREGULATORY
APPROACH TO FINANCIAL STABILITY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
DECEMBER 5, 2019
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-71
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
42-631PDF WASHINGTON : 2020
HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California ANN WAGNER, Missouri
GREGORY W. MEEKS, New York PETER T. KING, New York
WM. LACY CLAY, Missouri FRANK D. LUCAS, Oklahoma
DAVID SCOTT, Georgia BILL POSEY, Florida
AL GREEN, Texas BLAINE LUETKEMEYER, Missouri
EMANUEL CLEAVER, Missouri BILL HUIZENGA, Michigan
ED PERLMUTTER, Colorado STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut ANDY BARR, Kentucky
BILL FOSTER, Illinois SCOTT TIPTON, Colorado
JOYCE BEATTY, Ohio ROGER WILLIAMS, Texas
DENNY HECK, Washington FRENCH HILL, Arkansas
JUAN VARGAS, California TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas BARRY LOUDERMILK, Georgia
AL LAWSON, Florida ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam WARREN DAVIDSON, Ohio
RASHIDA TLAIB, Michigan TED BUDD, North Carolina
KATIE PORTER, California DAVID KUSTOFF, Tennessee
CINDY AXNE, Iowa TREY HOLLINGSWORTH, Indiana
SEAN CASTEN, Illinois ANTHONY GONZALEZ, Ohio
AYANNA PRESSLEY, Massachusetts JOHN ROSE, Tennessee
BEN McADAMS, Utah BRYAN STEIL, Wisconsin
ALEXANDRIA OCASIO-CORTEZ, New York LANCE GOODEN, Texas
JENNIFER WEXTON, Virginia DENVER RIGGLEMAN, Virginia
STEPHEN F. LYNCH, Massachusetts WILLIAM TIMMONS, South Carolina
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
C O N T E N T S
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Page
Hearing held on:
December 5, 2019............................................. 1
Appendix:
December 5, 2019............................................. 55
WITNESSES
Thursday, December 5, 2019
Mnuchin, Hon. Steven T., Secretary, U.S. Department of the
Treasury, and Chairperson, Financial Stability Oversight
CounciL (FSOC)................................................. 4
APPENDIX
Prepared statements:
Mnuchin, Hon. Steven T....................................... 56
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Written statement of Public Citizen.......................... 58
PROMOTING FINANCIAL STABILITY?
REVIEWING THE ADMINISTRATION'S
DEREGULATORY APPROACH TO
FINANCIAL STABILITY
----------
Thursday, December 5, 2019
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:05 a.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the committee] presiding.
Members present: Representatives Waters, Maloney, Sherman,
Meeks, Scott, Green, Cleaver, Perlmutter, Himes, Foster,
Beatty, Heck, Vargas, Gottheimer, Lawson, Tlaib, Porter, Axne,
Casten, McAdams, Ocasio-Cortez, Wexton, Lynch, Adams, Dean,
Garcia of Illinois, Garcia of Texas, Phillips; McHenry, Wagner,
Lucas, Posey, Luetkemeyer, Huizenga, Stivers, Barr, Tipton,
Williams, Hill, Emmer, Zeldin, Loudermilk, Davidson, Kustoff,
Hollingsworth, Gonzalez of Ohio, Rose, Steil, Gooden,
Riggleman, and Timmons.
Chairwoman Waters. The Committee on Financial Services will
come to order.
Without objection, the Chair is authorized to declare a
recess of the committee at any time.
Today's hearing is entitled, ``Promoting Financial
Stability? Reviewing the Administration's Deregulatory Approach
to Financial Stability.'' I want to inform all concerned that
this hearing will end at 1 p.m., per the request of Secretary
Mnuchin.
I now recognize myself for 4 minutes to give an opening
statement.
Today, I welcome back Secretary Mnuchin. We are here to
discuss the Trump Administration's actions that have undermined
and not promoted our nation's financial stability. As I have
said many times before, I am very concerned about this
Administration's actions to eliminate important protections for
consumers, investors, and our economy. It appears that our
banking regulators are following the deregulatory blueprint
that the Treasury Department, under Secretary Mnuchin's
leadership, has mapped out point by point, and are rolling back
many of the critical reforms Democrats made to prevent another
financial crisis. If these rollbacks continue, there will be
grave consequences for financial stability and our economy.
The 2008 financial crisis was devastating for our nation:
11 million Americans lost their homes; $13 trillion in wealth
was lost; and nearly 9 million Americans lost their jobs. As
chairwoman of this committee, I am committed to doing
everything that I can to ensure that we do not repeat the
mistakes of the past, as I have now seen twice how the road of
deregulation leads to financial crisis.
The focus of this hearing is the Financial Stability
Oversight Council, or FSOC. We created FSOC as part of the
Dodd-Frank Wall Street Reform and Consumer Protection Act to
eliminate regulatory gaps and to ensure the government could
identify and mitigate risk to our economy. After the financial
crisis, FSOC designated several large non-bank financial
companies for enhanced oversight, including AIG, the well-known
poster child for the financial crisis. Under the Trump
Administration, however, FSOC ceased supervision of all of
these non-banks, and advanced an activities-based approach that
amounts to more deregulation, willfully ignoring how
catastrophic the failure of a large financial institution would
be for the financial system and the economy.
The Trump Administration also cut FSOC's budget and reduced
its staff by half. It has also reduced the budget and staff of
the Office of Financial Research (OFR), which collects data and
conducts research and analysis to aid FSOC in its important
work. Along the way, the Trump Administration has fleeced the
American taxpayers with their tax scam, which contained more
big giveaways to the nation's largest banks. All of these steps
put Wall Street's bottom line first and Main Street back at
risk. And make no mistake, the risks are growing. Climate
change, cybersecurity, leverage lending, hedge funds, and the
rapid emergence of big tech in the financial system, led by
Facebook, are all concerns that must be taken seriously. Today,
Secretary Mnuchin will also once again be asked to explain the
harmful actions of the Trump Administration to the American
public.
With that, I now recognize the ranking member of the
committee, the gentleman from North Carolina, Mr. McHenry, for
4 minutes for an opening statement.
Mr. McHenry. Thank you, Madam Chairwoman. And, Secretary
Mnuchin, thank you for being here in your capacity as Chair of
the Financial Stability Oversight Council, and I appreciate the
work you are doing in leading the Financial Stability Oversight
Council. I do also think that the timing of this hearing would
have been more favorable if Members had been given more time to
read your report that was released yesterday, but that is a
timing issue here that we have to contend with. My colleagues
on both sides of the aisle haven't had ample time to review the
important work that the Council has done in this report.
So I think instead of just the political debate about
regulatory changes that the Administration has done, I think
this oversight of the Financial Stability Oversight Council is
really important. The issue of stability, financial stability,
and security is really important. Yesterday, prudential
regulators testified before this committee on similar issues.
During that hearing, I stated my concern with the transition
from the reliance on the London Interbank Offered Rate (LIBOR)
over to the Secured Overnight Financing Rate (SOFR). I think
the issues that we have and concerns that we have there are
about financial stability, and it is also magnified by recent
Federal Reserve (Fed) actions in the repo market, that we could
see more of at the end of the year. I also encouraged Vice
Chairman Quarles to continue his review of the regulatory
regime to ensure that safety and soundness and promoting
economic growth are prioritized in their measures. And, I would
like to hear your thoughts on the repo market as well. I think
it is very important for us to hear from you on that.
But back to this question about LIBOR to SOFR, LIBOR's
underlying bank reference rate is for about $200 trillion in
financial contracts worldwide, and it is set to be phased out
as a bank reference rate by 2021 and replaced with SOFR. Given
the recent volatility in the repo markets, I am concerned about
the subsequent volatility on mortgages, auto loans, business
loans, and other consumer loans as a new reference rate is
derived from secured overnight financing. Additionally,
transferring LIBOR-based legacy contracts to SOFR will
undoubtedly require financial institutions to renegotiate with
customers. This is also an issue of financial stability and
economic growth.
Finally, Secretary Mnuchin, I wrote to you last month
regarding an issue that I believe is an alarming issue of
potential consequence, and that is the financial transaction
tax. This is not a honeypot of money that just comes from
heaven. This will be a tax based off of buying or selling
stocks, bonds, or other financial instruments that many are
talking about as a new way to derive revenue for the Federal
Government, and the rhetoric is that it will hit only the
wealthiest. The reality is that average, everyday investors,
especially mutual fund investors and those who are saving for
retirement, will be severely impacted by this nefarious tax.
And, in fact, one study indicates that a typical mutual fund
investor will have to save an additional $600 per year or work
an additional 2 years to achieve the same retirement goals. I
would like to hear from the Financial Stability Oversight
Council and from OFR on this matter. I think it is important
that our government have an analysis of what this would do to
our markets and our investors.
I look forward to your testimony, and I thank you for being
here before the committee.
Chairwoman Waters. I now recognize the gentleman from New
York, Mr. Meeks, who is also the Chair of our Subcommittee on
Consumer Protection and Financial Institutions, for 1 minute.
Mr. Meeks. Thank you, Chairwoman Waters. Mr. Secretary,
welcome. I will repeat to you what I stated to Governor
Brainard and OFR Director Falaschetti when they testified at a
hearing I chaired in September on financial stability. I was
serving on this committee at the depths of the financial
crisis, and I never, ever want to be put in a position again
where the Treasury Secretary comes to the Floor of the House
and tells us that we literally have days to save the U.S.
economy from total collapse. I never again want to engage with
constituents who are losing their homes and their life savings
through no fault of their own, but because regulators and the
Administration had completely lost track of systemic risk in
the economy.
Mapping, quantifying, containing, and building contingency
plans for systemic risk is not and should not be a partisan
issue, and should not be a means for scoring political points.
This matters to every American family who is saving for
retirement, or to put a child through school, and I hope that
we can do this in an intellectual, honest manner devoid of
political partisan influence. I yield back.
Chairwoman Waters. Thank you. I now recognize the
subcommittee ranking member, Mr. Luetkemeyer from Missouri, for
1 minute.
Mr. Luetkemeyer. Thank you, Madam Chairwoman, and welcome,
Secretary Mnuchin. I really appreciate you being here to
testify today. Just yesterday, we had the prudential regulators
before this committee discussing a myriad of issues--from
regulatory rightsizing, to the Community Reinvestment Act, to
future pending regulations--that the financial services
industry is facinright now, as you well know. As you are the
head of FSOC, which serves as the body where regulators come
together to discuss overall financial stability, I am looking
forward to discussing how FSOC is addressing the different
matters affecting our financial system today.
Major areas of concern include Current Expected Credit
Losses (CECL), cybersecurity, fintechs, the repo market, and
LIBOR. All of these things will have a significant effect on
both consumers and the economy and deserve the full attention
of FSOC. I look forward to discussing these issues, and with
that, I yield back the balance of my time.
Chairwoman Waters. Thank you. At this time, I want to
welcome to the committee our witness, Steven T. Mnuchin, the
Secretary of the Treasury. He has served in his current
position since 2017. Mr. Mnuchin has testified before the
committee on previous occasions, and I believe he does not need
any further introduction. Secretary Mnuchin, you will be
recognized for 5 minutes for an oral presentation of your
testimony. And without objection, your written testimony will
be made a part of the record.
You are now recognized for 5 minutes to present your oral
testimony.
STATEMENT OF THE HONORABLE STEVEN T. MNUCHIN, SECRETARY, U.S.
DEPARTMENT OF THE TREASURY, AND CHAIRPERSON, FINANCIAL
STABILITY OVERSIGHT COUNCIL (FSOC)
Secretary Mnuchin. Thank you very much. Chairwoman Waters,
Ranking Member McHenry, and members of the committee, thank you
for inviting me today to discuss the Financial Stability
Oversight Council's 2019 annual report and other priorities of
the Treasury Department. The report is the product of extensive
collaboration among Council members, and I appreciate the hard
work by the staffs of the Treasury Department and other member
agencies. The report provides Congress and the public with the
Council's analysis of financial and regulatory trends and its
assessment of the potential risk to U.S. financial stability.
It also provides recommendations to enhance the integrity,
efficiency, competitiveness, and stability of the U.S.
financial markets.
Since the publication of the Council's last annual report
in December 2018, the U.S. economy has continued to perform
extremely well. Economic growth in the United States far
exceeds our G-7 trading partners, and unemployment rates are
near a 50-year low, including unemployment levels at or near-
level lows for African Americans, Hispanic Americans, Asian
Americans, and women. Wages are rising faster for hardworking
families, corporate and consumer delinquency and default rates
are low, and financial conditions remain stable.
This year's annual report discusses a number of risks we
continue to monitor, but I want to highlight cybersecurity as
one of the most important issues for the Council, regulators,
and the private sector. Financial firms heavily rely on
information technology, which creates great efficiencies for
consumers and businesses, but also increases the risk that a
serious cybersecurity incident could negatively affect the
economy and potentially have implications for U.S. financial
stability. We make specific recommendations in the report on
this important topic including, among other things, that
government and industry should work together to constantly
update and share best practices to ensure that we are treating
cybersecurity as a vital national and economic security
priority.
The report also provides a strong message to market
participants about the need to prepare for a transition away
from LIBOR as a reference rate. Failure to prepare adequately
could cause significant disruptions across financial markets
and to borrowers, even the widespread use of LIBOR. We
recommend that market participants formulate and execute
transition plans that any new instruments that reference LIBOR
should include fallback language to mitigate the risk in the
event that LIBOR becomes unavailable. We also encourage
financial regulators to evaluate the effects of new financial
products on financial stability, including potential risks from
digital assets and distributed ledger technologies. We will
continue to use the Council's working group on these issues to
promote consistent regulatory approaches to identify and
address potential risks while promoting American leadership and
financial services innovation.
Turning to another of Treasury's key priorities, we will
continue working with this committee on meaningful housing
finance reform to foster competition for the benefit of
consumers, protect taxpayers from future bailouts, and
facilitate a smooth transition for the Government-Sponsored
Enterprises (GSEs) out of conservatorship. I am proud of the
work we have done, with President Trump's leadership, to create
a resilient, thriving, and prosperous economy. Thank you, and I
look forward to answering your questions.
[The prepared statement of Secretary Mnuchin can be found
on page 56 of the appendix.]
Chairwoman Waters. Thank you very much. I now recognize
myself for 5 minutes for questions.
Secretary Mnuchin, I want to go straight to a discussion
about hedge funds. In November 2016, when the last public
update on the Hedge Fund Working Group's progress was issued,
FSOC outlined 5 date limitations that needed to be addressed to
better understand the risk posed by hedge funds. At times, in
the lead-ups to past crises, activities and losses in the hedge
fund sector have proven significant leading indicators. For
example, Bear Stearns' hedge funds with subprime exposure
collapsed in the summer of 2007, signaling the impending
subprime crisis.
When was the last time the Hedge Fund Working Group
convened? Why has the working group not met more frequently
during your tenure as FSOC's Chair? What is the status of the
limitations identified in FSOC's last public update? Does FSOC
now have access to the data previously identified in 2016 so
that it can assess whether hedge funds are a source of systemic
risk to the economy? If not, why hasn't FSOC taken any steps to
address this information gap over the past 3 years?
This is very important. We have members of this committee
who are trying to make some decisions about hedge funds. We
have members of this committee who think there are some who are
operating in good faith, but there are many who are not. We are
worried about hedge funds that take over fire departments, and
hospitals, and other city services. We are worried about hedge
funds that take over fire departments and the response time is
slowed down. We are worried about hospitals closing down. So
why don't you talk to us about what you know about what is
happening with the working group that was supposed to convene,
and help us to deal with this issue?
Secretary Mnuchin. Thank you very much. Let me first
highlight that on page 94 of the report, we specifically talk
about hedge funds. So, this is something that the staff is
monitoring. Since we have moved to an activities-based approach
as opposed to an industry approach, we are monitoring all of
the activities that hedge funds participate in as part of our
risk management. And one of the areas, in particular, we
focused on that I know the committee has highlighted is
leveraged lending. I also would say that fortunately, the hedge
fund industry has de-levered significantly. But I appreciate
your concerns, and we will continue to monitor carefully all of
the activities of hedge funds.
Chairwoman Waters. Can you make a distinction for us
between the hedge funds and the private equity funds? Are they
involved in the same kinds of operations and acquisitions?
Secretary Mnuchin. Normally, they are not, Madam
Chairwoman, and we do specifically also on page 94 break out
private equity funds. The difference is that mostly, and,
again, the majority of the hedge funds are in liquid markets,
and the majority of private equity funds are buying companies
or illiquid assets. And because of that, typically the private
equity funds are structured as very long-term funds, and the
hedge funds are normally subject to annual liquidity, which
does create additional risk that we are--
Chairwoman Waters. Thank you for that clarification. When
was the last time the Hedge Fund Working Group convened?
Secretary Mnuchin. I can check on that for you and get back
to you, but as I suggested, we have really focused on
activities. The activities are being monitored as opposed to
specifically the Hedge Fund Working Group, but we will get back
to you on that.
Chairwoman Waters. Do you know the status of the
limitations identified in FSOC's last public update?
Secretary Mnuchin. Yes, and, again, as I have suggested, we
specifically had a comment on hedge funds and private equity
funds in the report, and that is something that the Council is
focused on.
