HFSC Lawmakers Hear from Treasury Secretary Lew on the State of the International Finance System
AT
DECEMBER 12TH’S HEARING, lawmakers heard from U.S. Treasury Jack Lew on the state of
the international finance system and asked questions pertaining to a variety of
financial services issues.
In
his opening
statement, Chairman Jeb Hensarling (R-Texas) stated that America’s moral
authority in the international sphere “has been under question by the words of
our president.” American’s question the wisdom of supporting the International
Monetary Fund (IMF) and other multilateral institutions “that take their
hard-earned dollars and use them to bail out other countries,” he said.
He
added, “you cannot strengthen and reform the global economy without first
strengthening and reforming the American economy,” and also called on President
Obama to work with Congress to avoid the looming debt crisis.
Ranking
Member Maxine Waters (D-Calif.) largely
discussed the growing income inequality in America in her remarks. That
being said, she also mentioned that current U.S. international economic policy
“has, in fact, been too one-sided – too focused on elevating the interests and
mobility of capital over all other considerations.” Waters said it was a
“misguided belief” that “unfettered markets” would not only generate wealth and
stability, but that the benefits would trickle down to the rest of society.
If
there is anything to be learned from the crisis, it is that markets “must be
deeply embedded in systems of governance,” Waters stated, adding that the idea
that markets are efficient and self correcting “has received a mortal blow.”
Rep.
John Campbell (R-Calif.) discussed his concerns with the $63 billion increase
to the U.S. quota in the IMF. Campbell stated that if the Administration is
committed to this increase, the Committee will need: (1) a formal request for
this money transfer; (2) the Treasury to address the concerns the Committee
has; and (3) for the Treasury Secretary and the President to “vocally
articulate” why this is a priority in an era of limited budgets, and why the
concerns of the Committee are not well founded.
Testimony
In
his testimony,
Lew discussed how economic conditions are improving in advanced countries, and
noted that, despite initial headwinds, the U.S. economy is growing, “but we
have more to do.”
The
recession in the Eurozone “seems to be ending,” Lew said, though the high
unemployment rate remains a concern. He noted that Japan is taking efforts to
end deflation, but structural reforms are needed in order to strengthen
domestic demand growth and that emerging markets need to make reforms that
increase their resilience and address structural constraints to growth. China
has recently announced “bold commitments to reform,” and the “pact and
character of the reforms” will lead to greater domestic consumption led growth,
rather than export-oriented growth, he said.
Lew
stressed the importance that Congress act on approving the IMF quota and
governance reform measures, and told the Committee that the administration has
put forward draft legislation on this.
Looking
ahead, Treasury will continue to focus on its financial regulatory reform
efforts in the G-20 and through the Financial Stability Board (FSB); promote
vigorous and swift implementation of Basel III; convergent clearing, trading
and reporting requirements for OTC derivatives markets; and further address
cross-border resolution and systemic risks posed by shadow banking.
Question
& Answer
Questions
posed by the Committee included discussion of current spending and the
long-term budget outlook; whether the President would work with Congress to
avoid another debt ceiling crisis; prioritization of debt payments; the $63
billion increase in the U.S. quote in the IMF; the overall health of the
Eurozone; economic sanctions on Iran; and financial services related questions
posed below.
Financial
Services Inclusion in EU-US Trade Negotiations
Waters
asked for an update on trade talks between the Administration and the European
Union (EU), and expressed concern that the potential inclusion of financial
services into the talks could undermine the “broader efforts” by U.S. and
international regulators to address cross-border oversight. She asked Lew for
clarification on whether the Administration is “softening its tone” on this
issue.
As
in previous hearings, Lew stated the importance of making sure “we have a race
to the top” and “the highest standards possible in terms of financial
stability.”
The
Administration will continue to work actively through the G-20 and the FSB “to
try and drive that process,” and “I do not believe that trade agreements are an
appropriate place for us to dilute the impact of the steps that we’ve taken to
safeguard the U.S. economy.” Lew added, “I think that we should make a call to the
world community in the appropriate forum, like the G-20 and FSB to try and
drive that race to the top.”
When
asked how much pressure Lew and the rest of the Administration were receiving
to introduce financial services into the talks, Lew replied that the issue has
come up during his entire time as Secretary and that it has been an issue that
Europeans have raised.
