The Annual Testimony of the Secretary of the Treasury on the State of the International Financial

House Committee on Financial Services

The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System

Tuesday, June 13, 2023

 

Topline

• Members on both sides of the aisle raised concerns about China, outbound investment, debt relief, and regulations for digital assets.
• Republicans pressed Yellen on the Federal Reserve’s upcoming capital requirements and the European Union’s Corporate Sustainability Due Diligence Directive.

Witnesses

• Janet Yellen, Secretary, Department of the Treasury

Opening Statements

Rep. French Hill (R-Ark.)

In his opening statement, Hill said President Biden could have engaged with Speaker McCarthy on the debt ceiling sooner, noting that there is a lot of frustration surrounding the lack of transparency regarding when the Treasury Department expected the debt ceiling to be breached. He said two different X-dates were released with no explanation and no transparency. Hill noted that while he and Yellen agree that Ajay Banga is a serious and competent leader who has the capacity to lead the ship at the World Bank, the World Bank and IMF should be laser focused on eliminating poverty. He explained that the institutions seem to think about everything except economic growth, which has contributed to China becoming the world’s largest official creditor. Hill concluded that the IMF completely failed to bring China into compliance with international norms, and warned that if the IMF doesn’t get serious, there won’t be a compelling case for additional IMF resources at the end of this year.

 

Ranking Member Maxine Waters (D-Calif.)

In her opening statement, Waters noted the leadership and swift actions taken by Secretary Yellen prevented a banking crisis and protected our economy. She added that Secretary Yellen is restoring the image of the U.S. around the world by pushing multilateral institutions to take serious action to tackle existential threats like climate change and food scarcity. Waters said Republicans are threatening to drive the global economy off the cliff, explaining that after nearly tanking the economy through the debt ceiling standoff, Republican infighting has brought the House floor to a halt. Waters concluded that the U.S. is stronger than ever under Democratic leadership, citing 28 consecutive months of strong growth and record job creation.

 

Rep. Blaine Luetkemeyer (R-Mo.)

In his opening statement, Luetkemeyer said international financial organizations are neither capable of nor interested in meeting the goals they were founded to accomplish. He explained that the World Bank’s unrealistic and harmful green agenda is preventing the poorest nations from attaining the cheapest and most reliable energy sources, while the world’s largest polluter, China, continues to receive sweetheart deals from these institutions. Luetkemeyer concluded that China receives over $1 billion each year from the World Bank, noting that our money is paying for China’s terrible policies.

 

Rep. Joyce Beatty (D-Ohio)

In her opening statement, Beatty said the U.S. has preserved its status in the global economy through Yellen’s voice and vote at the IMF, World Bank, and other international institutions. She explained that this is increasingly critical as foreign adversaries seek to replace us in Africa and the Caribbean.

 

Testimony

Janet Yellen, Secretary, U.S. Department of the Treasury

In her testimony, Yellen explained how the past few years demonstrated the importance of international financial institutions (IFIs) as part of our broader economic and foreign policy toolkit. She discussed how IFIs advance U.S. national interests by fostering a more resilient global economy, enabling us to mobilize swift responses to mitigate global risks to the U.S. economic outlook, all while driving U.S. economic growth by expanding global demand for American products and services. Yellen added that IFIs leverage our dollars to mobilize additional funding from our partners and the private sector. She noted that U.S. leadership at these institutions is one of our core ways of engaging with emerging markets and developing countries. Yellen explained that these institutions reflect American values, because assistance from the IFIs comes with strong requirements for governance, accountability, and debt sustainability, which serves as an important counterweight to nontransparent, unsustainable lending from others, like China.

Yellen affirmed that the United States is not a passive shareholder, noting we actively shape the priorities of IFIs through our role as a leading shareholder. She said the Biden Administration seeks to bolster U.S. leadership in IFIs and requested authorization to renew participation in the IMF’s New Arrangements to Borrow, a critical backstop to IMF resources. Yellen added that Treasury also seeks authorization to lend to two key IMF trust funds: the Poverty Reduction and Growth Trust, and the Resilience and Sustainability Trust. She noted Treasury would also like to boost its involvement in IDB Invest and the African Development Fund. Yellen concluded that while she is relieved that we were able to avoid default, the United States once again came dangerously close to the line. She affirmed that this cannot be normalized as the way we do business in Washington because waiting until the last-minute hurts our global leadership and credibility on the world stage.