Chairwoman Waters. Does FSOC now have access to the data
previously identified in 2016 so that it can assess whether
hedge funds are a source of systemic risk to the economy?
Secretary Mnuchin. Some of that data we do have access to,
and some of the data we have determined is no longer relevant.
Chairwoman Waters. I yield back the balance of my time. The
gentleman from North Carolina, Ranking Member McHenry, is
recognized for 5 minutes.
Mr. McHenry. Secretary Mnuchin, as you well know, and as
the FSOC report here notes, in the past few months we have seen
significant volatility in the repo markets. And I know there is
speculation about what sort of combination of things occurred
that created this volatility. There is speculation that there
is a combination of regulatory effects that are impacting
monetary policy, and that there are regulatory and supervisory
actions that are unduly disincentivizing banks that are
required to hold cash at the Fed, from using their cash
reserves when the market needs liquidity the most. The Office
of Financial Research (OFR) is starting to collect data on repo
transactions--that is a positive--and the Council directed
agencies to undertake a focused review. So as the Chair of
FSOC, do you believe the spike in repo rates signals a need to
examine the overarching regulatory regime for potential risks
to financial stability?
Secretary Mnuchin. Let me first say we share your concern
about those 2 days when there was a significant spike. As
recently as yesterday, we had the Federal Reserve Bank of New
York, which is responsible for market operations, give a
present to FSOC. I have met with Chairman Powell multiple
times. We have talked about this as recently as this morning.
We have discussed in our weekly meeting making sure that the
Fed is prepared for year-end activities so that there are ample
reserves.
I think it was a result of many different issues that came
together in one day, one of them being, as you have outlined,
certain regulatory issues. Banks are required to have excess
overdrafts for intraday, so this is not normal liquidity, but
this is intraday liquidity. There was also the impact of the
Federal Reserve holds the Treasury cash account. We had a large
payment of taxes, so, effectively, you had money coming out of
banks going into the Treasury account, which drained reserves.
But I can assure you this is something FSOC is very focused on,
and this is something that in my role as Treasury Secretary,
Chair Powell and I are working together on.
Mr. McHenry. Okay. So along those lines, the impact of
regulation can impact monetary policy. And in this
circumstance, when you have Federal regulations demanding that
banks hold assets, and then they believe they should not use
those because of regulation, that becomes problematic. And so,
I think a systemic review of this to ensure that that intraday
activity can be dealt with adequately is really important. The
Wall Street Journal highlighted the question of tax payments,
that there was a deadline, and the timing of the deadline on
tax payments had an implication for the market, as you just
mentioned. On a going-forward basis, is Treasury reviewing some
of those timing issues?
Secretary Mnuchin. We are, and we are working very closely
with the Federal Reserve, as I said, to make sure that there
are ample reserves both associated with the Treasury cash
accounts, and we are working with the bank regulators on what
could have been regulatory issues that caused that spike during
the day, without creating anything that provides longer
financial risks.
Mr. McHenry. Thank you. And in 2019, again, in yesterday's
report, FSOC outlined and highlighted that ending LIBOR's
reference rate is a concern to financial stability, and
recommends that member agencies work closely with market
participants to identify and mitigate risks during the
transition from LIBOR to SOFR. Do you believe that financial
regulators are adequately prepared for this transition?
Secretary Mnuchin. I can assure you that this is something
that we are very, very focused on. It is a risk, as you have
highlighted, and we have outlined. Yesterday, just as an
example, Chair Powell, myself, Randy Quarles, and members of
the OCC, the FDIC, and others met with 10 bank CEOs to
specifically talk about this issue of LIBOR and the transition.
We are working closely with the SEC because we are also very
concerned about securities and how securities will transition
in the role of trustees. We may need to come back to Congress
at some point and suggest some regulatory language in law to
deal with this, but I can assure you this is one of the top
risks that we are very focused on.
Mr. McHenry. Thank you, and thank you for your response on
my request on the financial transaction tax as well. We will
follow up.
Chairwoman Waters. Thank you. The gentlewoman from New
York, Mrs. Maloney, who is also the Chair of our Subcommittee
on Investor Protection, Entrepreneurship, and Capital Markets,
is recognized for 5 minutes. Oh--
[laughter]
Mr. Sherman. I believe your statement is accurate for at
least a week.
Chairwoman Waters. Why did you give me this?
[laughter]
Mr. McHenry. Madam Chairwoman, do you have an announcement?
Mrs. Maloney. Thank you so much, and thank you so much for
your leadership, Madam Chairwoman. And I want to thank the
Secretary for your continued leadership and support of the
Corporate Transparency Act, the Beneficial Ownership Act, that
recently passed out of this committee with strong bipartisan
support. It would not have happened without your support, so I
wanted to thank you. Law enforcement in my home State of New
York, and across the country, considers this bill to be their
top priority to combat terrorism financing and to make us
safer, so I want to thank you. I do not think it would have
passed without your support. I am very grateful.
My first question concerns the Federal Reserve, which
recently warned about the ballooning corporate debt, which sits
at nearly $10 trillion. That is about half the size of our
overall economy. And there is a particular focus on the growth
of the near junk BBB bonds and the continued rise of leveraged
lending. Personally, I am very concerned that a lot of this
debt is being used for financial risk taking and stock
buybacks. I am also troubled to see that in the CLO market,
there has been a wave of downgrades, and there are questions as
to whether there is enough data on the CLO market. So, I have
two basic questions. First, does the FSOC have a grasp on the
global leveraged loan market, and, specifically, who actually
holds most of the outstanding CLOs? And second, other than
monitoring, what is FSOC doing to keep the surge of risky
corporate debt in check? Thank you.
Secretary Mnuchin. First of all, thank you for your work on
beneficial ownership and your acknowledgement of our
contribution. We are currently working with the Senate, and we
look forward to bipartisan support turning this into law.
Mrs. Maloney. Thank you.
Secretary Mnuchin. Specifically, as it relates to your
issue, let me just first say that the leveraged lending market
is something that FSOC is very focused on. We have had several
presentations at FSOC. We have a group within FSOC of all the
different regulators that are looking at this. It is one of the
things as part of an activities-based approach that we are
monitoring the risk. The first issue we have examined is what
is the exposure in OCC and FDIC banks, and I am pleased to
report that a lot of the leveraged lending has moved out of the
banks market to the CLO market, as you have commented. The CLO
market does have long-term capital associated with it. It is
something that we are carefully monitoring. And I would also
just comment, you are right, there has been a very large
issuance of BBB bonds. I don't think that has been used for
stock buybacks. Most of the stock buybacks have been done out
of cash and not additional leverage, but we are monitoring the
BBB market also carefully.
Mrs. Maloney. Well, thank you. I want to make sure you use
every tool available to understand their connectedness to our
overall economy. You have recently talked about LIBOR and SOFR
in our hearing today. Do you think that the recent issues in
the repo market indicate that SOFR might be more volatile than
anticipated? We have seen a lot of turbulence that has raised
some questions about it.
Secretary Mnuchin. No, I am concerned about the transition
from LIBOR to SOFR, and that is something that we are very
focused on because it is a regulatory issue, it is a technology
issue, and it is a legal issue. As it relates to SOFR and the
volatility in those 2 days, over a long period of time it would
not have a big impact on SOFR. But the thing we like about SOFR
is that it is a market that can't be manipulated. It is highly
liquid, and it is demonstrated and calculated unlike the LIBOR
markets.
Mrs. Maloney. That sounds like it is a good move. My time
has expired or is getting close to being expired, and I look
forward to working with you to pass the beneficial ownership
bill. Thank you. I yield back.
Chairwoman Waters. The gentlewoman from Missouri, Mrs.
Wagner, is recognized for 5 minutes.
Mrs. Wagner. Thank you, Madam Chairwoman. And, Secretary
Mnuchin, thank you for testifying before our committee today.
We have seen proposals to implement a financial transaction tax
in both the House and the Senate. And in addition, a number of
Democrat presidential candidates have either endorsed or are
considering a financial transaction tax. These proposals would
place taxes on financial transactions typically involving
stocks and bonds and derivatives. This tax would result in
fewer trades and would leave market participants to look for
other ways to avoid the tax. This will both reduce capital
gains taxes, and might lead to other forms of tax evasion.
Additionally, a financial transaction tax has already been
tried internationally, and the results have been very poor. In
Italy, the tax just raised 159 million euros of a targeted 1
billion euros in its very first year. In Sweden, a tax was
imposed in the 1980s, and by 1990, more than 50 percent of all
Swedish trading had moved offshore to London.
While proponents of the financial transaction tax argue
that it would only affect the wealthy, that is simply not the
case. This tax would impact all investors, most specifically
and including millions of Main Street investors, saving and
investing in mutual funds, a retirement account, a child's
education, or maybe a pension plan. Secretary Mnuchin, what
sort of impact could imposing a financial transaction tax have
on the U.S. financial system?
Secretary Mnuchin. Thank you for raising that issue. I
share your concern about this potential tax. I think, as you
know, that the United States is the leader in financial
services, in capital markets, and people come from all over the
world to raise capital in the United States. So, I am very
concerned that would destroy our capital markets, and that
American holders of mutual funds would bear the majority of the
cost. Mr. McHenry actually also inquired and wrote to us about
this, and we have committed to do some work internally and on
an interagency basis to study this to see if we can try to come
up with some research on what the impact would be.
Mrs. Wagner. Do you believe it would reduce liquidity?
Secretary Mnuchin. As I said, I think it would be quite
detrimental on many aspects, both liquidity.
Mrs. Wagner. No, volatility. Market volatility.
Secretary Mnuchin. I think we may have less market
volatility here because we won't have a market here.
Mrs. Wagner. Right.
Secretary Mnuchin. As you mentioned, it will go to London,
to Hong Kong, and to other places where we clearly don't want
it to be right now.
Mrs. Wagner. And how would this impact overall U.S.
economic growth, Mr. Secretary?
Secretary Mnuchin. It would be a burden on economic growth,
and, more importantly, it would be a burden on all the American
taxpayers who already pay taxes and hold mutual funds and have
their savings and their retirement in mutual funds.
Mrs. Wagner. There are millions, as I said, of Main Street,
hardworking Americans in my own 2nd District of Missouri who
would be greatly impacted by this. Could this tax result in
fewer trades and lead market participants to look for other
ways to avoid the tax, the kind of tax evasion that we have
seen internationally in other countries?
Secretary Mnuchin. I believe it would. It would move money
offshore. It would disproportionately hurt pensions, 401(k)s,
and people who are saving for retirement.
Mrs. Wagner. Do you believe, sir, that the cost to the
Treasury of issuing Federal debt could increase because of the
potential increase in trading cost and the reduction in
liquidity that would occur if this tax were, in fact, imposed?
Secretary Mnuchin. If the tax were put on U.S. Government
securities, it would clearly just raise the cost of the
government borrowing. There is no question.
Mrs. Wagner. So, Federal debt would even be affected by
this?
Secretary Mnuchin. It would.
Mrs. Wagner. Thank you. I look forward to your study, and
we do hope that FSOC will do more work and research so that we
can be very clear before moving forward with a horribly
regressive and detrimental financial tax like this. Thank you
so much for your time, and I yield back, Madam Chairwoman.
Chairwoman Waters. Thank you. The gentleman from
California, Mr. Sherman, who is poised to become the next Chair
of our Subcommittee on Investor Protection, Entrepreneurship,
and Capital Markets, is recognized for 5 minutes.
Mr. Sherman. I thank the Chair. The gentlewoman from
Missouri brings out a number of concerns about a financial
transactions tax. There are pros and cons of that tax, but I
did make a list of all the problems she had with the financial
services tax, and every single one of them would be avoided
with a wealth tax. So I will put you in touch with the
academics on our side who are helping Elizabeth Warren
produce--
Mrs. Wagner. If the gentleman will yield, I can't wait for
that debate.
Mr. Sherman. I will not yield, because I think we know
where you stand on this.
[laughter]
A lot of questions divide us ideologically, and then there
are the simple ones where we can do something important for the
economy, and we just put it off and we put it off. And we
ignore the fact that even if we get it done by the very last
minute, we have caused a harm to the market. And a trillion
here, and a trillion there, adds up to real money. We have
LIBOR instruments out there relying on the LIBOR index to the
tune of roughly $10 trillion, and the LIBOR rate will not be
published, or may very well not be published, after 2021.
Mr. Secretary, you said in your opening statement, ``We
recommend any new instruments that reference LIBOR should
include fallback language to mitigate the risk in the event
that LIBOR becomes unavailable.'' Good, but that still leaves
us with $2 trillion of the LIBOR-based contracts that will
still be outstanding at the end of 2021. They have already been
written, these LIBOR legacy instruments, and we can't amend
these instruments without the consent of every participant.
That is impossible. I am working on legislation that would
solve this problem and link these LIBOR-denominated instruments
to the secured overnight financing rate so far.
But it occurs to me you might be able to tell me that we
don't need legislation. Does Treasury have the authority to
issue regulations, or does any Executive Branch agency have the
authority to issue regulations, to simply say if you have a
LIBOR contract and it doesn't provide for a backup rate, here
is how to do the calculations? And if you don't have the
authority, do you want the authority?
Secretary Mnuchin. Yes. First of all, again, let me
acknowledge that I agree that this is a bipartisan issue. This
is something we should work on. And the work on this predated
me coming to Treasury, so this has been a long time. And as I
mentioned earlier, we may come back to Congress and suggest
that you pass legislation--
Mr. Sherman. I would ask you, this is not on your 2021
calendar. This should be on your December calendar or your
January calendar.
Secretary Mnuchin. I agree with you--
Mr. Sherman. I look forward to working with you. I need to
know whether you need legislation. I need to know what you
need, and we need to make sure that there aren't $2 billion of
debt instruments outstanding where people cannot determine what
interest is supposed to be paid. And I want to move on because
I do chair the Asia Subcommittee for another week, and we
focused on China. China could end up with $1.5 billion of World
Bank loans. This is under discussion now. China's income has
already exceeded the level where they should be eligible for
these loans.
The Chinese government has enough money to put a million
Uyghurs behind bars and to build a military complex that
destabilizes the world. So it seems like maybe China should
only be able to borrow money in the private markets at private
market rates. Now, I know the United States won't support World
Bank loans to China, but I am asking, what are you doing to
stop those loans? Are we simply making academic arguments, or
are we making it clear that our future involvement in certain
World Bank activities is dependent upon not giving
concessionary loans to China?
Secretary Mnuchin. Again, thank you for raising this issue,
which I also think there is a bipartisan consensus on. David
Malpass, who is now the World Bank president, when he was
working for me as Under Secretary, as part of our reforms
package we negotiated with the World Bank, with the prior
leadership there. We negotiated significant reductions in China
lending with the path to get below $1 billion. They have been
below $1 billion this year. Yesterday, we submitted our
objection to the current country plan, so we look forward to
following up with you.
Mr. Sherman. Thank you.
Chairwoman Waters. The gentleman from Florida, Mr. Posey,
is recognized for 5 minutes.
Mr. Posey. Thank you, Madam Chairwoman, and Ranking Member
McHenry, for holding this hearing on systemic stability. For
many of us who grew up after the Great Depression, the first
experience we had with severe systemic instability was the last
financial crisis. At this time, we often watch the classic
movie, It's a Wonderful Life, where we experience the drama of
a run on the banks with George Bailey, the hero of the movie
played by Jimmy Stewart, who saves the small town savings and
loan from the bank run. The last crisis taught us that we no
longer live in the world of Jimmy Stewart banks. Runs on other
financial system liabilities, like money market funds, may
often threaten far greater consequences today than bank runs.
Markets for assets make a lapse in dramatic ways and
destroy the ability of financial institutions to fund their
assessment holdings and meet the survival constraints imposed
by liquidity and even solvency. We often hear the words, ``you
can't be too careful,'' but the reality is that in recognizing
our financial system, we can be so careful that we stifle its
innovation, restrict credit and finance, slow economic growth,
and inhibit jobs for people. We must strike a balance between
the risk of return, and we must look to those balanced
solutions to keep our economy on a path towards sustained
growth. Mr. Secretary, please let me commend you for your
leadership in working with other key regulators to finalize
reforms related to the proprietary trading provisions of the
Volcker Rule. Thank you.
As you know, our banking history was different from banks,
where banks focused on trade capital and played a limited role
in long-term capital markets. In this country, banks always had
a role in capital markets and the investments that made our
economy a mighty engine of growth, the intercontinental
railroad, shipping, and a host of other industries. I believe
banks have a key role to play in venture capital, and the
Volcker Rule is restricting that vital function. I recently
joined other members of this committee in sending a letter to
you and other key stability regulators asking that you move
quickly to issue a proposed rule to amend the covered fund
provisions of the Volcker Rule. Specifically, we asked you to
revise the overly-broad definition of a ``covered fund'' to
exclude venture capital and other long-term funds.
Mr. Secretary, this statute makes you, as Chair of FSOC,
responsible for coordinating rulemaking. Are the financial
regulators and the Department of the Treasury working on
changes to the covered funds provision? And if so, could you
please provide us with an insight on the timing for such a
proposal?