Campbell
pounced on Lew’s belief that the G-20 and FSB are more appropriate venues for
negotiating financial services issues.
“Won’t
the Europeans make the same arguments at the G-20 that they will here? I mean,
why is that any better or different than trying to harmonize these financial
regulations as best we can through a trade agreement, particularly given how
the border in financial matters have dropped so much?”
Lew
discussed how since 2009, the G-20 and FSB have been “quite effective places”
to work through technical financial services issues, adding “I don’t think the
trade context is the ideal place for that to be done.”
“The
people at the table are not necessarily the right people, and the mechanisms
already exist in the G-20,” he added.
Asked
what the outcome of his meeting with European officials was back in November,
Lew acknowledged that Europeans “do make the argument that it should be in the
trade agreement,” but from the U.S. standpoint, “we make the argument that it
should be in the G-20 and the FSB.”
Lew
noted the pressure in trade agreements to lower standards on various issues,
“and that’s something that we just think is not acceptable” for financial
services.
Trans-Pacific
Partnership Agreement
Waters
also expressed concerns that the Trans-Pacific Partnership (TPP) talks “could
create rules affecting technology development that would supplant domestic
regulation.”
Lew
replied that the question was more appropriate for the U.S. Trade
Representative, but did mention that watering down U.S. regulatory standards
“is not appropriate in trade agreements in terms of protecting our financial
markets, our financial system and our economy.”
“I
do think, separately, we have to discuss what does it mean to harmonize across
international boundaries,” he said, before repeating the importance of the
international community reaching U.S. regulatory standards.
Inclusion
of currency manipulation discipline in the TPP Agreement
Reps.
Emanuel Cleaver (D-Mo.), Gary Peters (D-Mich.), Daniel Kildee (D-Mich.) asked
Lew for his and the Administration’s position on an inclusion of currency
manipulation discipline in the TPP agreement, and efforts to safeguard U.S.
competitiveness abroad.
Lew
replied that progress has been made working through the G-20 and G-7,
particularly getting countries to agree to the U.S. position that “currencies
should be market determined, exchange rates should be market determined, and
that the tools that governments use should be domestic tools for domestic
purposes.”
“Any
agreement reached has to be built on the principles that we have worked to
reach in places like the G-20,” he said, adding that the G-20 is “an
appropriate place” to push for such principles.
In
response to a follow up question from Cleaver, Lew responded that Treasury has
seen “real progress in terms of the exchange rate approaching, not reaching,
the point that we’re pressing them to get to.” Treasury will continue to press
on this issue, Lew concluded.
Lew
said he made it “exceedingly clear”, in discussions with officials from Japan
and China, that market determined exchange rates are “a matter of
necessity in order for us to have our bilateral relations continue to improve.”
Financial
Literacy and Education Commission
Questioned
on the progress with the Financial Literacy and Education Commission (FLEC) by
Rep. Rubén Hinojosa (D-Texas), Lew replied that he has worked closely with Richard
Cordray, Director of the Consumer Financial Protection Bureau (CFPB) and that
financial literacy “is a matter of importance to us personally.” Lew noted the
CFPB’s progress in creating tools for financial literacy, especially the
simplified mortgage disclosure forms that are easier to understand.
Volcker
Rule (in general)
Rep.
Scott Garrett (R-N.J.) asked Lew whether the final rule negatively impacts the
corporate bond market, to which Lew replied that the rule reflects an
“important balance” in making sure the taxpayer is protected and that the
financial sector “will be able to manage” the implementation of the rule.
Rep.
Jim Himes (D-Conn.) expressed concern with the final rule regarding the
exemption of proprietary trading in sovereign bonds, and the exemption for muni
bonds, adding that these exemptions still allow banks “to invest in securities
which could be very, very risky and quite volatile over time.”
Lew
responded that the initial concern was the treatment of U.S. treasuries, and
the potential impact the rule would have had on bank’s relationships with other
foreign nationals and their sovereign debt.
Lew
mentioned that the rule provides for greater accountability as CEOs have to
come up with a plan for implementing the provisions of the rule that is
consistent with the intent of the rule. Nevertheless, “there’s going to be
questions of interpretation,” Lew acknowledged, adding that this was
“deliberately left” to be worked out between regulators and firms to strike the
right balance in order to avoid shutting down “a very important … sovereign
market, including the market for U.S. treasuries.”