 

Question & Answer

China

Rep. Brad Sherman (D-Calif.) said we have a capital gains allowance that is costing us tens of billions of dollars, and asked why we use the tax system to subsidize U.S. investment in Chinese companies. He explained that the investment incentives built into our tax code incentivize investments in Chinese stocks. Sherman asked why we provide these subsidies, and if there was an explanation other than Congress was lazy and only wrote one policy for all stocks and forgot about China. He said he looked forward to working with Yellen on a policy that makes sense from a foreign policy perspective.

Rep. Bill Posey (R-Fla.) asked about the Biden Administration’s strategy to use American participation in IFIs to address and mitigate the threats posed by China to the United States’ financial and economic wellbeing and geopolitical stability. Yellen said the Administration has taken the position that the multilateral development banks should cease lending to China. She explained Treasury is working to ensure China meets its responsibilities when it comes to debt relief, noting the Department has had some success in those efforts.

Rep. Gregory Meeks (D-N.Y.) explained that while it’s crucial for the U.S. to provide necessary debt relief to countries in Africa and South Asia, the U.S. must also ensure that debt relief from global institutions is not used to pay off debts to China. He asked Yellen about the Administration’s approach to this dilemma. Yellen said the Administration is very concerned about the large and growing number of countries that require debt relief to restart economic growth, and that relatively few countries have signed up for debt restructuring frameworks.

Luetkemeyer asked if Treasury has worked with Commerce to establish a plan in case China invades Taiwan. Yellen said the National Security Council works with the interagency group and noted she’s not able to provide any details on the response to hypothetical events. She assured Luetkemeyer that Treasury works with other agencies to ensure the U.S. is ready.

Rep. David Scott (D-Ga.) noted that China is trying to establish a military base 90 miles from our shores in Cuba. He asked if Congress should consider prohibitions for U.S. private equity investment in private sector firms that have ties to the Chinese military and Chinese state surveillance apparatus. Yellen said Treasury is looking at potential restrictions on outbound investment that could pertain to private equity firms that invest in Chinese firms with connections to their military. She added the Department is worried about potential national security risks.

Rep. Ann Wagner (R-Mo.) said it’s essential that the U.S. decouple from Chinese industries and entities that are participating in unthinkable human rights abuses. She asked how Treasury plans to de-risk the U.S. economy from the Uyghur genocide. Yellen explained that Treasury has sanctions in place to prevent Americans from doing business with entities who are involved.

Rep. Andy Barr (R-Ky.) asked if Treasury would commit to pausing any outbound investment Executive Order, pending Congress putting forward legislation like his Chinese Military and Surveillance Companies Sanctions Act, so that Treasury can coordinate with Congress. Yellen said that decision is up to the President. Barr explained that Congress is working collaboratively and in a bipartisan fashion on an outbound investment legislative package and asked the Administration to work with Congress.

Rep. Jim Himes (D-Conn.) explained that this moment calls for close statesmanship with China. He asked if it is in the national or economic security interests of the U.S. to impoverish the Chinese people.

Yellen said no, and applauded China for lifting millions of people out of poverty. She noted that we must protect our national security interests, and cited concerns with China’s behavior on trade. Yellen concluded that de-risking would be beneficial, but that it would be disastrous for us to attempt to decouple from China.

Himes asked what effects eliminating trade with China would have on the American economy. Yellen explained that the U.S. greatly benefits from access to cheaper products and the wide array of products produced in China. She noted that China benefits from its purchases from us, and we benefit from our ability to export to China. Yellen concluded that competition leads to faster innovation and technological progress. Himes affirmed that we must tackle the national security side of the China issue without damaging the economics.

 

Digital Assets

Hill cited a 2022 FSOC report, which recommended that Congress pass legislation to provide regulators with authority over spot markets for digital assets, and to give regulators more visibility to supervise digital asset companies. He asked if those recommendations still represented the view of FSOC. Yellen said yes and said FSOC would like to see a regulatory framework over spot markets. She also cited gaps surrounding stablecoins and the need for a federal framework.

Sherman asked about the timeline for regulations to require someone to pay taxes if they make a profit selling their crypto. Yellen said Treasury would get back to him shortly.

Rep. Warren Davidson (R-Ohio) asked Yellen about FINCEN’s December 2022 request for comment on a potential rule that would ban self-custody. Yellen said she wasn’t familiar with the details of that rule but noted that Treasury is concerned about the use of cryptocurrency and digital assets for illicit activity. Davidson asked if Treasury is trying to end individual self-custody. Yellen said she hadn’t had any discussions on the topic.