Secretary Mnuchin. Thank you. First, let me just
acknowledge what you said, that a healthy banking system is
critical to our economy, and our banks have de-risked and built
up significant amounts of capital. So, the regulators have
already made some proposed changes to the Volcker Rule that
won't create undue risk, but will create more liquidity in
certain markets. And we are working with them, as you
suggested, on the covered fund issue as well. Thank you.
Mr. Posey. Any idea what the timeline would be on that?
Secretary Mnuchin. I would hope it will be over the next 90
to 120 days, but we will get back to you.
Mr. Posey. Do you expect much criticism in that regard?
Secretary Mnuchin. I am not going to speculate, but any
proposed rulemaking will be open to public comment, and we will
take those comments into consideration.
Mr. Posey. Very good. I wanted to talk about some of the
climate change regulations, but I only have a minute left. And
I just wondered if you could give me your assessment on the
usefulness of taking the short-term stress testing discipline
into a much longer period realm of climate change. Does that
make any sense to you?
Secretary Mnuchin. It does not. I'm sorry. Can you repeat
your question? I want to make sure I heard it correctly. I said
it does not, but I want to make sure.
Mr. Posey. I just wonder what your assessment is on the
usefulness of taking the short-term stress testing discipline
into the longer-term realm of the climate change requirements?
Secretary Mnuchin. Let me just say that I have vast
expertise on a lot of different things, but climate is not one
of them, but I think the banks have a difficult enough time on
modeling different risks. I think long-term climate risk is
something that is subject to a lot of different views, and as
long as there is proper disclosure, I think that is adequate.
Mr. Posey. Very good. I thank you, and my time has expired.
I yield back.
Chairwoman Waters. Thank you. The gentleman from New York,
Mr. Meeks, who is also the Chair of our Subcommittee on
Consumer Protection and Financial Institutions, is recognized
for 5 minutes.
Mr. Meeks. Thank you, Madam Chairwoman. Mr. Secretary, I
think that we can agree--as I said in my opening statement, I
am really concerned. It was one of the things that shocked me
as a Member of Congress when Secretary Paulson came on the
Floor talking about how our whole economy was going to drop.
And so with FSOC, we are trying to look forward to try to
figure out what is going on and what will happen in the future.
I have some real concerns because, as I look at the Chinese
growth stalling, as I look at how the European economies are
slowing, with some entering recession, I look at Brexit looming
and what effects that Brexit may have, and then all of the
turmoil that is going on in Latin America, it gives me real
concerns. And when I look at some of the forecasts, America and
the U.S. economy is slowing also.
History may not repeat itself, but sometimes it certainly
rhymes, and I fear that over the next few years, for the
economy it may rhyme a little too much for me with the past
decade. And so I am hoping that the Administration is going to
look well ahead of what takes place and have certain formulas
that they put in place in case there is a tremendous problem,
like when I look at the debt stock of corporations, and even
colleges and universities, has ballooned. An important share of
this debt is in the form of leveraged loans and covenant-lite
loans. And there seems to be a real risk of a downgrade cliff,
and that a growing share of this debt is just barely above
junk.
I am hoping--do you have some models to show what would
happen to employment, homeownership, and the broader economy if
these loans were downgraded loans en masse in the event of a
downturn in the economy? And also, what would it affect and how
would it affect the retail sector, for instance? Is there any
model that you have? Can you tell us, because I am really
concerned about these leveraged loans that are out there?
Secretary Mnuchin. First, let me just say we share your
concerns on financial stability. I worked for Secretary Paulson
for a long time, and I speak to him regularly, and I hope we
are never in that type of a time period again. Specifically as
it relates to leveraged lending and covenant lite, we do share
your concerns. We are monitoring those risks. Those are the
types of activities we are carefully looking at. We have
studied it very carefully as it relates to the banks, and,
again, we are very comfortable that there is very limited
exposure in the banks. As it relates to specifics of the impact
on employment and retail sales and other areas, we will get
back to you on our thoughts on that.
But, again, my view is that it is minimal because the
exposure is outside of the banking industry and shouldn't have
the type of contagion and risk that occurred during the
financial crisis.
Mr. Meeks. Thank you for that, and I do get concerned
sometimes, too, because now that it is outside of the financial
or the banking system, we try to put certain things in place
for the banking system so that we can make sure that see
systemic risk before, and we could then make sure that we could
downsize it to what was necessary. But outside where we may
not, I want to make sure that we are watching what is happening
on the outside also because I don't want this to catch us by
surprise. I think that is tremendously important.
Secretary Mnuchin. I agree, and I assure you we are.
Mr. Meeks. Also, when I looked at what devastated me in
this financial crisis, it is a reminder that recessions and
crises don't hit all sectors and demographics of the economy
equally. For example, if you look at my district, and Black and
minority communities, they overwhelmingly lost wealth, lost
jobs, and were foreclosed upon at disproportionately high
rates, and many of them haven't fully recovered yet. In fact,
minority banks failed at 2\1/2\ times the rates of non-minority
banks, and they have also yet to recover. So, I was wondering,
as FSOC considers systemic risk and the risk of financial
disruptions, how much consideration is given to the manner in
which the burden falls on low-income and minority segments of
the economy, and how do you quantify this, and what has it done
to seek to address this? You have 23 seconds to address this,
if you can do it.
Secretary Mnuchin. Sure. Let me make me two comments, and
we are happy to follow up with you on another one. But one,
housing reform is something we are very focused on,
particularly because of the disproportionate impact on certain
communities. And also on minority-owned banks, we have a
program at Treasury, a mentorship program, that we are working
on. But I look forward to following up with you.
Chairwoman Waters. The gentleman from Missouri, Mr.
Luetkemeyer, is recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman. First, I
would like to thank the Secretary for responding to a letter
that I and 20 of my colleagues sent to you recently regarding
CECL. Looking at the minutes of FSOC's meeting yesterday, I can
see that you directed OFR to examine all current research on
the matter and report back. I think this will enable some light
to be shed on the standard which I believe is detrimental to
our industry as well as our consumers and our economy, and we
are looking forward to following up with OFR just to make sure
the process is conducted quickly. And I look forward to working
with you on issues that I think are going to be pointed out by
this research. So, thank you for doing that and responding to
our request.
The first issue I want to talk about today is with regards
to the new digital currency, Libra, that is being proposed by
Facebook. We had Mr. Zuckerberg in here recently, and he
explained his intentions and how this is all going to take
place. Since then, China has made an announcement with regard
to their own digital currency, and there have been some calls
for the Fed to issue its own currency. And I would just like
for you to give us your position on it, and where you see it
going, and what your thoughts may be on it, because it does
seem to have some legs.
Secretary Mnuchin. Sure. Let me just comment that when
people talk about digital currencies, it is a large, vastly
different area, and different sectors have different things.
Specifically as it relates to Libra, we have had probably a
dozen meetings with Facebook. We have shared our concerns. It
is part of the reason why they are slowing down their movement
forward. We have discussed it at the G-7 and the G-20. If
Facebook wants to get into digital payments, that is fine, and
that may be good for their customer base and good for a lot of
Americans who don't have access to banks. We want to make sure
if they do it, they are doing it in a way that is fully
compliant with our BSA/AML, and that in no way can this be used
for terrorist financing and illicit activities.
Mr. Luetkemeyer. Okay. But the Chinese have decided to get
into this as well. And so the last half of my question was,
there has been some thought process about the Fed getting into
it and having their own digital currency. Is this something you
see as necessary? Something you don't want to get into?
Something that shouldn't be there? Where do you see this going?
Secretary Mnuchin. Again, I would differentiate what China
is doing from what a Bitcoin or a Facebook would do. What China
is doing is really issuing digital currency in lieu of physical
cash, and they can track all that, so they will be able to
track where that goes. That is different than a Bitcoin. It is
no different than in the U.S.--if money is sent on the Fed wire
system, it can be tracked, and money through Swift has
identifiers. So, again, I would differentiate kind of what
central banks are doing from what a Libra or a Bitcoin is
doing.
As it relates to the Fed, and Chair Powell and I have
discussed this at length, I think we both agree for the near
future in the next 5 years, we see no need for the Fed to issue
digital currency. And that is because, again, we have a very
sophisticated system. The Fed is working on an electronic
payment system. We need to make sure there is a real-time
electronic payment system in the U.S. But thank you for your
concerns.
Mr. Luetkemeyer. Okay. I appreciate the response.
Yesterday, we had a hearing here in the committee, and there
were a number of questions with regards to credit unions buying
out banks. It seems that that is a little bit of a trend here
in the last 12 to 14 months. In fact, the comment was made
yesterday that I think there are 28 that have already been
purchased this year with another 14 more in the hopper, I
understand. The IRS is in your purview, Mr. Secretary. This
means that those 28 banks, plus perhaps those other 14, are
going to going to come off the rolls as taxpayers. It is going
to dent the Treasury sum, obviously not much, but some, and
there doesn't seem to be any resistance from the standpoint of
the FDIC and/or the credit union regulators to not allow this
to happen.
So, it is continuing to be approved. It is continuing to
happen. In fact, I was having a discussion last night with
somebody, and they said, well, maybe the banks need to start
buying credit unions, throw the charter out the window and
become a credit union, and they can avoid taxes. I don't know
if that is doable, but there are some people starting to think
outside the box because they are looking at this as a tax
loophole. From your standpoint, do you see concerns from the
standpoint of credit unions buying out banks? Is this just
another part of a merger situation that is going on in this
country, or is there a trend? Is it a tax evasion situation?
How do you view this?
Secretary Mnuchin. We will follow up with the FDIC on this
issue and monitor it. It is not something that has caught my
attention because fortunately it is on still small scale. But I
appreciate you raising the concern, and we will follow up with
the FDIC.
Mr. Luetkemeyer. This past week, there was an announcement
of a $700 million bank that was bought out by a $10 billion
credit union.
Secretary Mnuchin. Yes.
Mr. Luetkemeyer. So this is going to continue to grow, and
it is going to be a concern, I think, that needs to be on your
radar. Thank you for your response.
Chairwoman Waters. The gentleman from Georgia, Mr. Scott,
is recognized for 5 minutes.
Mr. Scott. Secretary Mnuchin, how are you? I want to make
sure I am clear on your level of concern about the continued
volatility in the repo market and its impact on the calculation
of SOFR, the Secured Overnight Financing Rate, which, as you
know, is a designated replacement rate for LIBOR. Now, I
listened to your response to Mr. McHenry and also to the
gentlelady from New York, and I want to be clear because I read
your report, FSOC's 2019 financial stability report. Here is
what you said: ``Market participants with significant exposure
to LIBOR remain vulnerable if they do not sufficiently prepare
all the way to the end of 2021.'' What did you mean by that,
and what did you mean by ``prepare?'' What are you doing to
help the industry participants prepare?
Secretary Mnuchin. Again, let me just emphasize two
different issues that are related in a way, as you said. I am
concerned about what happened in the repo markets. That is not
just a concern for SOFR. That is a broader concern because we
rely on these repo markets, and it impacts many, many
individuals and institutions, so we have had active discussions
with the Fed on that issue. That does impact the LIBOR
transition, but the LIBOR transition is a much broader problem,
and, as I said, as recently as yesterday, we convened a group
of the banks and the regulators on this.
Mr. Scott. What did you mean by, ``they will remain
vulnerable?''
Secretary Mnuchin. Well, if banks and trustees and security
holders don't prepare for the transition, there are trillions
of dollars that people could wake up in 2021--
Mr. Scott. And by ``prepare,'' you mean to do what?
Secretary Mnuchin. It is a list of everything from prepare
technology so that they have the ability, prepare the legal
analysis, prepare a transition. People literally have hundreds
of thousands of transactions, and, as I said, part of this may
be coming back to Congress and asking you to pass legislation
in part of this because there may be serious legal issues that
we are still exploring.
Mr. Scott. let's go overseas for a moment. I am very
concerned about Brexit and the particular impact that Brexit
will have on our businesses, on our financial markets,
particularly because of the uncertainty we are seeing around
the whole deal of delays after delays, and the failure of them
to come up with a clean deal. So what I want to get from you,
as our Treasury Secretary is, how concerned are you about this
situation with Brexit and the impact that this uncertainty is
having on our cross-border transactions with our financial
market participants?
Secretary Mnuchin. I would say that I am moderately
concerned. I have been discussing this issue for the past 3
years with my counterparts at the Bank of England as well as
the regulators, and the finance minister who is the Chancellor
of the Exchequer. It is a significant risk to the U.K. It could
have carry-on risk to the U.S. We are working with the
regulators on those risks. We have managed through some of
those, and some of those are still open. But as I have
encouraged the U.K., they need to resolve this one way or
another.
Mr. Scott. Also in your report, concerning that, you
highlight the potential for risk and that they will have
significant spillover effects in the United States, should
there be a no-deal Brexit, particularly with regard to the
cross-border transactions. What did you mean by that?
What would be the potential with no deal? What would be
better for us or worse, no deal or deal, in your mind?
Secretary Mnuchin. Let me just say I respect the people of
the U.K. They can decide whether they want to be in Brexit or
they don't want to be in Brexit. The risk is making sure that
whichever case, there is a coordinated transition.
Mr. Scott. Thank you, Mr. Secretary.
Chairwoman Waters. The gentleman from Oklahoma, Mr. Lucas,
is recognized for 5 minutes.
Mr. Lucas. Thank you, Madam Chairwoman.
And thank you, Mr. Secretary, for appearing before this
committee one last time before year's end.
Secretary Mnuchin, in the Council's annual report, it
recommended that the government and the private sector should
have more effective information-sharing practices. Could you
expand on how agencies can best work with financial
institutions to address cybersecurity concerns without
inhibiting the growth of emerging technologies?
Secretary Mnuchin. As I highlighted in my opening comments,
cybersecurity is one of my most important priorities. While I
think the industry is well-prepared, we can never be prepared
enough. The bad people continue to operate. We need to make
sure that our financial markets are not only protected for
today, but are protected for the future. And it is a
coordinated response between private companies, public
companies, and the intel community, as well as the Treasury and
the regulators.
Mr. Lucas. Mr. Secretary, in what ways is FSOC and its
members educating the general public on cybersecurity risk,
particularly, as you noted, those coming from bad actors and
bad actors abroad, too?
Secretary Mnuchin. Our focus is less on educating the
general public and more on making sure that the banks are
educated, that they have the best practices. The general public
will be protected as long as the banks and the financial system
is protected, and that is what we work on every single day.
Mr. Lucas. One last question, and I am thinking of my
colleague discussing Brexit for a moment. You are in a unique
position, with your finger on the national economy, a
businessperson of much experience. Could you speak for a moment
about potentially how much better the United States-Mexico-
Canada Agreement (USMCA) deal is for American workers and why
it is essential for the economy that we act swiftly on that in
this body?
Secretary Mnuchin. Yes. First of all, let me say I hope
that Congress passes that between now and the end of the year.
I know Ambassador Lighthizer, the Speaker, and others are
working closely on this, and this will be a terrific win for
American workers, and for the American economy.
Our largest trading partners are Mexico and Canada. These
economies are interlinked. This is a great step for growth.
Mr. Lucas. Thank you, Mr. Secretary. And with that, Madam
Chairwoman, I yield back.
Chairwoman Waters. Thank you very much. The gentleman from
Colorado, Mr. Perlmutter, is recognized for 5 minutes.
Mr. Perlmutter. Mr. Secretary, it's good to see you.
My questions are going to go back towards the repos, the
repurchases, because there are some red flags here. Last year,
banks had the most profits they have had in forever, in part
because of the big tax cuts and stuff like that, but huge
profits. And at the same time, we saw the excess reserves of
the banks decline by 35 percent since 2017, and at the same
time as the Fed and Treasury were sort of shrinking the balance
sheet, all of a sudden over the last few months have had to
expand it again.
I don't understand how those all come together, and if you
could try explaining that again, I would appreciate it. Because
we have big profits, shrinking reserves, and now expansion of
the balance sheet again.
Those are the kinds of things that I think we have FSOC in
place to monitor. What is it that is really driving this on a
bigger scale, if you could tell us?
Secretary Mnuchin. I am happy to address it again because
it is a very important issue, and I don't want to minimize it.
Again, as recently as yesterday at FSOC, we had a presentation
from the Federal Reserve Bank of New York. I think there are a
lot of different issues that came together on those 2 days that
caused the spike. It was not any one single issue. But we are
studying it carefully to make sure that this doesn't occur
again and to make sure it doesn't occur on a prolonged basis.
The banks are having very good profits mainly because the
U.S. economy is performing very well. I don't think this has to
do with an issue of bank profits. This has to do with an issue
of bank liquidity. The banks had plenty of liquidity. The banks
had enough liquidity to go in and take up the repo, but they
didn't want to do it. And the reason they didn't want to do it
had to do with different regulatory tests that fit together.
So, the liquidity test was fine. It was different ratios
that they were worried about hitting and tripping. So, again,
this was partially a Treasury issue of Tax Day. It was
partially a regulatory issue. It was partially a reserves
issue.
And then just to comment, as you said, the Fed has been
shrinking the balance sheet, which I think makes sense because
as they went out of quantitative easing, they didn't need a
giant. That was for the financial crisis. And what they are
doing now doesn't impact the growth of the balance sheet by
buying securities. It is really a cash management function
around the repo markets.
