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House Financial Services Committee Hearing with Treasury Secretary Mnuchin

House Financial Services Committee

“The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System – Part II”

Wednesday, May 22, 2019

Key Takeaways

  • Trade: When asked by Rep. David Kustoff (R-Tenn.) about the impact to the economy of the United States-Mexico-Canada Agreement (USMCA), Mnuchin replied that it has a “very important economic impact” as Mexico and Canada are “two of our largest trading partners.” He continued that if the USMCA is not passed, the economic impact will depend on “whether you stick with” the North American Free Trade Agreement (NAFTA).
  • Inter-affiliate Initial Margin: Rep. Frank Lucas (R-Okla.) noted how Treasury’s 2017 Capital Markets report recommended harmonization between the Commodity Futures Trading Commission (CFTC) and other regulators when it comes to an inter-affiliate initial margin exemption, but that the prudential regulators have not decided to implement this recommendation yet. He continued that last week when he asked the prudential regulators whether they are prioritizing this, he became concerned that they may make this part of a larger review of Federal Reserve regulations, which could drag out for years, and asked Mnuchin if this fix should be a priority and if he will impress upon the prudential regulators the importance of acting on this. Mnuchin replied that he would.
  • Marijuana: Rep. Ed Perlmutter (D-Colo.) discussed the importance of allowing banks to do business with legal marijuana businesses, to which Mnuchin replied that it is “an issue for Congress to decide” but that it is a “big problem,” as there are federal and state laws, with Treasury and the Internal Revenue Service (IRS) “caught in the middle” of it. Mnuchin added that it is “not in anyone’s interest to have this amount of cash on the streets,” as it will end up in “illicit hands.”

Witness

Opening Statements & Testimony

Due to the hearing being a continuation of the previous one held on April 9, opening statements and testimony were waived and the event started with Members of Congress who were unable to ask questions in the previous hearing.

Question & Answer

Sanctions

Members on both sides of the aisle asked about sanctions. Mnuchin noted that the President is “determined” to continue the effort of enforcing UN and U.S. sanctions against North Korea. He continued that he has also had conversations with Russia and China regarding sanctions being proposed for Venezuela.

Trade

When asked by Rep. David Kustoff (R-Tenn.) about the impact to the economy of the United States-Mexico-Canada Agreement (USMCA), Mnuchin replied that it has a “very important economic impact” as Mexico and Canada are “two of our largest trading partners.” He continued that if the USMCA is not passed, the economic impact will depend on “whether you stick with” the North American Free Trade Agreement (NAFTA).

Multiple Democrats criticized the proposed list for Chinese tariffs, to which Mnuchin replied that there will be an exception process and that he has had multiple conversations with the Commerce Department, U.S. Trade Representative and the CEO of Walmart to discuss the issue, adding that the Treasury is “especially sensitive” about consumer items.

Cybersecurity

Rep. Denver Riggleman (R-Va.) asked about harmonizing cybersecurity regulation among the regulatory bodies, to which Mnuchin replied that it is a “major priority” and that he has met with bank CEOs and regulators to discuss. He highlighted the need to have better coordination between the government and private sector to ensure they are better prepared for cyber-attacks.

Chinese Loans

In response to questions about Chinese loans to invest in infrastructure projects across Asia, Mnuchin explained that the International Monetary Fund (IMF) and World Bank are “very focused on debt transparency” and ensuring China “follows the rules” of debt transparency. He discussed the need to ensure countries taking on debts that are sustainable and affordable, adding that “if there’s proper financing for infrastructure it’s one thing, but if it’s money designed to loan to own, it’s not appropriate.”

Inter-affiliate Initial Margin

Rep. Frank Lucas (R-Okla.) noted how Treasury’s 2017 Capital Markets report recommended harmonization between the Commodity Futures Trading Commission (CFTC) and other regulators when it comes to an inter-affiliate initial margin exemption, but that the prudential regulators have not decided to implement this recommendation yet. He continued that last week when he asked the prudential regulators whether they are prioritizing this, he became concerned that they may make this part of a larger review of Federal Reserve regulations, which could drag out for years, and asked Mnuchin if this fix should be a priority and if he will impress upon the prudential regulators the importance of acting on this. Mnuchin replied that he would.

Brexit

In response to a question from Rep. Scott Tipton (R-Colo.) on what Treasury is doing to minimize the consequences of Brexit, Mnuchin replied that while Treasury is not directly involved, it has been part of discussions. He continued that he was “relieved” there was an extension and that he hopes the UK and Europeans “take advantage of that,” as a hard Brexit “could have detrimental economic impacts.”

Systemic Designations

Rep. Jesus “Chuy” Garcia (D-Ill.) discussed the recent removal of SIFI designations by the Financial Stability Oversight Council (FSOC) and a recent letter by former Fed chairs Janet Yellen and Ben Bernanke, and former Treasury secretaries Tim Geithner and Jack Lew, criticizing FSOC’s announcement that non-banks will have to demonstrate a “high likelihood of distress” before being more closely scrutinized. Mnuchin replied that the former regulators have a “different view on regulatory issues” but that Treasury will consider letters they receive when finalizing rules.

Leveraged Lending

Mnuchin noted that FSOC and the President’s private working group are looking at leveraged lending, and while the primary regulators are not “particularly concerned” now, they are monitoring to make sure it does not become an issue.

Housing Finance Reform

Rep. Barry Loudermilk (R-Ga.) asked how much can be done for housing finance reform administratively, to which Mnuchin replied “a lot” and that they are “working on it.” He continued that there is a bipartisan opportunity for Congress to work on this, but if it does not happen “we’ll do things administratively,” adding that “it’s a priority of ours.”

Marijuana

Rep. Ed Perlmutter (D-Colo.) discussed the importance of allowing banks to do business with legal marijuana businesses, to which Mnuchin replied that it is “an issue for Congress to decide” but that it is a “big problem,” as there are federal and state laws, with Treasury and the Internal Revenue Service (IRS) “caught in the middle” of it. Mnuchin added that it is “not in anyone’s interest to have this amount of cash on the streets,” as it will end up in “illicit hands.”

Insurance Capital Standards

Reps. Scott Tipton (R-Colo.) and Lee Zeldin (R-N.Y.) discussed the global insurance capital standards, the importance of ensuring the U.S. insurance system can compete globally, and not being held to European standards. Mnuchin replied that the U.S. interagency group of regulators working with the Europeans is “focused on defending” the U.S. state-based regulatory system.

Beneficial Ownership

Ranking Member Patrick McHenry (R-N.C.) discussed the letter he sent to the Director of FinCEN asking for data to support the need for Rep. Carolyn Maloney’s (D-N.Y.) beneficial ownership bill, noting how he has not seen the justification for the “massive new collection of ownership data” that will be placed on small businesses. Mnuchin replied that Treasury will be responsive on a “timely basis” and that McHenry will “have the data” to develop his opinion.

For more information on this hearing, click here.