Rep.
Spencer Bachus (R-Ala.) asked Lew whether any other country was considering
adopting a version of the Volcker Rule, saying “We’ve adopted the rule
prohibiting proprietary trading. The rest of the world has not. Does that
concern you?”
Lew
replied that the fundamental objective was to “meet the challenge of making
sure that we’re taking the steps we need to safeguard the U.S. financial
system, the U.S. economy, and then try to bring the world to that high
standard.”
Lew
would not give a straight answer, but did state that other countries will have
to make their own judgments and that the U.S. will “continue to make the case.”
Towards
the end of the hearing, Lew mentioned that Germany and France “have their own
form of rules here,” and that the U.S. is not the only country dealing with
proprietary trading.
Volcker
Rule – Who is the Enforcer?
Reps.
Patrick McHenry (R-N.C.) and Patrick Murphy (D-Fl.) questioned Lew on who the
primary enforcer is of the Volcker Rule.
Lew
replied that he would submit to McHenry in writing an answer to McHenry’s
question as to who is the primary enforcer for the Volcker Rule.
In
response to Murphy, Lew said regulators regulate different entities “based on
their characteristics.” Nevertheless, Lew acknowledged that the regulatory
structure “sometimes does create some shades of difference between entities
based on what regulator has jurisdiction over them and what the characteristics
of the entity are.”
He
added, “I think there is an underlying issue in our regulatory system, that it
is a complicated system that divides up responsibility amongst many different
regulatory authorities.” That being said, Lew stated that it was unprecedented
to have five agencies come together on the same rule text on the same day.
Rep.
Garland “Andy” Barr (R-Ky.) questioned whether the Volcker Rule is “capable of
consistent management,” noting Federal Reserve Governor Sarah Raskin’s remarks
about how Section 619 of the Dodd-Frank Act “certainly doesn’t … specify
enforcement standards.” He asked Lew how five separate regulators with
divergent philosophies are supposed to enforce the rule on a consistent basis.
Lew
repeated that the five regulators coming together on identical rule text “is
enormous progress”. Lew said he thinks “we’re going into this stronger than
anyone might have expected.”
OFR
Report on Asset Managers as SIFIs
Reps.
Patrick Murphy (D-Fl.) and Gary Miller (R-Calif.) expressed concerns about the
recent Office of Financial Research (OFR) study,
Asset Management and Financial Stability.
Miller
asked Lew whether he agreed with the statement in the study that asset
manager’s activities “differ in important ways from commercial banking and
insurance activities.” Miller added that “asset managers act primarily as
agents: managing assets on behalf of clients as opposed to investing on the
managers’ behalf. Losses are borne by – and gains accrue to – clients rather
than asset management firms.”
Lew
replied, saying there is “no doubt they are different,” though the question “is
whether or not there are systemic risks that rise to the level of designation.”
Similar to his response to Murphy, Lew said the OFR study is not a “regulatory
undertaking” but an analytical study that will be considered along with other
analysis.
Lew
stated, “I think that we deal with a complex financial system where we have
many different players that have different functions. They sometimes look more
similar in some cases than others. But to acknowledge that they’re different
seems to me to be necessary to understand what each of them are. And the
question as to whether or not there are issues of systemic risk has to flow from
the character of what each organization is. And we can’t be afraid to ask the
questions.”
Rep.
John Delaney (D-Md.) also remarked in his opening comments that he did not
think asset managers should be deemed systemically important.
EXIM
Bank Reauthorization
Rep.
Garland “Andy” Barr (R-Ky.) asked Lew about the Export-Import Bank’s (EXIM)
mission, to which Lew replied that the bank seeks to promote opportunities for
U.S. exports and provide a level playing field in allowing the U.S. industry
“to compete in a fair way.”
In
response to a question from Denny Heck (D-Wash.), Lew responded that without
the EXIM Bank, U.S. companies would face an unlevel playing field “because so
many companies have programs like this.”
Application
of Banking Standards on Insurance Companies
Reps.