But these are all very complicated issues that were
intertwined, and we continue to work on them.
Mr. Perlmutter. But those were sort of the things that led
up to the recession 10 years ago, that all of a sudden, there
was this illiquid setting of our banks, and then everybody
started getting nervous and the auction rate securities went to
heck, and everything else started closing in. And I guess it
just doesn't add up for me. We are making money over here, but
all of a sudden, the reserves are shrinking like crazy.
We try to shrink the balance sheet, but now we are
expanding it again. And it isn't just 2 days. It has been
happening for several months now.
Secretary Mnuchin. Again, I can assure you that the
technical issues that happened around this have nothing to do
with the financial crisis. The financial crisis was driven
primarily by real losses in real estate markets, in highly
leveraged securities. This issue is all about the government
repo market.
And again, when we talk about the reserves at the banks,
the excess reserves, most of those excess reserves are locked
up at the Fed because of regulations that require the banks to
have so much excess liquidity--
Mr. Perlmutter. But let me slow you down for a second
because as we--I asked my staff to just kind of give me some
numbers on student loans, on auto loans, and on corporate debt.
We are at $1.6 trillion in student loans: 44 million Americans
have student loans, with almost $30,000 as the average debt.
Auto loans were at $1.26 trillion: One hundred seven
million Americans have auto loans, and seven million Americans
are more than 3 months behind.
And corporate debt, we are at $10 trillion, $1.3 trillion
in leveraged loans, $1.2 trillion in junk bonds. There is a lot
of lending going on out there. And so the question is, are we
getting overextended again? And that is what I am worried
about.
Chairwoman Waters. The gentleman from Colorado, Mr. Tipton,
is recognized for 5 minutes.
Mr. Tipton. Mr. Secretary, did you want to answer that?
Secretary Mnuchin. Thank you.
What I was just going to comment on is I think it is a good
thing that we have a lot of lending, a healthy economy. And
again, I really do think that this bank issue is a highly
technical issue, but it is something we are very focused on.
And student loans, that is a longer subject that we are
studying carefully. We share certain concerns on the student
loan market right now.
Mr. Tipton. Thank you, Mr. Secretary, and I appreciate you
taking the time to be here and speaking to that specific point.
The ability to be able to have access to capital, to be
able to get this economy moving, and I think it is worthy of
note that in the first 1,000 days that you have been in office
with President Trump, you have been able to implement historic
tax reform, and you have been able to take extraordinary steps
to safeguard national security, making strides to being a
better steward of taxpayer dollars.
And it is important to note that our free market system,
with the help of tax reform and other deregulatory policies
that have come out of Congress and the Trump Administration,
has helped to be able to stimulate my State's economy in
Colorado. In the past year alone, Colorado employers have
created 43,800 jobs. Nearly 67,000 Coloradoans have found jobs.
In fact, in my State, the unemployment rate is at 2.6 percent.
As you noted in your testimony, we are at a 50-year low on
unemployment in this economy right now. We have policies that
are actually making this capitalistic system work. Main streets
in rural America is of primary concern to me. That is my
district. And as you probably know, in many cases when we are
looking at economic recovery after downturns, it is rural
America that is last to come out of that recovery. And if
another downturn comes, they are the first to be able to lead
the way in to distressed economies.
And I am really pleased to be able to report to you that in
my district, we are now starting to see property move in some
of these rural areas. We are starting to see the economies
move, jobs being created through the opportunity of our system,
and I appreciate the efforts that you and the Administration
have made to address that.
Would you agree, when we look at the overall economy--low
unemployment, historic low unemployment in so many demographic
groups that we have, the opportunity that we are seeing in this
country--is this a good, positive sign for my State of Colorado
and for America as a whole?
Secretary Mnuchin. It is, indeed. And it is actually the
bright spot of global growth.
Mr. Tipton. And I think that is something that is going to
be important for us as a Congress, as a nation, to be able to
keep our eyes on. Despite some of this historic growth, we have
some of our colleagues across the Capitol and in Governor's
mansions across the country who are trying to upend our
capitalistic system that has benefitted the majority of
Americans in this country.
The economic engine that we have in this nation is
something to be celebrated and to create those opportunities in
front of us. We should not be pursuing socialistic policies to
be able to redistribute income, to be able to slow that down,
but rather, policies that are going to be making sure that
every American has that opportunity to be able to reach their
highest and best potential, as God has given them the ability
to be able to do.
I would like to encourage you and the Administration to
continue those policies that are creating opportunity for so
many Americans, and to reject those that are going to be
seeking to be able to redistribute income, to build out bigger
government, more programs rather than empowering people with
their own resources to be able to build for that bigger,
better, and brighter future.
Again, I appreciate you taking the opportunity to be here
today, and for your work on this economy, and I want to wish
you and your family the best for the holidays.
Thank you, and I yield back.
Mr. Perlmutter. [presiding]. Thank you. The gentleman from
Colorado yields back. The gentleman from Connecticut, Mr.
Himes, is recognized for 5 minutes.
Mr. Himes. Thank you, Mr. Chairman.
And thank you, Mr. Secretary, for being here.
I would love to use my 5 minutes to have you reflect a
little bit on shadow banking, and in particular the
intersection of shadow banking and the mortgage system. I am of
a tenure, I was sworn in, in January of 2009, when this
committee wasn't sure that Citibank, for example, would remain
solvent until probably a couple of quarters had gone by and all
the implications. And of course, so much of that was due to
irresponsible underwriting in the mortgage market.
In your report, which I have not had a ton of time to
absorb, you actually make specific mention and, in fact, Box B,
nonbank mortgage origination servicing, here the message is
pretty clear, which is that nonbanks are now originating, it
looks like more or less than half of mortgages, and those
mortgages are disproportionately, significantly
disproportionately going into the GSEs.
That makes me nervous because, of course, the GSEs are
guaranteed by the full faith and credit of the United States
and the American taxpayer. This feels to me like a little bit
of a replay in which institutions that maybe don't have the
underwriting discipline of banks are out there writing a lot of
mortgages, sure that those mortgages will then be securitized.
I have sort of a general question, and then a specific
question. My general question is, what sort of visibility do
you think you and the other regulators have into the quality of
the overall underwriting? And specifically, we spend a lot of
time in this committee, and tried to reflect in Dodd-Frank, the
notion of retention, meaning you actually eat your own cooking
with respect to the underwriting.
And I have a suspicion that a lot of these nonbanks are
actually not retaining exposure, but that, in fact, they are
transferring it to the GSEs. So, generally, what kind of
visibility do you have? And more specifically, are these
nonbanks underwriting competently?
Secretary Mnuchin. Let me say that we do have concerns, and
that is why we have highlighted it. The good news is we do have
visibility, and the main reason we have visibility, as you
pointed out, a lot of these loans are being sold to the GSEs. A
lot of these loans are being guaranteed by FHA. One of the
things we want to do as part of housing reform is we are
concerned, both at FHA and at the GSEs, that the underwriting
criteria is deteriorating, and the loan-to-values are
increasing. So, we are working with the FHFA and we are working
with HUD on those issues.
The other area of concern that we have is that the mortgage
servicing business, which used to be dominated by banks, is now
dominated by nonbanks. And one of the problems is the nonbanks
don't have the liquidity to advance on mortgages that the banks
had. So, this is something that FSOC is very carefully
studying.
I can also tell you, in my role on the FHFA board, we are
studying this as well. I would say it is not at the point where
we are nervous of the levels that it was 10 years ago, but it
is a significant concern, and that is why we are carefully
following it. And we will come back with additional
recommendations, and I think there is a lot that both HUD and
FHFA can do to cut down these risks.
Mr. Himes. Let me follow up. You have a sentence here in
Box B that says that loans originated by nonbank lenders have,
on average, marginally higher debt-to-income ratios and lower
borrower credit scores than those originated by banks.
So it feels to me--and again, I haven't had a chance to
study this--like there is a little bit of an adverse selection
going on here inasmuch as lower-credit mortgages are being
guaranteed by the GSEs, but that the higher-quality mortgages
are perhaps staying outside of the GSE structure. Am I right in
inferring that from the report?
Secretary Mnuchin. Not necessarily. What is occurring is
because a lot of the loans that the banks are originating are
being sold to the GSEs. But if you look at the loans that the
banks are originating, they are better-quality loans than the
nonbanks. So if you look at what the GSEs are buying, the
higher loan-to-level are from the nonbanks, and we are
concerned about that.
The good news is the bank regulators made sure that banks
weren't originating bad loans and just selling them. So, that
goes back to your original comments.
And by the way, these should be bipartisan concerns. These
should concern all of us.
Mr. Himes. No, no. I completely agree, and I am glad to see
this focus. I would emphasize again just drawing on what it
felt like. My own State of Connecticut has only now in the
aggregate recovered economically from the impact of what
occurred in 2007 and 2008. So I appreciate you highlighting
this, and I hope that if you need us to help with GSE reform or
whatever, that we will be involved rather than surprised.
And I yield back the balance of my time.
Secretary Mnuchin. We do need your help on GSE reform. So,
we look forward to working with you.
Mr. Perlmutter. The gentleman from Connecticut yields back.
The gentleman from Texas, Mr. Williams, is recognized for 5
minutes.
Mr. Williams. Thank you, Mr. Chairman.
It's good to have you here, Mr. Secretary. Full disclosure
again about me--car dealer, retailer, Main Street, and Texas.
And I want to thank you for taking time out of your busy
schedule to come up here to answer these questions.
By my count, this is the fourth time that you have appeared
before this committee, and I know I have asked you this
question before. But this is politics, and things up here in
Washington seem to change hour by hour and minute by minute. So
before I continue with my questions, I must ask you again, are
you a capitalist or a socialist?
Secretary Mnuchin. I am pleased to report I am still a
capitalist.
Mr. Williams. And I am pleased to hear that. Thank you.
Now while our country is moving in the right direction
economically, I am worried that we are not paying enough
attention to the national debt, which recently surpassed $23
trillion. The net interest payment on this debt is estimated to
reach around $400 billion during this fiscal year and could
account for over 10 percent of the GDP by the end of 2020.
Federal Reserve Chairman Jerome Powell stated in November
that our debt is on an unsustainable path that will cripple our
ability to respond to a recession. In addition to Chairman
Powell's comments, I have heard from former senior military
officers, including some who served at Fort Hood in my
district, that our debt is one of the greatest national
security threats that they see facing the nation.
So the fact is we need to cut government spending, and we
need to get serious operating within our means. So, Mr.
Secretary, can you elaborate on the threat that our mounting
national debt has on financial stability?
Secretary Mnuchin. I would say that today it doesn't have
much of a threat because we are the reserve currency of the
world, and I think relative to this side of the GDP, it is
sustainable. But what I would say is we need to grow our
revenues faster than we grow our expenses. And I think, as you
know, when the President came in, he presented a balanced
budget. He wanted to increase military spending and decrease
nonmilitary to pay for it.
To get a bipartisan deal done, we increased both. I was
part of this with Speaker Pelosi just negotiating the recent
deal, but over time, we need to look at government spending.
Mr. Williams. It is no secret economic growth has been
slowing throughout the world. The International Monetary Fund
revised its global growth estimates down to 3 percent for 2019
when just 2 years ago, the world's economy was growing at a
rate of 3.8 percent.
But even as the global growth slows, the United States
continues to outperform other developed economies, as you have
talked about today, across the globe. And I can tell you again,
being in the retail business, being on Main Street America,
business is as good as I have ever seen it, and I appreciate
that. So, Secretary Mnuchin, what factors are contributing to
our growth outpacing our European counterparts?
Secretary Mnuchin. I think there is no question it is the
economic policies of the Trump Administration. It has been a
combination of tax cuts, regulatory relief, and better trade
deals. And that is what we are focused on.
Mr. Williams. Unemployment currently, as we know, exists at
3.6 percent. And earlier this year, the top economist at
Goldman Sachs predicted that this number could fall to as low
as 3.25 percent by the end of 2020. So what concrete actions
would you recommend we take in Congress to help make this
prediction become a reality?
Secretary Mnuchin. I would suggest you continue on
bipartisan support of USMCA. That is the most important thing
on the economic side the Congress can do between now and the
end of the year.
Mr. Williams. I totally agree with you. Next, data security
is one of the greatest threats to our financial system as our
economy becomes more digital. Because of congressional
inaction, many States have adopted their own data privacy
standards. Unfortunately, for many businesses in my district,
they are going to be forced to comply with various standards in
order to operate their businesses in all 50 States.
I know you have addressed this before, but as it is
important for the businesses in my district that we talk about
this, what would be the value of having a single Federal data
security standard?
Secretary Mnuchin. I think it is something we should look
at very carefully. Just as there are national banking
standards, I think data is something that is very critical. And
also, by the way, this is an issue on a global basis. We want
to make sure that localization doesn't stymy growth in
transactions.
Mr. Williams. Before I close, again, thanks for being here.
I want to applaud the Treasury Department's work in standing up
for U.S. interests during recent negotiations with European
regulators over insurance capital standards. We cannot allow
bureaucrats in Brussels to write unworkable rules and
regulations that would hurt insurance companies in our country.
Keep up the good work, and I yield back the balance of my
time.
Mr. Perlmutter. The gentleman from Texas yields back. The
gentleman from Illinois, Mr. Foster, is recognized for 5
minutes.
Mr. Foster. Thank you, Mr. Chairman, and thank you,
Secretary Mnuchin.
There are so many new, emerging threats to financial
stability today from cryptocurrency projects such as Libra, to
ballooning levels of corporate debt, leveraged lending, and
questions about the accuracy of ratings from bond rating
agencies, in addition to climate-related risk, and the
concentration of cloud services providers, just a very long
list. And that is why I am very concerned that the Treasury's
budget and staffing levels for FSOC and the Office of Financial
Research have been greatly reduced under your watch.
Compared to the Fiscal Year 2017 budget, the Trump
Administration's Fiscal Year 2020 budget would result in about
half of the staff for FSOC and OFR. So, Secretary Mnuchin, do
you really think that it is a wise idea to cut the FSOC and OFR
staff levels in half?
Secretary Mnuchin. I do. And the reason for that is
because, one, you have been successfully increasing our
Treasury staff outside of FSOC, as well as the other
regulators. We rely upon one of the things that FSOC does is, I
think it can have a smaller group of core people, and most of
the work is done on a coordinated basis through all of the
agencies. So, that is really why we are comfortable doing that,
and we are trying to be prudent on expenses.
Mr. Foster. Well, it seems very short-sighted to me to cut
the resources that are desperately needed to make sure that we
even reduce the risk of the sort of financial crisis that we
lived through.
So you are unwilling to commit to doing anything to restore
those budgets. Is that correct?
Secretary Mnuchin. I would never say I am unwilling to
commit. We are happy to come up and explain to you what our
thinking is. Again, we are just trying to save taxpayer
dollars. We are not trying to do anything that would create
more financial instability. If we thought we needed those
resources, we would keep them.
Mr. Foster. Well, okay. I believe that we need to give FSOC
and the OFR the funding and personnel they need to carry out
what I regard as their very important missions, and that is why
I have introduced the Enhanced Financial Stability Research and
Oversight Act, which I am hopeful that we are going to be
marking up in committee within a few weeks here.
This is a common-sense measure that just tries to restore
the minimum funding levels that we had in 2017. It is pretty
simple because we cannot foresee and prevent the next crisis if
we do not have the personnel around to actually do the work,
including the coordination of collecting the data, analyzing
the risk, and performing the essential research.
Anyway, I just hope my colleagues will support me in this
important effort. I think it is short-sighted to cut back those
essential functions.
Now another point that I alluded to earlier is that,
increasingly, big tech firms like Amazon, Google, and others
are pushing into financial services and products, including
cloud computing services for the largest banks. And according
to a recent readout of the FSOC meeting, cloud computing was a
topic of discussion.
My first question is, in your view, does FSOC have the
authority it needs to designate a cloud provider as being a
non-bank systemically important financial institution (SIFI)
market utility?
Secretary Mnuchin. At this point--and this is a very fact-
specific situation--the answer is no. But it is something we
have discussed at the FSOC and--
Mr. Foster. But do you have the authority? If you come to
the conclusion that they should be designated, do you feel that
you have the authority?
Secretary Mnuchin. If we came to the conclusion.
Mr. Foster. Right. Okay. I have a real worry that the
concentration of cloud providers--it would be an interesting
thought experiment to say what happens if, for example, there
was not too long ago a story on Bloomberg about the possibility
that the Chinese had put little hardware bugs in very widely
used equipment inside cloud utilities.
And so if that is discovered at a single cloud utility
where they have to replace a big fraction of their hardware and
have to be down for potentially months while that happens, to
actually think what that would do to our economy if AWS went
down for a month or two.
Secretary Mnuchin. As I highlighted earlier, cybersecurity
is a big focus of ours, and part of the reason why we are
focused on the cloud is because we share your concerns. We want
to make sure that no one financial institution is dependent
upon, and would be taken down by, a cloud provider.
Mr. Foster. In my remaining time, I just want to thank you
for your response to the letter that Congressman Loudermilk and
I sent to you having to do with digital identity solutions. And
I think that there is an essential government role there to
leverage--as was the Administration's position--the REAL ID Act
to allow citizens who wish to have a way to authenticate
themselves in a secure manner online.