Rep. Josh Gottheimer (D-N.J.) asked Yellen where additional clarity is needed for digital assets. Yellen cited the supervision of spot markets, while noting that stablecoins also require a full-blown regulatory framework. She added that Congressional legislation is appropriate to create this framework.

 

Capital Requirements

Rep. Frank Lucas (R-Okla.) noted that Vice Chair Barr indicated the Basel III proposal coming from the Fed will impact the capital market activities of large U.S. institutions, adding that he is concerned that adding punitive capital charges to U.S. banks is counterproductive to promoting liquidity and efficient markets.

Lucas asked Yellen if the changes would undermine the resilience of the U.S. capital markets. Yellen said Treasury will carefully review and think about any forthcoming changes and the impacts they could have on our capital markets.

Barr asked Yellen if the banking system is well capitalized. Yellen said yes. Barr noted that prudential regulators are preparing sweeping changes to the banking capital framework, and asked if Yellen supported the required, large capital increases. Yellen said she has not seen the details of the proposals that the Fed is considering, but noted she agrees with Basel III.

 

Climate & Sustainability

Rep. Nydia Velazquez (D-N.Y.) asked how Treasury is working to integrate the macroeconomic effects of climate change into the IMF’s core activities. Yellen said the Treasury is concerned about integrating this into the work of the IMF and the multilateral development banks. She explained these banks need to evolve their work to move from focusing purely on country-specific challenges to responding better to global challenges, including climate change.

Lucas asked if Treasury had an estimate of how many U.S. companies will be impacted by the EU’s (CSDDD). Yellen said that while Treasury is supportive of the aims of the CSDDD, it is concerned that the CSDDD has extra-territorial scope and the potential for unintended negative consequences for U.S. firms. She noted she is discussing these concerns with the E.U.

Barr asked what specific steps Yellen is taking to prevent the E.U.’s CSDDD rule from applying to U.S. based firms. Yellen said Treasury is expressing its concerns to the E.U.

Rep. Bryan Steil (R-Wisc.) asked if there are any EU regulations that the Biden Administration is planning to adopt or mirror. He also asked if Treasury determined whether any of the regulations coming from the EU are in the best interest of the U.S. Yellen said the Treasury is looking very carefully at the EU’s CSDDD and is concerned about the impact it could have on U.S. firms. Steil cited his concerns that the CSDDD will impact our ability to be a leader in capital markets.

Rep. Dan Meuser (R-Pa.) asked if the U.S. is taking the threat of the CSDDD seriously. Yellen said the Administration has significant concerns, which they are communicating to the EU.

 

LIV Golf/PGA Merger

Waters explained that Saudi Arabia has a repressive government known for jailing dissidents and enacting draconian punishments on their citizens, adding that Saudi Arabia spent billions of dollars before 9/11 to fund terrorism, spread their vitriolic hatred of Americans, and finance Al Qaeda.

Waters asked Yellen what scrutiny the LIV Golf/PGA merger will receive, and if CFIUS is looking into the investments by the Saudi Sovereign Wealth Fund. Yellen said CFIUS is a very important part of our national security mission and is well positioned to review these transactions. She pointed to strict confidentiality rules to explain why she can’t comment on any single potential matter or case. Waters concluded that she hopes CFIUS focuses on the merger and Fund.

Rep. Bill Huizenga asked if the LIV-PGA agreement will be subject to CFIUS review. Yellen explained she is not allowed to discuss specific matters before CFIUS.

 

American Families and Jobs Act

Rep. Steven Horsford (D-Nev.) discussed the recently introduced American Families and Jobs Act, which he said should be called the Republican Tax Scam 2.0. Horsford said the bill is a tax giveaway for big corporations which will cost taxpayers upwards of $1.1 trillion.

Horsford asked Yellen about the consequences of the proposed $1.1 trillion in lost tax revenue. Yellen said the bill would benefit wealthy individuals and corporations, while doing nothing for working families. She noted the Act is not paid for and would exacerbate the debt.

Horsford said the Act would force us to pay interest on the tax cuts for the wealthy and balance the budget on the backs of working people. He asked Yellen about the macroeconomic costs associated with stripping away the recently passed tax incentives for clean energy production and clean energy vehicles, with a specific focus on the harm to American domestic manufacturing. Yellen noted the renaissance in American manufacturing because of the Inflation Reduction Act, and explained how revoking the incentives would be harmful across the country.

 

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