Randy Neugebauer (R-Texas), Bill Foster (D-Ill.), Dennis Ross (R-Fl.), and Gary
Miller (R-Calif.) expressed concerns about the application of banking standards
on the insurance industry.
Lew
responded that “where there’s an appropriate need for regulation, we ought to
be sensitive to the differences between insurance companies and other financial
institutions.” Regulators are “looking at being flexible as they use the tools
they have” and “to the extent that there is a need for regulation of insurance
companies, it ought to reflect the characteristics of insurance companies.”
On
concerns the Financial Stability Oversight Council (FSOC) could apply banking
standards to insurance companies, Lew responded that the FSOC’s responsibility
is not to implement but to make a determination on whether or not there is
systemic risk and then have the various regulators use their tools as
appropriate.
“We
understand that banks and insurance companies are not identical,” Lew said.
On
concerns that federal supervision of non-bank systemically important financial
institutions (SIFIs) could potentially require insurance firms to change
accounting procedures, from what is currently reported to the state, to what
could be reported to federal regulators, Lew replied that regulators “are
sensitive to the fact that there is an ongoing regulatory structure” and “these
are issues they’re working their way through.”
Miller
noted the Federal Reserve’s previous view that Section 171 of the Dodd-Frank
Act constrains regulator’s ability to tailor standards to non-bank business
models, like insurance. Miller expressed concern that despite acknowledgment of
the problem, Treasury has taken the position not to do anything until after
implementation is completed.
Lew
replied that regulatory agencies are looking at the discretion they have within
their current statutes and noted there may be disagreement about how much
flexibility regulators have. That being said, whether agencies have enough
flexibility “is the question,” Lew said, but added “I think we have to wait and
see if it is enough.”
QM
Standards, Conforming Loan Limit
Rep.
Keith Rothfus (R-Pa.) touched on Lew’s recent remarks at a Pew Charitable Trust
event where he praised CFPB’s implementation of new qualified mortgage (QM)
standards, in addition to criticizing the Committee for trying to institute
reforms to the CFPB. Rothfus then mentioned how constituents and organizations
back in his district have expressed alarm with the new QM standards and that
the standards, as written, would significantly harm the housing market and the
economy.
In
response to the concerns, Lew said Cordray is working through the final details
“and I believe that many of those concerns can be addressed.”
Rep.
Brad Sherman (D-Calif.) briefly mentioned that the higher conforming loan limit
in his area, as well as other high-cost areas, actually make money for Fannie
Mae and Freddie Mac, “and thus for the federal government.” Any potential cuts
would increase the national debt, he added.
Taxation
Rep.
Al Green (D-Texas) focused on income inequality and provided numbers on hedge
fund manager pay. He noted that “speculative pay” is taxed at a lower rate than
ordinary income, and asked Lew if there are any policies that could be
implemented to prevent the expansion of such “speculative pay.”
Lew
acknowledged that earned and unearned income are taxed differently, and that
raising the top rates was one way of trying to deal with this differential.
However,
Lew said “I think we have to have a tax system that encourages investment. We
have to have a tax system that encourages people to work. And I think we have a
lot more work to do.”
Rep.
Brad Sherman (D-Calif.) touched on the California system of apportionment for
international taxation and asked for Lew’s commitment to talk about such a
system “to cut the Gordian knot and eliminate the transaction-by-transaction
approach and instead say that if a company is 50 percent based in the United
States, we ought to tax 50 percent of its worldwide income.”
Lew
responded that he would be “happy to continue the conversation.”
TBTF
Sherman
stated in his remarks that too big to fail (TBTF) is “too big to exist,” and
questioned whether regulators, including the Treasury secretary, would actually
break up a TBTF bank before “you and I pass a law requiring it.”
For
more on the hearing, please click
here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:International/Trade,Hearing Summaries Agency:House Financial Services Committee,Publish Year:2013
AT
DECEMBER 12TH’S HEARING, lawmakers heard from U.S. Treasury Jack Lew on the state of
the international finance system and asked questions pertaining to a variety of
financial services issues.
In
his opening
statement, Chairman Jeb Hensarling (R-Texas) stated that America’s moral
authority in the international sphere “has been under question by the words of
our president.” American’s question the wisdom of supporting the International
Monetary Fund (IMF) and other multilateral institutions “that take their
hard-earned dollars and use them to bail out other countries,” he said.