I think that is a fundamental necessity in a modern
economy, and I think there is an essential job for the Federal
Government to provision that basic identity and many
opportunities for the private sector to leverage additional
features on top of that. I want to thank you for your response,
and I encourage you to continue.
I yield back.
Mr. Perlmutter. The gentleman from Illinois yields back.
The gentleman from Arkansas, Mr. Hill, is recognized for 5
minutes.
Mr. Hill. Thank you, Mr. Secretary. It's great to have you
back to the committee. I appreciate all of your leadership, and
I just was so interested in listening today. And thanks to the
regulators that we talked to yesterday for their swift
implementation of S.2155 on regulatory reform. We appreciate
Treasury's leadership on that.
In your work on strict sanctions around the world, in
Venezuela, North Korea, Iran, and Russia, you have demonstrated
a lot of leadership there. And of course, tax reform has been
talked about extensively. So we are grateful for your
leadership as our Treasury Secretary.
I want to turn and mention a couple of things that we have
talked about today. On the repo market that Mr. Perlmutter
talked about and the ranking member, I think the concern is
that the New York Fed is not supporting the repo market, they
are the repo market. I think that is the challenge.
And we don't see the bank reserves that are more than
adequate, billions more than needed--on JPMorgan, for example,
$120 billion in daily cash held at the Fed on a $60 billion
cash requirement, and yet they are not entering that repo
market. So I am pleased that yesterday at the FSOC meeting, you
talked about this, because I do think supervision is an issue
here. And the stigma attached with something that was a regular
part of our business lives, which is running a daily, interday
daylight overdraft at the Fed.
On mortgage servicing, I appreciated your comment there.
Again, that business shifted out of the bank sector to the
nonbank sector because of Dodd-Frank. And for the 5 years that
I have served in Congress, I have tried to get the Obama
Administration and the now Trump Administration to support the
idea that mortgage servicing rights are not a derivative that
should be treated in that manner.
It is, as you know from your long career in mortgage
finance, a natural companion to the origination of residential
mortgages. So I hope FSOC will lend its weight to allow
mortgage servicing to not have the capital penalty that they
have in Dodd-Frank.
Mr. Foster and I have had a lot of conversations about
digital currencies. Fed Chairman Jay Powell just answered our
letter on the idea of a digital token, and I think the concept
is a little misunderstood.
If we want a digital future in finance and we want to
protect the preeminence of the American dollar as the reserve
currency, this idea of a digital token is an important concept.
And it is not anything except allowing our government to
facilitate a blockchain transaction process legally in the
future.
We have Visa debit. We have Mastercard. We have Swift,
Fedwire, the ACH system. All true, all have private sector
participation in them and government participation. But this
idea that there is a new rail created that is a blockchain rail
that both banks and nonbanks can participate in to settle
transactions through a token, it is coming our way faster than
we like, perhaps faster than the 5-year timeframe you outlined.
So I do think it is an important issue for the FSOC to continue
to consider and also to have Treasury's view on, independent of
what your agent over at the Federal Reserve thinks as you
implement Article I's power on currency.
Let me turn and ask you a question about World Bank issues
that we were--we had a hearing a few weeks ago at the
subcommittee on that topic, multilateral development
institutions. There was no Treasury representative; there was
an illness that day.
And one thing I talked about in the hearing is the
legislative mandates that are put on our managing director and
our Governor to direct votes at the Fed. So my question to you,
Mr. Secretary is, are you concerned that that kind of
governance, to support or oppose a financing project, ties the
hands of the United States in leading at the bank due to being
forced to abstain on voting?
Secretary Mnuchin. I am.
Mr. Hill. And does Treasury have an amount, a record of
those abstentions? And that long binder, I understand, of rules
that our Governor has to follow, and is that something you
could share with the committee and help educate the committee?
Secretary Mnuchin. We can come back to you on that. It is a
huge bureaucracy running all these tests, and we keep the data,
so we can get back to you.
Mr. Hill. Yes, what I hear, both from your former
colleague, Mr. Mathis, and others is that it just reduces
America's effectiveness to lead the bank. So I think we would
be very interested in working with Treasury on a way to reduce
those mandates, fine-tune the mandates, remove ones that are
redundant, and have your leadership on that. Is that something
you would be interested in helping us on?
Secretary Mnuchin. We look forward to working with you.
Mr. Hill. Good. Thank you, and I yield back, Mr. Chairman.
Mr. Perlmutter. The gentleman from Arkansas yields back,
and before I recognize the gentlelady from Ohio, I think we all
want to wish the gentleman from Arkansas a happy 29th birthday.
[applause]
Mr. Hill. This is how I wanted to celebrate it.
[laughter]
Mr. Perlmutter. Okay. I would like to recognize now for 5
minutes the gentlelady from Ohio, Mrs. Beatty.
Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking
Member. And thank you to our witness, Secretary Mnuchin.
Let me start out by saying thank you for the information
that I received from you on working with your Office of
Minority and Women Inclusion (OMWI) Director, looking at the
diversity information, and that was very much appreciated. So,
thank you.
Today, Mr. Secretary, I wanted to share with you that in
yesterday's hearing with prudential regulators, several of my
colleagues, including Congressman Cleaver, raised the issue of
minority depository institutions (MDIs), specifically with the
rate that they are disappearing. And as you know, since the
financial crisis of 2008, the number of MDIs that fail is 31
percent.
At the end of 2018, we only had 149 of these institutions
left. MDIs are incredibly important to the minority community
that they operate in, and so I am introducing legislation today
to codify the Treasury's Financial Agency Mentor-Protege
Program, and it is known as the Expanding Opportunity for MDIs
Act.
And I also want to say that it was just brought to my
attention that your staff had sent my office some comments and
technical assistance on the bill last night. So, I am very
appreciative of that. Can you briefly describe what the
Treasury's Financial Agency Mentoring Program will seek to
accomplish and how your Department came up with it?
Secretary Mnuchin. First of all, thank you very much, and
we were glad to assist on this.
The Protege Program has worked very well, and the idea is
to partner a minority bank with a large bank. And in that way,
the minority bank can get resources and training and help to
run their business.
We share your concern. I think there should be an increase
in opportunities for minority banks, not a decrease. This is
something I am pleased about. I personally wrote and asked many
of the big CEOs to help on this, and we look forward to--I know
we did work with you on some technical issues, and we look
forward to continuing to help you on this.
Mrs. Beatty. I want to say, thank you. Was there a specific
need that you thought you had to send the letters to the big
banks? Do you think it would help them to be more engaged to do
it or because you felt they weren't doing anything?
Secretary Mnuchin. No, they were pleased. I would say, when
we asked people to go into this Protege Program, people have
been very receptive, and it has worked. And we look to scale
this up, and we look to work with you on your potential
legislation.
Mrs. Beatty. Well, thank you. Because we have noticed that
some of the larger banks whom I have been very critical of,
their lack of working, increasing enough with their CRAs,
participating on diversity and inclusion. So I would like to
say, Mr. Chairman and Mr. Ranking Member, people ask us all the
time, why do you talk so much about diversity and inclusion,
and it is beyond just hiring people because of their race or
ethnicity or gender. It is also about, if you have someone in
the room and you are mentoring and you are working with people,
it helps with the economy. It helps with jobs.
Therefore, it crosses over that people can pay for their
housing, because we have a lack of affordable housing. It helps
them with healthcare. It helps them with daycare and childcare
if they are in the room.
Again, I would like to say thank you, and Mr. Chairman, I
yield back the balance of my time.
Mr. Perlmutter. The gentlelady yields back. The gentleman
from Tennessee, Mr. Kustoff, is recognized for 5 minutes.
Mr. Kustoff. Thank you, Mr. Chairman.
And thank you, Mr. Secretary, for appearing today.
We have had questions today about the U.S.-Mexico-Canada
Agreement USMCA), and can I ask you, just in layman's terms,
what is the effect to the economy if, in fact, Congress does
pass the U.S.-Mexico-Canada Agreement? And conversely, what is
the effect on the economy if we fail to pass the U.S.-Mexico-
Canada Agreement?
Secretary Mnuchin. I would say if we pass it, we estimated
it is in excess of 50 basis points a year in GDP, which is very
significant. This would create additional jobs. This would
create additional revenue for the government, additional
revenue for consumers and businesses, and it modernizes trade
with our two most important trading partners.
I am not going to speculate on what would happen if you
don't pass it, because I am highly encouraged that you will.
Mr. Kustoff. I would like to share your enthusiasm, and I
appreciate that.
You received a question from Mr. Williams of Texas about
the data localization and whether there should be a Federal
standard. If I could, though, I would like to ask you about
India. I know that you were recently in India, and we have read
the press accounts about how India is trying to raise the bar
as it relates to the data localization and, frankly, the
restrictions on free trade as it relates to startups and other
companies.
Can you talk about what the barriers are for U.S. companies
operating now in India and what effect that could have?
Secretary Mnuchin. Again, in my recent trip, we had very
specific conversations. We have been dealing with them over the
last year on this issue. We want to make sure that U.S.
companies are treated fairly and can compete.
We have no issues if countries want to have local data for
regulatory purposes, they do that. It is the issue of then
eliminating data outside. And I think, as you know, we are in a
global economy. We are in a scenario where data transfers. The
data is processed in different places. So, this is a
complicated issue that we continue to work on to make sure that
our financial services companies are treated fairly.
Mr. Kustoff. Not only financial services companies, but
also other companies that are operating in India as well?
Secretary Mnuchin. That is correct.
Mr. Kustoff. And Treasury continues to work with the
officials in India on that?
Secretary Mnuchin. We do. And we are also working very
closely with the Office of the United States Trade
Representative (USTR) because it is a trade issue.
Mr. Kustoff. Thank you, Mr. Secretary.
We have talked about the benefits of the Tax Cuts and Jobs
Act, which no doubt has been a tremendous benefit to our
economy and to our folks who live in the Eighth Congressional
District in Tennessee and across the country. One thing that we
may not have gotten right in the Tax Cuts and Jobs Act is the
Qualified Institutional Placement (QIP) as it relates to
depreciation, and I think that is a technical fix, trying to
resolve that.
Could you talk about the effect of trying to resolve that
in terms of depreciation from 39 to 15 years?
Secretary Mnuchin. Let me just say this is something that I
hope this committee and others will help us with on a
bipartisan basis. This was clearly a technical mistake, and
what happened for retailers was due to literally a technical
mistake in the drafting, the amortization became longer as
opposed to shorter. And I think everybody acknowledges on a
bipartisan basis that this was a technical mistake.
And this impacts an area of the economy, which is
retailers. It is a big part of the economy. We have been trying
to get this fixed. I would hope it is something that Congress,
next year, will reconsider helping us work on. It was a simple
mistake, and nobody is debating that.
Mr. Kustoff. From your standpoint at Treasury, is it
something that should be resolved sooner rather than later, or
you would hope would be resolved sooner rather than later?
Secretary Mnuchin. It is our number one, two, and three
technical fix request.
Mr. Kustoff. Thank you, Mr. Secretary. I yield back the
balance of my time.
Mr. Perlmutter. The gentleman from Tennessee yields back.
Mr. Heck from Washington is recognized for 5 minutes.
Mr. Heck. Thank you, Mr. Chairman.
First, I want to join with my friend from Texas, Mr.
Williams, in expressing my appreciation for the role that
Treasury played in the international insurance negotiations. I
happen to be one who believes that we ought to keep faith with
the McCarran-Ferguson Act and that it is the best way to have a
well-regulated, consumer-oriented insurance market. I think it
has worked well. So, thank you, sir.
I am also grateful that my friend across the aisle raised
the issue of the Tax Cuts and Jobs Act. I would like to ask you
about it. Obviously, at the time, small technical fixes
necessary notwithstanding--and I am a cosponsor of that bill. I
hope as well that we get to it--that we were promised that it
would be a game changer. Actually, those were your words.
This is going to be a game changer for business, and it was
broadly held as something that would lead to increased business
investment. It hasn't. There is the chart. That is the chart of
the Bureau of Economic Analysis revealing that we basically had
six quarters of a significantly downward trend of business
investment and capital.
And I am going to ask you why you think that is, and what
it is you think we ought to do about it, especially given the
promises that were made. But I want to say, first of all, why I
care about this.
I think it is pretty clearly established that there is a
close relationship between increased productivity and increased
wages. And let's face it, the data is in. We have been fairly
stuck on wage growth for the better part of 30 years in this
country, and while it is beginning to inch up, it is not really
material in that increase.
Every upward trend is appreciated, but we still do not have
wage growth. And presumably, we do not have wage growth because
we do not have increased productivity, presumably because we do
not have increased business investment, which we were promised.
So, Mr. Secretary, why not, and what should we do about it?
Secretary Mnuchin. First of all, I agree 100 percent with
you on the impact of wage growth. That has been one of our
priorities. I kind of disagree with you; I think it actually
has been significant. I think that for the first time in the
last 10 years, we have seen wages growing and growing at a
level that is meaningful to taxpayers. I think we have also--
Mr. Heck. Would you care to cite the data, because it has
not over consecutive quarters significantly outpaced the
Consumer Price Index? And this is coming on the heels, I might
remind you, sir, of basically 30 years of flatline.
Secretary Mnuchin. Again, we are happy to give you the
charts. But there is no question that wage growth has been
increasing, and inflation has been very low. So, we are happy
to get back to you with the data.
Mr. Heck. But the question is that downward arrow. We were
promised an upward arrow. We haven't gotten it.
Secretary Mnuchin. To be honest with you, I can't really
read that chart, other than I can read the capital spending.
Mr. Heck. And do you see the blue arrow?
Secretary Mnuchin. I got the blue arrow.
Mr. Heck. That is not good, sir.
Secretary Mnuchin. I got the blue arrow. I will say--
Mr. Heck. That is business investment.
Secretary Mnuchin. Again, I don't know how you are
calculating that business investment.
Mr. Heck. I am not. The Bureau of Labor Statistics is.
Secretary Mnuchin. Well, you have obviously picked a slide
that demonstrates a dramatic decrease. We are happy to come
back to you with our own data. Look, there is no question--
Mr. Heck. One of my favorite adages is that some people use
facts and figures the way a drunk uses a lamppost to lean on,
not to illuminate. I assure you, sir, I have not done that.
This is the Bureau of Economic Analysis data. It is six
consecutive quarters. I haven't in any way reshaped the bar
graph or the line or the data in any way.
We are on a downward trend in business investment and
capital equipment, even though we were promised, as a
consequence of the Tax Cuts and Jobs Act, that it would flower.
And we need it for increased productivity for real increases in
wages. Why haven't we gotten it? You promised it to us.
Secretary Mnuchin. Mr. Heck, first of all, we are the only
economy in the world that is showing continued growth. That is
not coincidental. We are showing additional jobs. We are
showing wages--
Mr. Heck. Economic growth is 2 percent now.
Secretary Mnuchin. Again, that--
Mr. Heck. That is what you are bragging about, a revised 2-
percent forecast?
Secretary Mnuchin. Those numbers, if you would let me
respond, as opposed to screaming at me. Those numbers--
Mr. Heck. Oh, no, sir. If I am screaming at you, you will
know it. This is not screaming.
Mr. Perlmutter. Gentlemen, please.
Secretary Mnuchin. Those numbers were impacted partially by
the Boeing impact. Those numbers were partially impacted by the
strikes, and I would say they have also been impacted by a
significant slowdown in global growth. And I think you are
going to see growth quite significant in the pickup in the rest
of the year and next year.
So, there is no question American taxpayers are seeing the
benefit of tax cuts.
Mr. Heck. Thank you, sir.
Mr. Perlmutter. The gentleman's time has expired. The
gentleman from Georgia, Mr. Loudermilk, is recognized for 5
minutes.
Mr. Loudermilk. Thank you, Mr. Chairman.
And Mr. Secretary, thank you for being here.
First, I want to thank you for directing Treasury to put
America first, and for standing strong for American interests
during the recent international insurance negotiations. I
think, and I think you agree, that we must be very cautious
about imposing European capital standards on U.S. insurers. I
am glad Treasury has registered its official opposition. So, I
want to thank you for that.
I would like to talk to you about the National Association
of Registered Agents and Brokers, NARAB. In the 5 years that we
have had NARAB, it has never been operational because the board
of directors must be nominated by the President and confirmed
by the Senate, and this hasn't been done.
And the last time you were here, we discussed that, and you
committed that you would speak to the President about how
important it was to get these nominations done. And I just
wanted to follow up and find out where we are on that process?
Secretary Mnuchin. We have put in recommendations, and it
is going through the process, and we will follow up with you
again, as we have suggested.
Mr. Loudermilk. Okay. And I appreciate that, if you could
stay on top of it, because it is very timely. And I am
concerned with the timeliness right now of the Senate because
if we proceed with impeachment, as it appears we are doing, we
are about to shut down the Senate for potentially 2 months or
longer and not being able to get anything else done. So, I
appreciate that.
I am also ranking member of the committee's Artificial
Intelligence Task Force, and earlier this year, we had a
hearing regarding customers' digital identity. And the task
force chairman and I recently sent a letter to you, asking to
move forward with some of the recommendations of the 2018
Fintech report, and I just wanted to find out what action
Treasury has taken to work with the private sector on solutions
to digital identity issues?
Secretary Mnuchin. I think, as you pointed out, this is
something that we identified early on. It is something that we
continue to work on with the private sector. It is something I
am also very interested in because of the IRS and from the
government standpoint as well. So, it is something we look
forward to continuing to work with you on. It is an important
issue.
Mr. Loudermilk. Okay. I appreciate that, and if you could
keep us up-to-date on progress that is made, that would be very
helpful to us as well.
Also, in 2017, FSOC formed the Digital Assets Working
Group, which is going to explore issues surrounding blockchain
technology. I applaud you for doing that, but the one concern I
have is that State banking regulators have been excluded from
the working group. And Dodd-Frank specifies that nonvoting
members of FSOC, such as State banking regulators, must not be
excluded from FSOC activities.
So I think it is important that we have our stakeholders in
the States involved, and do you know why the State regulators
have been excluded from the working group?
Secretary Mnuchin. I don't, but it is not intentionally. I
don't remember kind of whether they were excluded from the
FSOC. I would say right now it is not an important issue, but
if the State regulators want to be part of it, we will
absolutely accommodate them.
Mr. Loudermilk. Okay, I would appreciate it, again if you
could keep us abreast of that.
And I want to close out by thanking you for your part in
this robust historic economy that we have. I see that we could
even add another $68 billion into this robust economy if we
could move forward with the USMCA, and I hope that very soon we
can put the American people first and move forward with that.
With that, I yield back, Mr. Chairman.
Mr. Perlmutter. The gentleman yields back. The gentlewoman
from Michigan, Ms. Tlaib, is recognized for 5 minutes.
Ms. Tlaib. Mr. Secretary, thank you so much for coming
before our committee again.
As you know, my district is the third-poorest congressional
district in the country, and the economic recession devastated
my district. We are still recovering not only in Detroit, but
even the Wayne County communities throughout my district.
And one of the things that we did through Dodd-Frank, as
you know, is create the Financial Stability Oversight Council.
That kind of oversight of shadow banks is going to be critical,
too-big-to-fail kind of banks and so forth.
Under your tenure so far--and again, I would love to hear
your vision of what you think this Council is supposed to do
because so far under your tenure, Mr. Secretary, we dropped the
appeal of the district court's decision in the MetLife lawsuit.
I think there is not one single non-banking institution that is
designated as too-big-to-fail, or what I believe we call,
systemically important financial institutions (SIFIs).
What is the direction that we are going in, if we are not
doing any oversight? The whole purpose of Dodd-Frank was so
that we don't have another downturn, an economic recession that
led to predatory practices by these big banks.
Secretary Mnuchin. First, let me say, I share your concern
and your issues, and we are doing a lot on oversight. The
committee is very focused--
Ms. Tlaib. But you don't have anybody to regulate.
Secretary Mnuchin. Again, the fact that companies haven't
been designated--
Ms. Tlaib. Not one single institution, correct?
Secretary Mnuchin. Again, that is a good thing. That is
because the companies deleveraged significantly.
Ms. Tlaib. So you think MetLife, Prudential--none of those
are too big-to-fail?
Secretary Mnuchin. That is correct. As a matter of fact,
they are a lot better capitalized, and by the way, GE Capital
was de-designated prior to us coming here. So, part of the
benefit of the designation was it encouraged all these
companies to de-risk so they wouldn't be designated, and they
wouldn't be regulated by the Fed, so that they have proper
regulators.
I want to be clear: The committee's job is to bring all the
regulators together to make sure that the primary regulators
are regulating these entities.
Ms. Tlaib. But by dismissing the case, I believe, in the
MetLife lawsuit, we don't have that much authority now that we
have walked away by saying that they would fall under certain
guidelines for oversight.
Secretary Mnuchin. Actually, that is not the case at all.
We have the same authority as we always had. The only issue we
have talked about is including a cost-benefit analysis, which
we think was required by law.
I just want to be clear: I view it as good news to the
economy that we don't have anything designated. And if we were
sitting here with lots of entities designated, that would be a
major concern of ours.
Ms. Tlaib. Mr. Chairman, if I may, I would like to submit
for the record, ``Strengthening the Regulation and Oversight of
Shadow Banks.''
Mr. Perlmutter. Without objection, it is so ordered.
Ms. Tlaib. Last question, and it might be out of whack, but
this is important for me to understand. Do you believe in
socialism for corporations?
Secretary Mnuchin. Do I believe in socialism--
Ms. Tlaib. Socialism for corporations.
Secretary Mnuchin. --for corporations? No, I--
Ms. Tlaib. A lot of people talk about socialism. I want to
know, do you believe in it?
Secretary Mnuchin. I do not believe in socialism for
corporations.
Ms. Tlaib. Thank you very much. I yield back.
Mr. Perlmutter. The gentlewoman yields back. The gentleman
from Ohio, Mr. Gonzalez, is recognized for 5 minutes.
Mr. Gonzalez of Ohio. Thank you, Mr. Chairman, and thank
you, Mr. Secretary, for being here.
As you may know, I have been working with your staff on
some World Bank reform issues, and I just want to thank you for
your collaboration on that. To me, I think, when I look at the
World Bank, the number-one issue is ensuring that China
graduates from the loan program. It is unconscionable to me
that my taxpayers, our taxpayers should, in any way, shape, or
form, be subsidizing the Chinese growth model.
And my understanding is that today, at this very moment, or
maybe it has already happened, China's country partnership
framework is going to get a vote at the bank. I couldn't access
the document. That is not your fault. It wasn't on the bank's
website. But my understanding is that it provides loans for $1
billion in perpetuity and assistance in advancing the Chinese
growth model internationally, a growth model that has social
credit scores, interns its own people, and obviously, what is
going on in Hong Kong. It's a huge issue for me.
I guess my first question is, just at a basic level, do you
agree with the graduation objective? Do you believe that China
should be made to graduate at the World Bank?
Secretary Mnuchin. I do.
Mr. Gonzalez of Ohio. And then, second, as a follow-up,
what is the best way to ensure that occurs? Because right now,
it feels like we have our hands tied behind our back. Despite
the fact that we are the largest shareholder and have veto
authority, it still feels like we have no ability to affect
this. So, how can we do it?
Secretary Mnuchin. I don't think that is the case. I think
that, again, as I mentioned earlier, this is something that
David Malpass worked on with the World Bank when he worked for
me. This was his number-one issue in reforms. Now at the World
Bank, and leading the World Bank, he has worked with China.
China actually, I understand, is cash flow-positive this
year, meaning there is more cash coming into the World Bank
than cash going out. I believe they are going to be under $1
billion this year, and he is working towards them--and by the
way, in the China program, as I have said, our executive board
member has objected to the program, and I think that gets read
in, and ultimately, that will be on the World Bank's website.
Mr. Gonzalez of Ohio. Yes, and I guess he objected, but we
do technically have veto power, right? Can you explain how that
would work so that--
Secretary Mnuchin. Just to be clear, we don't have veto
power over every single loan or veto power over a specific
statement. We have veto power over capital allocations and
other issues. But again, I have great confidence in David
Malpass. He understands this issue. He is working with China on
this issue. We all share the same objectives.
Mr. Gonzalez of Ohio. Yes. And I appreciate it. I certainly
appreciate the progress, right? But for me, even a dollar is
too much for our taxpayers to be contributing to China.
As you may know, I have also recently introduced
legislation to support the policy that you just articulated to
transition China off of bank lending. I appreciate your staff's
feedback and I look forward to further collaboration.
Another section of my bill deals with debt transparency
with respect to the Belt and Road Initiative. I see providing
debt management assistance as a vital piece of our national
strategy, with some of our partners and allies sharing the same
concerns regarding China's lending practices.
Can you talk about the current strategy and efforts to
provide debt management assistance at the World Bank and the
International Monetary Fund (IMF) to borrowing countries of the
Belt and Road Initiative? And what are we doing to get other
partners and allies fully onboard?
Secretary Mnuchin. We have a lot of support on this issue
both from the leadership of the World Bank and the leadership
of the IMF, as well as the G-7. Everybody supports debt
transparency. It is very important that China play by these
common rules, and we have had very direct discussions with
them.
Mr. Gonzalez of Ohio. Thank you.
Secretary Mnuchin. And as conditions of certain IMF
programs, without me going into specifics, we have demanded
complete transparency on exposure.
Mr. Gonzalez of Ohio. Thank you, and I look forward to
continuing to work with your staff on these issues. I think
they are critically important.
Shifting a bit to the Volcker Rule, I sent you and the
prudential regulators a letter this week about the importance
of establishing a regulatory framework that promotes investment
opportunities in startups and small businesses. I know the
Volcker regulations are considering revisions to the covered
funds portion of the Volcker Rule.
For me, prior to this job, I ran a Silicon Valley tech
startup. It is very easy to acquire capital in that industry,
in that section of the country, and less so where I am from in
Northeast Ohio, and whom I represent.
Can you talk about your thoughts on this specific issue and
how it would impact private capital flowing into communities
outside of places like Silicon Valley?
Secretary Mnuchin. I commented on this earlier, but we are
working on the regulators, and I hope over the next 3 to 6
months we can address this. I do think it is something
important and will help small businesses. In no way is it going
to impact systemic risk.
Mr. Gonzalez of Ohio. Thank you, and thank you for your
leadership. I yield back.
Mr. Perlmutter. The gentleman yields back. The gentleman
from Illinois, Mr. Casten, is recognized for 5 minutes.
Mr. Casten. Thank you, Mr. Chairman. And thank you,
Secretary Mnuchin, for being here today. I introduced H.R.
5194, the Climate Change Financial Risk Act, with Senator
Schatz, of course, introducing the companion bill in the
Senate, to create a climate change risk subcommittee within
FSOC and to report annually on systemic risks of climate change
to the financial system. The reasons for that are, and I am
sure you know this, but just to reiterate for everyone here,
from 2016 to 2018, average economic losses from natural
disasters were $150 billion. I just returned from Madrid. The
goal of the Paris Agreement is to stay under 1\1/2\ degrees of
additional warming. We are not globally on that target right
now. We are not even at 2 degrees. Right now, if we don't
change direction, we are at 4 degrees of warming. Eight degrees
of warming is within the zone of possibility. At 8 degrees,
Manhattan feels like Qatar, essentially. It is really
unpleasant. At 4 degrees of warming, the global losses could
hit $23 trillion per year.
There are already predicted to be 311,000 homes that will
be regularly inundated by 2045, and millions by the end of the
century. This dwarfs the financial crisis, and presumably a lot
of those homes will be subject to 30-year mortgages. So by any
analysis, that is systemically disastrous, and I want to just
follow up. You expressed doubt earlier in this hearing about
whether bank stress testing was necessary to assess the impacts
of the climate crisis. Have you consulted with any climate
scientists in the course of coming to that conclusion?
Secretary Mnuchin. So, again, let me just preface, I have
expertise on a lot of issues, but climate is not one of them.
Mr. Casten. No, no. That is why I am asking whom you
consulted with.
Secretary Mnuchin. I think there is a place and a role to
study the climate issues and the impact on the economy. I don't
think FSOC is that place, and I think there are plenty of other
areas.
Mr. Casten. Does the Office of Critical Infrastructure
believe that there is no systemic risk from the climate crisis,
because you are not an expert in cyberterrorism either, but
presumably we do look at those--
Secretary Mnuchin. Actually, I have become an expert in
cyberterrorism. I spent a lot of time on that because that is
my primary responsibility.
Mr. Casten. I don't mean to criticize your expertise, but I
am saying there are systemic risks that the Office of Critical
Infrastructure has concluded. So, have they concluded that
climate change is not a systemic risk?
Secretary Mnuchin. I don't believe they have concluded that
it is a systemic risk. I don't know in the negative if they
have concluded it the other way, but let me just comment,
outside of the United States, there are some areas where
climate issues are very, very, very significant. So, I think
the U.S. has made a lot of progress on this.
Mr. Casten. No, we haven't. We are not on a sustainable
path, but let me just throw out some numbers. Likely sea level
rise, we already know if we went to zero CO2 tomorrow, we still
have another 2 feet baked in. Realistically, we probably have
meters measured in. So at the likely sea level rises of the
best analyses, there are $900 billion worth of U.S. homes that
are underwater by the end of the century. That is at current
values. They would be worth a lot less by the time they go
underwater. Has FSOC analyzed how that would impact the
financial system?
Secretary Mnuchin. Not to my understanding, it hasn't.
Mr. Casten. Okay. The projected private investor losses
globally, depending on the warming scenario, somewhere between
$4.2 and $13.8 trillion, depending on the scenario. Has FSOC
estimated the effect on systemic financial stability from those
losses?
Secretary Mnuchin. Again, as I have commented earlier, and
you have obviously spent a lot of time on this and I appreciate
that, there is a place and role to analyze these. I think that
the issue for FSOC is to make sure that banks have proper
disclosure, but I don't believe this is a systemic risk that
warrants FSOC review, but I will discuss it with the committee.
You have brought it up. I am happy to discuss it with the
committee.
Mr. Casten. Okay. The concern, and just as I think about
these things, obviously none of us are rooting for this. But if
I am an insurer and I am looking at these risks out in the
future at some point, not right now when I only have a 1-year
policy in front of me. But when we start to get to the point
where those policies are coming due, I am going to start
changing my risk profiles. I am going to stop insuring certain
sectors. We have seen what the maps of the country look like,
and where you will not want to live, and where we are going to
have crop failures, and it is impossible for me to see a
scenario where those don't become systemic risks.
Just before I left for Paris, I watched ``Planes, Trains,
and Automobiles'' with my daughters, and I am reminded of that
scene where they are driving down the road the wrong way and
everybody says, you are going the wrong way. They don't even
know where we are going. We are going the wrong way. We know we
are in the wrong lane. We know there are a couple of trucks
coming down the highway at us. And if you don't think that FSOC
should do it, I guess I respectfully disagree, and that is why
we introduced the bill, because I think we need to look into
these risks so that we can swerve while we still have time.
Thank you. I yield back.
Mr. Perlmutter. The gentleman's time has expired. The
gentleman from Tennessee, Mr. Rose, is recognized for 5
minutes.
Mr. Rose. Thank you. Welcome, Secretary Mnuchin. It is good
to have you here today, and thank you for taking time to visit
with us. One of the defining tenets of our insurance industry
is that it, is by and large, State-regulated. It is the
strength of the country, and it is something we need to defend.
Secretary Mnuchin, like so many of my colleagues here today, I
want to thank you for your efforts to defend our State-based
insurance regulatory regime, for your close and collaborative
work with the State insurance commissioners, and for
registering Treasury's official opposition to the International
Capital Standard (ICS) in Abu Dhabi.
I know there is still work to do on behalf of Team USA to
ensure foreign bureaucrats don't dictate the rules for U.S.
insurance regulations, so I appreciate your continued efforts
on the ICS and hope you will continue to engage with Members of
Congress and the State insurance commissioners as we move
forward. Secretary Mnuchin, since the ICS was adopted, what are
some of your main concerns with the current framework?
Secretary Mnuchin. Let me say I am pleased to hear that
there is bipartisan support on this issue. We do very much
support the State regulatory mechanism for insurers, and we are
concerned, and we have expressed these concerns, that although
they are not required to be adopted, that it could force the
industry in a way that is detrimental to our leadership and our
State-based regulators.
Mr. Rose. Thank you. Vice Chair Quarles said in his January
2019 remarks at the American Council of Life Insurers that the
Federal Reserve's building block approach, or BBA, could strike
a better balance between entity-level and enterprise-wide
supervision of insurance firms, which would facilitate the
continued robustness of product availability here in the United
States. I believe part of the intent behind developing the BBA
was that it could be deemed comparable to the ICS. Mr.
Secretary, are you familiar with the BBA?
Secretary Mnuchin. I am not completely, but I will follow
up with your office. We have a lot of people who are experts,
as you know, and have spent time on this, and focused on it for
me.
Mr. Rose. Okay. Thank you. Do you think, based on what you
know now, that the BBA framework could eventually be recognized
as an outcome equivalent approach to the ICS, and would it be
preferable, in your opinion?
Secretary Mnuchin. Again, I want to get back to you on
that, but I believe that is the case. But I want to get back to
you on that issue.
Mr. Rose. To reiterate, I believe it is important that we,
as Members of Congress, also continue to voice our bipartisan
support for the State-based insurance system. And so, along
those lines, I want to thank my colleagues, Mr. Heck and Mr.
Budd, for introducing the International Insurance Standards Act
again this Congress, which I was proud to co-sponsor. Mr.
Secretary, is there anything else that you are aware of that
we, as Members of Congress, should be doing to help the USA's
position on the ICS?
Secretary Mnuchin. I think not, at the moment. You have
been very supportive working with our office, and we have had a
lot of bipartisan support as we work with Team USA to represent
these issues.
Mr. Rose. Thank you. Transitioning over to some other
issues, I wanted to ask you about the FSOC's work on the
transition away from LIBOR as a reference rate. LIBOR is set to
be phased out as a bank reference rate by 2021. From the FSOC's
September minutes, I understand LIBOR is the underlying
reference rate for approximately $200 trillion in financial
contracts worldwide. Secretary Mnuchin, I know this will likely
cause a bit of disruption in our markets and that the
Alternative Reference Rate Committee's preferred alternative to
LIBOR is the Secured Overnight Financing Rate, or SOFR. What
makes the SOFR a suitable alternative?
Secretary Mnuchin. I think the most important issue is that
we have a transition from all these loans and all these
securities. The thing that we like about SOFR, and, again, this
work predated me, is that it is a very liquid market. It can't
be manipulated, and it is readily calculable. I met with a
group of banks yesterday. There may also be, no different than
there were LIBOR loans and there were prime loans, there may be
more of a credit-oriented index that develops as well. But we
are very focused on the transition.
Mr. Rose. And in the remaining seconds here, as we
transition from LIBOR to SOFR, what sort of outreach is
Treasury doing to engage with stakeholders as attention to the
LIBOR transition increases?
Secretary Mnuchin. We have a huge group working on it. As I
mentioned yesterday, myself, Chairman Powell, and a bunch of
the regulators met with 10 of the CEOs, and we continue to have
outreach working on this.
Mr. Rose. Thank you, and I yield back.
Mr. Perlmutter. The gentleman yields back. The gentlewoman
from Virginia, Ms. Wexton, is recognized for 5 minutes.
Ms. Wexton. Thank you, Mr. Chairman, and thank you,
Secretary Mnuchin. It is nice to have you back with us today.
In September, the House passed the Uyghur Human Rights Policy
Act, which is bipartisan legislation that was authored by
Senator Rubio and co-sponsored by 44 Senators and 130 U.S.
Representatives, including many on this committee. This week,
the House passed the Uyghur Intervention and Global
Humanitarian Unified Response Act, or the Uygur Act. Both of
these bills seek to hold officials in the Chinese government
and the communist party responsible for the gross violations of
human rights in China's Xinjiang Uyghur autonomous region,
including the mass internment of over 1 million Uyghurs, as
well as China's intimidation of U.S. citizens on American soil.
The Uyghur Act passed 407-1. Would you recommend to President
Trump that he sign these bills when they come across his desk?
Secretary Mnuchin. I am not going to make any comments
publicly about what my recommendation will be to the President
one way or another, but that doesn't mean I am not recommending
it.
Ms. Wexton. Okay, because we are getting mixed signals from
the White House officials, and reporting is suggesting that the
Treasury Department, and you in particular, are responsible for
blocking or slow-walking efforts to hold Chinese officials
accountable.
Secretary Mnuchin. No, that is not accurate.
Ms. Wexton. Okay. Well, I am going to read from an article,
an October 8, 2019, New York Times article, which I would like
to submit for the record, Mr. Chairman.
Mr. Perlmutter. Without objection, it is so ordered.
Ms. Wexton. ``Senior officials in the National Security
Council and in the State Department have pushed for the use of
the entity list to target Chinese companies supplying
surveillance technology to the security forces in Xinjiang.
They have also urged Mr. Trump to approve sanctions that would
penalize Chinese officials and companies involved in the
abuses. The top American trade negotiators, including Treasury
Secretary Steven Mnuchin, have cautioned against policies that
would have upset trade talks.''
Are you saying that is inaccurate reporting?
Secretary Mnuchin. That is inaccurate reporting, and I
think you know how we feel about the New York Times.
[laughter]
Ms. Wexton. But are you willing to sacrifice human rights
abuses for the sake of trade talks, because it certainly
appears that way?
Secretary Mnuchin. Again, let me just say I am here to talk
about financial stability, but I will respond to your question.
I very much am concerned about human rights issues all over the
world. We administer Global Magnitsky sanctions all over the
world on sanctions. We administer things in China as in other
places, but I am not going to make any comments on confidential
discussions I have with the President on these or other
subjects.
Ms. Wexton. Related to that, back in April, I joined a
number of other Members of Congress and the Senate in a letter
addressed to you, Secretary Pompeo, and Secretary Ross urging
the Administration to employ Global Magnitsky sanctions on
senior policy leaders who were complicit in these gross
violations and human rights abuses, including Chen Quanguo, who
is the so-called architect of the roundup of Uyghurs, and we
never received a response from Treasury or from you. So while I
have you here, what is the status of Global Magnitsky sanctions
on Chen Quanguo and other senior party leaders in China?
Secretary Mnuchin. I thought State had responded for that
letter on behalf of all of us. We will get back to you.
I thought State responded from all of us, but as a general
comment, we don't make comments on future sanctions at all,
although I will tell you, whenever we get letters, we take
these things seriously.
Ms. Wexton. And that letter was sent in April, more than 6
months ago. We have gotten no response, and there has been no
action by Treasury.
Secretary Mnuchin. Again, if the letter was written to all
three of us, it is common that one agency responds if it is an
interagency issue. It is not common that we all respond. Again,
did the State Department respond to you?
Ms. Wexton. Yes, but they did not respond on Treasury's
behalf--
Secretary Mnuchin. Again, the way we work on interagency
issues is the primary agency that is responsible for an issue
responds. And, again, I won't comment on future sanctions other
than to say that article is inaccurate.
Ms. Wexton. And while we are discussing human rights
violations, I want to follow up on a question I asked you last
time you were here, about 6 months ago. When is the
Administration going to hold Mohammad bin Salman accountable
for ordering the brutal murder of journalist, Jamal Khashoggi?
Secretary Mnuchin. Again, I don't see what that has to do
with financial stability, and you are also making certain
assumptions. But I can tell you, because I was the official who
went over after Secretary Pompeo, and, again, we had very
direct discussions about our concerns on these issues.
Mr. Perlmutter. The gentlelady's time has expired. The
gentleman from Indiana, Mr. Hollingsworth, is recognized for 5
minutes.
Mr. Hollingsworth. Good afternoon. I really appreciate you
being here and I appreciate your continued efforts at the
Treasury Department to ensure that we get to those better
outcomes we have always talked about for the American people,
for the American economy, and for American competitiveness
around the world. And I know from many of our dialogues and
discussions, your passion for that very same topic.
I did want to ask a little bit about some of the public
debt market structure. I know you have had a lot of
conversations about this. You have spoken publicly about it.
But I wanted to better understand kind of where Treasury is
with regard to disseminating data in the Treasury market. This
is something that for every other asset class, for most other
assets that are traded, you get both price and volume
information after the fact, which has led to increased
competitiveness, increased liquidity, and also lower
transaction costs associated with that market. And I know
Treasury has been looking into that for quite a while, and I
think recently said that they were going to start
disseminating, much after the fact, volume data, but were going
to put out pricing data or volume data that were very close to
those trades. I was curious why that decision was made when
FINRA keeps all of that data? And are there further steps that
are going to be taken to release more data around transactions
in the Treasury market? That was a long-winded question, sorry.
Secretary Mnuchin. No, no. Let me respond.
Mr. Hollingsworth. Yes, please.
Secretary Mnuchin. Look, this is a complicated issue, okay?
Mr. Hollingsworth. Right.
Secretary Mnuchin. First, let me just say, the U.S.
Treasury market is one of the most liquid markets in the world.
It has very small transaction costs, and obviously it
facilitates our borrowing. So, our number one objective is to
make sure that we not do anything that is detrimental to--
Mr. Hollingsworth. I totally understand that, and I
stipulate to you that it is a well-functioning market.
Secretary Mnuchin. We have studied this carefully, and
trying to balance the disclosure issues and whether that really
is going to help or hurt the market. I will say, as you look at
some of these other markets, and you look at the data, there is
less liquidity in a lot of these other markets. Now, part of
the reason why there is less liquidity, I will acknowledge,
also has to do with the Volcker Rule to proprietary trade. When
you look at transaction costs, you have to look at transaction
costs in the context of overall liquidity. And we are happy to
come and talk to you about it, but we want to make sure we get
this right. And if it were clear to us that releasing all the
data would create more liquidity and more transparency, we
would be doing it.
Mr. Hollingsworth. I certainly understand the do-no-harm
philosophy, and I really appreciate that. And I stipulate to
you, as you articulated very well, that it seems to be a well-
functioning market. There have been some blips along the way,
October 2014 notably, right? It is hard for me to imagine, and
I hope you might expound upon, the potential harm from
transparency in price and volume data. I understand that you
want to do no harm, but it is also hard for me to understand
what that harm might be. Could you help me understand a little
bit about that?
Secretary Mnuchin. Again, I think there are times when we
have gone back and looked at the data as it relates to other
markets, okay?
Mr. Hollingsworth. Yes.
Secretary Mnuchin. There are times when releasing the data
hurts liquidity. I would also say another interrelated issue is
the advent of electronic trading, and a larger and larger
portion of the government market is from people who invest
virtually no capital, but take advantage of sophisticated
algorithms.
Mr. Hollingsworth. Right.
Secretary Mnuchin. So, again, I want to make sure that the
release of data actually is helping the market and not just
creating arbitrage opportunities for people who want to do
electronic day trading.
Mr. Hollingsworth. I totally agree. I don't want to be
pejorative to those who are taking advantage of those small
arbitrage opportunities because they are helping to close the
market, right in a real and meaningful way. And I don't want us
to make a decision because we want to prevent somebody from
being able to take advantage of that and not providing the
transparency that the market may benefit from.
And I agree it is well-functioning today. It is well-
functioning on many, many days. But I want to ensure that
transparency is an important part of that market going forward,
as do you, and I am certain that we share that passion. It is
just sometimes hard for me to understand what harm might come
on account of that. And I understand that you have looked at
other markets and have seen some adverse impact of liquidity,
but, as you well know, it is really hard to hold everything
constant when you are looking at different time periods,
different markets, different asset classes. And so, I respect
the fact that you have a lot smarter people than me over at
Treasury to look into that. I will follow up with a question
for the record.
But I wanted to transition really quickly and talk about
the Taxpayer First Act that was signed into law in July. It
included a provision that persons receiving return information
must obtain the express permission of taxpayers. My question is
really going to come down to, the law stipulates that it is to
become effective on December 28, 2019. I think there has been
some guidance from the IRS that that is for all transcripts for
everything that is sold after December 28th by Fannie Mae and
Freddie Mac, and it may apply to those things that are before
December 28th. And I want to get some clarity around that as
quickly as possible because it is important to the functioning
of the--
Mr. Perlmutter. The gentleman's time has expired.
Mr. Hollingsworth. Thank you. I yield back.
Mr. Perlmutter. The gentleman yields back. The gentlewoman
from Iowa, Mrs. Axne, is recognized for 5 minutes.
Mrs. Axne. Thank you, Mr. Chairman, and thank you,
Secretary Mnuchin, for being here again today. I know that we
have heard a lot of criticism about the 2017 tax cuts as
primarily benefiting the richest Americans. I absolutely think
that is accurate, but that is not what I want to focus on. What
I am interested in looking at is how the IRS is treating the
wealthy. The Wall Street Journal reported that IRS audit rates
for people making more than $10 million a year have dropped
more than 80 percent in just the last 4 years. Why are the top
1 percent's tax returns being looked at so much less
frequently?
Secretary Mnuchin. That is actually not the case, and I am
working with the IRS to release the data, because one of the
issues is the way the IRS releases the data now is on closed
cases, not open cases. But I can assure you, when I saw that
article, I had the same concern, and I called up the
Commissioner, and I said we should be doing more of these
audits, not less. So, we are going to release this data in a
transparent way to assure you that the people who are making
the most money are getting high audit rates.
Mrs. Axne. Well, that is fantastic to hear.
Secretary Mnuchin. By the way, if you want to give us more
money for enforcement, I am happy to take it.
Mrs. Axne. We will absolutely talk with you about that. I
think that is a great idea. So are you telling me then the
number is much lower that is being audited?
Secretary Mnuchin. No, it is higher, as a matter of fact,
thank you. So, again, this is the problem in the data you guys
just gave me. The way we report the data is on closed audits,
and these audits take obviously a long period of time. I am
happy to come back, and I am going to get the IRS to release it
publicly. The way I think we should be looking at the data is
for each tax year, what percentage of an income group are we
auditing, not what percentage has closed in that year.
Mrs. Axne. Okay. That would be great. If you could get that
over to this committee, or to my office, I would really
appreciate that, as well as if you could make sure that it
tells us what percent is currently being audited.
Secretary Mnuchin. What people should want to understand is
not what percentage of the audits were closed in the year. What
people should want to understand is in a tax year, what
percentage of those people will be audited, whether it was
closed in 2018, 2019, 2020--
Mrs. Axne. Sure.
Secretary Mnuchin. We will get you the data.
Mrs. Axne. No, that--
Secretary Mnuchin. I can assure you I had the same view
when I saw it.
Mrs. Axne. Listen, I am glad to hear that. My concern is I
just want to make sure that those who are the wealthiest among
us in this country are being audited at the same rate that
other folks are, and from what we can see right now, which is
the data that we are able to have access to, it shows that they
are being audited at a much lower rate. So if you can provide
us with information that differs from that, I would love to see
that. So, I appreciate that.
The next thing I want to talk about is back to the 2017 tax
law. It included two provisions intended to limit the use of
tax havens for multinational corporations, of course, Global
Intangible Low-Taxed Income (GILTI) and Base Erosion and Anti-
abuse (BEAT). The IRS's own data shows that in 2016, U.S.
corporations booked more than $33 billion of profits in
Bermuda, despite having only 384 employees there. So for anyone
trying to do that math, this is high productivity. That is more
than $85 million per employee. My goodness. Now, I know that
data is from 2016. That is before the tax cuts were passed, but
I am using it because it is the last information that we have.
So, Mr. Secretary, my question is, has there been a significant
reduction in profits booked in Bermuda in 2017 or 2018 data?
Secretary Mnuchin. I don't have that data. We are happy to
look into it and get back to you.
But I will tell you, part of the reason we moved from a
global tax system to a territorial system with the GILTI tax
was to basically prevent people from moving to tax havens, and
to make sure that the U.S. taxed companies fairly.
Mrs. Axne. Okay. Great. I am so glad to hear that because
from what we are seeing right now, and what we have seen in the
past, that is not happening. I would love to see if we are
making some improvement on that. Obviously, I want to make sure
that we limit corporations' use of tax havens. We need all that
money here in the United States so we can address things like
infrastructure and things that people in this country need. I
guess I would ask you, what suggestions do you have for
continuing to work on curbing the use of tax havens?
Secretary Mnuchin. Again, there were many regulations we
put out through the last 2 years on the Tax Act that limit
these types of things. And, again, we are happy to follow up
with you specifically on some of them.
Mrs. Axne. Okay. And then lastly, the European Union has
actually had success in reducing tax havens simply by requiring
public disclosure of country-by-country income. Is that
something you think might help?
Secretary Mnuchin. Not necessarily, although I will say, a
lot of the information exchange with the Europeans is helpful
in looking at tax havens.
Mrs. Axne. Thank you.
Mr. Perlmutter. The gentlewoman yields back. The
gentlewoman from New York, Ms. Ocasio-Cortez, is recognized for
5 minutes.
Ms. Ocasio-Cortez. Thank you, Mr. Chairman, and thank you,
Mr. Secretary, for coming in today. I looked through the
minutes of the FSOC meetings this year, and I didn't see any
mention of student loans. The total outstanding student loan
debt burden is now at over $1.5 trillion. Young people are
waiting until their 30s and 40s to have children, buy a home,
and make other major purchases. Do you believe that student
loan debt currently poses a major risk to our financial
stability?
Secretary Mnuchin. I share your concern on student loans,
although I don't think it is a major risk to financial
stability. But I can assure you on an interagency basis, we are
working with the Department of Education and the NEC, because I
think in many cases, people have taken out student loans that
have created certain issues for them. So, student loans are a
large part of the debt, and that is something we are carefully
studying.
Ms. Ocasio-Cortez. So it is a problem, but not a major risk
to financial stability? I just wanted to kind of run through a
few different topics here. Turning back to the minutes from the
FSOC meetings, I also didn't see any mention of climate change.
Do you believe climate change poses a risk to our economy?
Secretary Mnuchin. You may have missed my comments before
on this--
Ms. Ocasio-Cortez. Oh, my apologies.
Secretary Mnuchin. I acknowledge that climate change should
be discussed in certain areas. But FSOC is not an area where I
believe it should be discussed. But based on previous
discussions, I said I would raise that with the committee.
Ms. Ocasio-Cortez. Okay. Let's talk about leveraged
lending. I know there was some discussion of it earlier, but it
is up 20 percent this year with a total outstanding balance of
over $1 trillion for the first time. I heard earlier you don't
think it poses a threat to our financial system either, is that
correct?
Secretary Mnuchin. Not at this time, and, specifically, it
doesn't pose a threat to the banking system or the insurance
system. But this is an area that FSOC will continue to monitor
on a quarterly basis because it is an area, particularly if the
economy slows down, that we want to carefully monitor.
Ms. Ocasio-Cortez. Do you see similarities between
collateralized loan obligations and mortgage-backed securities
that helped trigger the 2008 financial crisis?
Secretary Mnuchin. Not at all.
Ms. Ocasio-Cortez. No. We have talked about student debt.
What about medical debt? We spent about $3.3 trillion on
healthcare last year. That is more than $10,000 per person.
That is up almost 20 percent over the last 5 years. Do you
believe that medical debt poses significant risks to our
financial system?
Secretary Mnuchin. Again, I would say this is not an FSOC
issue, but putting on my Treasury hat, we are concerned about
the rate of growth of medical expenses. And that is something
where we are trying to look at many different things, because
that does pose economic issues, although not financial
stability issues.
Ms. Ocasio-Cortez. Okay. What about housing? I see some
mention in recent FSOC minutes about mortgage origination from
non-bank lenders. So I am assuming you at least agree that
there are some problems in the housing market that can pose
threats to the stability of the financial system in that
respect?
Secretary Mnuchin. Yes, I commented earlier that we are
monitoring the amount of the mortgage market that has moved out
of the banking system. Particularly, we are focused on non-bank
servicers that don't have liquidity, and we hope to work with
this committee and others on housing reform. It is an important
issue.
Ms. Ocasio-Cortez. What percentage of mortgages were
originated by non-banks this year?
Secretary Mnuchin. I think it is roughly 50 percent.
Ms. Ocasio Cortez. Fifty percent. So half of mortgages in
America are being originated by non-banks. That puts them
outside of the usual scope of regulation. Is that correct?
Secretary Mnuchin. No, not outside the usual scope of
regulation at all. It is outside of the banks, so it is
something that we are looking at carefully. And, again, a lot
of those loans are sold to Fannie Mae and Freddie Mac or
insured by FHA, so we are also looking at it through all those
different regulators.
Ms. Ocasio-Cortez. And what about the overall shortage in
the housing stock? The number of homes for sale is about 6
percent nationwide, and it is down more than 15 percent in
several large metropolitan areas. Does the fact that this
market seems to be slowing down pose a risk to the financial
system?
Secretary Mnuchin. Again, not risk to the financial system,
but affordable housing is something we are concerned about and
making sure that there is greater access to affordable housing.
It's not an FSOC issue, but a Treasury issue.
Ms. Ocasio Cortez. Okay. So we have here student loan debt
does not pose a risk to financial stability. Climate change,
potentially. Leveraged lending does not. Medical debt does not.
Mortgage origination does not. What are some of the largest
risks to our economy right now?
Secretary Mnuchin. Again, there is a larger--
Ms. Ocasio-Cortez. And the financial system.
Secretary Mnuchin. The financial system. I don't know if
you had a chance to read the report. But, again, if you just
look at, and we highlight cybersecurity, structural issues,
alternative reference rates, risk to the credit expansion. We
specifically talk about non-bank mortgage origination,
financial innovation, housing finance.
Ms. Ocasio-Cortez. And do you see that there is kind of a
decoupling here with the quality of life from what we are
seeing in terms of measurements of financial stability?
Secretary Mnuchin. No, I am not making that connection, but
I am happy to explore that.
Ms. Ocasio-Cortez. Okay. Thank you very much.
Chairwoman Waters. The gentleman from Kentucky, Mr. Barr,
is recognized for 5 minutes.
Mr. Barr. Thank you, Madam Chairwoman, and, Mr. Secretary,
you are almost at the end of the line here. I was compelled to
come back and take my 5 minutes. I wasn't originally, but I had
to ask you to elaborate a little bit more on your dialogue with
my friend, Mr. Heck from Washington, on capital expenditures
and tax cuts. My views on this, having spoken to many
manufacturers and agricultural businesses in Central and
Eastern Kentucky, is that there is no doubt that the expensing
provisions and bonus depreciation accelerated business
investment, and improved productivity. In fact, most of the
CEOs and small business owners said that tax cuts were huge in
terms of pulling forward investment that they needed to enhance
the productivity of their businesses. Large and small
businesses told me that, and it has made their employees more
productive.
And so my theory is, when you look at Mr. Heck's chart of
declining capital expenditure (CAPEX), it certainly wasn't
caused by tax cuts. Tax cuts may have pulled forward a lot of
capital expenditures and business investment, but what most
private sector people tell me is that the decline in capital
expenditures is not attributable to anything other than trade
uncertainty. And also they note, many of them would continue to
invest in capital, and equipment purchases, and other items
that would make their businesses more efficient and more
productive if the Democrats would stop opposing making those
provisions permanent in the Tax Code. The uncertainty of not
having permanency with the bonus depreciation and expensing
provisions is maybe an impediment for continued CAPEX.
I want your thoughts on that feedback that I am getting
from actors in the private sector on CAPEX. I also want your
opinion about how trade uncertainty is contributing to a pause
in additional business investment.
Secretary Mnuchin. First of all, thank you for coming back.
There is no question from the companies that we are visiting
all over the country that there have been major capital
expenditures as a result of the Tax Cut Act. And as you said,
this incentivized companies because they get automatic
expensing, which I would just comment on, when people ask
about, will the tax cuts pay for themselves, I remind them this
has to be calculated over a 10-year period of time because this
was designed to stimulate investment and lead to expensing in
year 1, which will recoup in year 5, 6, 7, 8, 9, and 10. As it
relates to trade, I would say there are a lot of people who are
waiting on the sidelines because of USMCA.
Mr. Barr. Right.
Secretary Mnuchin. I am hopeful that Congress will pass
USMCA between now and the end of the year. It is the single
most important economic trading relationship we have. And there
is no question that passing it will add something like 50 basis
points to GDP, and it will increase capital expenditures.
Mr. Barr. I agree, and reclaiming my time, USMCA is why we
don't have that line continuing to go up in terms of capital
expenditures, so the best thing we can do in a bipartisan way
in this Congress is to pass the USMCA. And I would argue that
that is going to give you and Ambassador Lighthizer momentum
with China and the EU if we can lock in USMCA. So I encourage
my colleagues on the other side of the aisle to join us in
supporting this renegotiated North American trade deal for all
those reasons.
In my remaining time, I want to talk to you about leveraged
lending. There has been lots of hand-wringing on the other
side, in particular, about the growth in corporate debt. And I
wanted to ask you your views on collateralized loan obligations
(CLOs), in particular, as non-bank investor vehicles, taking
some of this leverage out of banks, federally-insured
depository institutions, into these CLO vehicles, and the
extent to which CLOs non-market long-term vehicles provide
liquidity, and could provide liquidity precisely in the time
where we need it, in an economic downturn, and to that extent,
offer the financial system a tool, a financial stability tool;
and that if we overreacted to leveraged lending, particularly
if we overreacted to CLOs, that could actually have a
destabilizing effect and limit liquidity right when we need it.
Secretary Mnuchin. I would agree with you, and I would even
go one step further, which is that a significant problem of the
financial crisis was that there were too many high-risk
mortgages in the banking system. So, the good news is the
higher-risk leveraged lending has moved out of the banking
system into permanent capital vehicles.
Mr. Barr. Thank you. I yield back.
Chairwoman Waters. The gentleman from Texas, Mr. Green, who
is also the Chair of our Subcommittee on Oversight and
Investigations, is recognized for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman, and thank you for
your appearance, Mr. Secretary. Mr. Secretary, I am on a
mission of mercy. Here is why: In 2008, we had 215 minority
banks; and in 2018, we had 149. Of the 149, 23 are said to be
African-American banks, meaning more than 50 percent African-
American ownership. And it seems, according to the Independent
Community Bankers of America (ICBA)--this is dated October 22,
2019--these 23 African-American-owned banks have assets of $5
billion. Total assets, $5 billion.
I am on a mission of mercy because usually these banks are
in neighborhoods wherein the people are not high-income
earners. They are underserved neighborhoods. They are
economically distressed neighborhoods. And they are
neighborhoods in need of banks, but these banks need additional
capital. So when you mentioned your Small Bank Mentorship
Program, it really made my heart warm. I really would like to
know how this program will help me with my mission of mercy to
help capitalize these small banks that I no longer call
community banks; I call them neighborhood banks. Community
banks, $10 billion. These neighborhood banks, if they can get
to $1 billion, there will be a great celebration. Can you
please share some intelligence on the topic?
Secretary Mnuchin. I share your concern. It is really
terrible that these numbers have dropped as much as they have.
And these are, as you said, some communities that really,
really need these banks. The Protege Program is a step in the
right direction of helping these banks, but we need to work
with the regulators. We need to work with private capital in
making sure that these banks have access to capital and can
grow, and we turn these numbers around in the other direction.
Mr. Green. How far along are you with the program? My
understanding is that you have a departure date that is certain
in your mind. I am not sure it has been published. But will
this become viable before you leave?
Secretary Mnuchin. I wasn't planning on going anywhere
anytime quickly, so, yes.
Mr. Green. Okay. I have heard rumors--I'm sorry--that you
might be leaving.
Secretary Mnuchin. Leaving when? I have said I would stay
through the second term, so I don't--
Mr. Green. Through the second term? My apologies.
Secretary Mnuchin. I don't know what rumors you have heard
of me leaving.
Mr. Green. Listen, you are talking to a guy who is proud to
apologize. I apologize. I am glad to know you will be here. So
the question becomes, how can we collaborate and work together
in a positive way to affect positively these African-American
banks? And I am saying, ``African-American,'' because they are
at the lower end of the totem pole. No other community, no
other banks, when you take the aggregate, are in this kind of
dire circumstance. So I really want to work to get some help.
Secretary Mnuchin. I will ask my staff to schedule a
meeting with you. Maybe we can try do it in the beginning of
January and figure out how we can work together.
Mr. Green. I absolutely assure you that I will look forward
to this meeting. And I would just add one additional thing
about these banks. I have many of them in my district, and they
take pride in what they do. They have good personnel, but they
don't have all of the technology that other institutions are
blessed to have, and they don't have obviously the clientele,
but there is a willingness to grow and to work with larger
banks. This Protege Program, pairing smaller banks with larger
banks, can reap some good benefits if it is done appropriately
and properly. So I am eager to hear more about how we can do
this pairing and to work with some of these banks, these small
African-American banks. Thank you, and I yield back.
Chairwoman Waters. Thank you. The gentleman from Missouri,
Mr. Cleaver, who is also the Chair of our Subcommittee on
National Security, International Development and Monetary
Policy, is recognized for 5 minutes.
Mr. Cleaver. Thank you, Madam Chairwoman. Mr. Secretary,
thank you for being here, and I appreciate your response to my
letter in which I discussed the whole issue surrounding the
rise of white supremacy and the El Paso attack specifically,
and I don't think there is much question that that that attack
was motivated by white nationalism. And in my letter, I talked
about the Treasury Department's ability or the tools you had
available to challenge and hopefully even curb the rise of
these style of acts of white terrorists, white nationalist
terrorists.
In your letter, you talked about the fact that you shared
my concern over the racially- and ethnically-motivated violent
extremism, and then said you would use all the tools available.
But you also said that you did not want to comment on any
investigation, which I understand and appreciate. What I would
like to know, however, is based on what the FBI Director said,
which is, ``A majority of the domestic terrorism cases
investigated are motivated by some version of what you might
call white supremacist violence, and 40 percent of the 850
domestic attacks were racially motivated.''
I am one of the victims myself, as my congressional office
was firebombed. But the guilty one was caught, and so I don't
need any help there. But I do want to see where you are in
terms of trying to help curtail financing of these criminal
networks. I am not asking you about what happened in El Paso. I
am asking you about in general the criminal networks that I
think all of our intelligence, counterintelligence units are
saying is out there. And is there something going on in
Treasury where those networks are being targeted?
Secretary Mnuchin. Let me just say I didn't realize your
office had been attacked. That is just a horrible situation.
Any of these attacks are just despicable. As it relates to
Treasury's role, FinCEN plays a significant role in working
with all of law enforcement. When I was a banker and I used to
send in all those SARs, I always wondered if they went just
into nowhere land, and I can tell you that these activities,
and us being able to follow the money, is very important in us
being able to fight all these different activities.
Mr. Cleaver. Is there a unit in Treasury that is actually
following the money?
Secretary Mnuchin. There is. There are two units. There is
both FinCEN--
Mr. Cleaver. Yes, I am familiar with FinCEN.
Secretary Mnuchin. --and they are the ones who take in all
the data, and they have huge analytic programs that work with
all of law enforcement. And the other area is obviously the
RTFI area, which is less domestically and more internationally.
But to the extent there are domestic issues, we work with law
enforcement as well.
Mr. Cleaver. Okay. Madam Chairwoman, thank you. I yield
back.
Chairwoman Waters. Thank you very much. I would like to
thank the Secretary for his time today.
I am going to interrupt the closing. We have a hard stop at
1:00. If you will take your seat, I think we can get you out in
5 minutes. Excuse me, Mr. Secretary, for the inconvenience.
Secretary Mnuchin. Not a problem. Not at all.
Chairwoman Waters. But we are going to try and get this
done so that we can honor your hard stop. The gentlelady from
California, Ms. Porter, is recognized for 5 minutes.
Ms. Porter. Thank you, Mr. Secretary. I really appreciate
your willingness to stay, and I will be sure to be done in 4
minutes and 56 seconds. In June 2017, Treasury issued a report
on banking deregulation. It suggested that if Congress raised
the $50 billion threshold above which U.S. banks are subject to
stricter oversight, that Congress ought to do the same for
foreign mega banks. Earlier this year, the Fed followed that
Treasury recommendation and massively deregulated foreign mega
banks, and that was an item on a wish list that you published
in 2017.
There is a lot that concerns me about this, but the most
glaring for me is about Deutsche Bank. I am sure the chairwoman
is very familiar with Deutsche Bank. They would now only need
to submit their living will once every 6 years. This is the
same Deutsche Bank that within the last 6 years had a surprise
$3 billion quarterly loss--I don't know how you lose $3 billion
and not see that coming--has failed its stress test in 3 of the
last 4 years; was fined for a mirror trading scandal involving
laundering money for Russian oligarchs; admitted to
participating in LIBOR interest rate market-rigging scandals;
and violated U.S. sanctions laws against Iran, Libya, Syria,
and the Sudan. Why did you advocate to deregulate one of the
worst corporate recidivists operating in the U.S. banking
system, particularly when it is not even a U.S. bank?
Secretary Mnuchin. Let me just first say I share many of
your concerns about Deutsche Bank. I obviously can't comment on
any of the specifics because from a regulatory standpoint, it
would be inappropriate for me to comment specifically on
Deutsche Bank. But I share many of your concerns, and
particularly sanctions evasion is something that we will not
tolerate by anybody, domestic or internationally. So, I am
going to answer this generically, not as it relates to Deutsche
Bank. The question is, will the banks be regulated? The U.S.
subsidiaries, and the way that we have changed the structure,
there is intermediary holding companies so that the foreign
subsidiaries that are effectively U.S. institutions, we can
look at the risk at that level.
Ms. Porter. I understand the subsidiary foreign
relationship. I just don't understand why we would do something
that is deregulating one of the worst actors in the
marketplace, and particularly when it is a foreign bank
operating on our soil and threatening the stability of our
markets. I understand there is a balance between regulating the
industry and stifling capitalism, but if you do share my
concern about Deutsche Bank, this gives us one less tool. I
want to ask you about something else. How many people currently
work at FSOC, the Financial Stability Oversight Council?
Secretary Mnuchin. Again, and there have been some comments
on this earlier. You weren't here, so I will just clarify. The
way FSOC works is there are people who directly work under
FSOC, and there are people who work at all of the different
agencies.
Ms. Porter. I am asking about the direct number.
Secretary Mnuchin. There are hundreds of people if you add
up all the different agencies and how many people--
Ms. Porter. No, I mean people whose sole job is to work at
FSOC.
Secretary Mnuchin. There is a small group within Treasury.
Ms. Porter. How many?
Secretary Mnuchin. And then, there is the Office of
Financial Research, which we have cut significantly because we
thought those resources weren't being used appropriately.
Ms. Porter. Because financial research isn't valuable?
Secretary Mnuchin. Again, we didn't think that was the best
use of taxpayer money, so it was really a function of, we felt
that the resources within the different agencies are quite
ample and quite significant that are dedicated to this.
Ms. Porter. I just want to be clear, how many people work
at FSOC and only at FSOC? Is it a secret?
Secretary Mnuchin. Again, when you say, ``at FSOC,'' are
you referring to within the Treasury Department, who are solely
dedicated--
Ms. Porter. Let's start there. Since you are the Secretary
of the Treasury, let's start there.
Secretary Mnuchin. Again, we probably have about 10 people
who are directly in the Treasury who work on that, but we
probably have 50 people within Treasury--
Ms. Porter. Does anyone work just for FSOC?
Secretary Mnuchin. Yes, there is a small number--
Ms. Porter. How many, sir?
Secretary Mnuchin. Again, it is slightly less than a dozen
people.
Ms. Porter. Less than a dozen.
Secretary Mnuchin. Yes.
Ms. Porter. Do you know what the maximum number was at its
height?
Secretary Mnuchin. Again, comparing this to the middle of
TARP, in the middle of the financial area when, by the way,
there weren't resources--
Ms. Porter. Thank you very much.
Chairwoman Waters. Let me start over again. I would like to
thank the Secretary for his time today.
The Chair notes that some Members may have additional
questions for this witness, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to this witnesses and to place his responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
Thank you very much. This hearing is adjourned. Secretary
MNUCHIN. Thank you very much.
[Whereupon, at 12:58 p.m., the hearing was adjourned.]
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