He
added, “you cannot strengthen and reform the global economy without first
strengthening and reforming the American economy,” and also called on President
Obama to work with Congress to avoid the looming debt crisis.
Ranking
Member Maxine Waters (D-Calif.) largely
discussed the growing income inequality in America in her remarks. That
being said, she also mentioned that current U.S. international economic policy
“has, in fact, been too one-sided – too focused on elevating the interests and
mobility of capital over all other considerations.” Waters said it was a
“misguided belief” that “unfettered markets” would not only generate wealth and
stability, but that the benefits would trickle down to the rest of society.
If
there is anything to be learned from the crisis, it is that markets “must be
deeply embedded in systems of governance,” Waters stated, adding that the idea
that markets are efficient and self correcting “has received a mortal blow.”
Rep.
John Campbell (R-Calif.) discussed his concerns with the $63 billion increase
to the U.S. quota in the IMF. Campbell stated that if the Administration is
committed to this increase, the Committee will need: (1) a formal request for
this money transfer; (2) the Treasury to address the concerns the Committee
has; and (3) for the Treasury Secretary and the President to “vocally
articulate” why this is a priority in an era of limited budgets, and why the
concerns of the Committee are not well founded.
Testimony
In
his testimony,
Lew discussed how economic conditions are improving in advanced countries, and
noted that, despite initial headwinds, the U.S. economy is growing, “but we
have more to do.”
The
recession in the Eurozone “seems to be ending,” Lew said, though the high
unemployment rate remains a concern. He noted that Japan is taking efforts to
end deflation, but structural reforms are needed in order to strengthen
domestic demand growth and that emerging markets need to make reforms that
increase their resilience and address structural constraints to growth. China
has recently announced “bold commitments to reform,” and the “pact and
character of the reforms” will lead to greater domestic consumption led growth,
rather than export-oriented growth, he said.
Lew
stressed the importance that Congress act on approving the IMF quota and
governance reform measures, and told the Committee that the administration has
put forward draft legislation on this.
Looking
ahead, Treasury will continue to focus on its financial regulatory reform
efforts in the G-20 and through the Financial Stability Board (FSB); promote
vigorous and swift implementation of Basel III; convergent clearing, trading
and reporting requirements for OTC derivatives markets; and further address
cross-border resolution and systemic risks posed by shadow banking.
Question
& Answer
Questions
posed by the Committee included discussion of current spending and the
long-term budget outlook; whether the President would work with Congress to
avoid another debt ceiling crisis; prioritization of debt payments; the $63
billion increase in the U.S. quote in the IMF; the overall health of the
Eurozone; economic sanctions on Iran; and financial services related questions
posed below.
Financial
Services Inclusion in EU-US Trade Negotiations
Waters
asked for an update on trade talks between the Administration and the European
Union (EU), and expressed concern that the potential inclusion of financial
services into the talks could undermine the “broader efforts” by U.S. and
international regulators to address cross-border oversight. She asked Lew for
clarification on whether the Administration is “softening its tone” on this
issue.
As
in previous hearings, Lew stated the importance of making sure “we have a race
to the top” and “the highest standards possible in terms of financial
stability.”
The
Administration will continue to work actively through the G-20 and the FSB “to
try and drive that process,” and “I do not believe that trade agreements are an
appropriate place for us to dilute the impact of the steps that we’ve taken to
safeguard the U.S. economy.” Lew added, “I think that we should make a call to the
world community in the appropriate forum, like the G-20 and FSB to try and
drive that race to the top.”
When
asked how much pressure Lew and the rest of the Administration were receiving
to introduce financial services into the talks, Lew replied that the issue has
come up during his entire time as Secretary and that it has been an issue that
Europeans have raised.
Campbell
pounced on Lew’s belief that the G-20 and FSB are more appropriate venues for
negotiating financial services issues.
“Won’t
the Europeans make the same arguments at the G-20 that they will here? I mean,
why is that any better or different than trying to harmonize these financial
regulations as best we can through a trade agreement, particularly given how
the border in financial matters have dropped so much?”
Lew
discussed how since 2009, the G-20 and FSB have been “quite effective places”
to work through technical financial services issues, adding “I don’t think the
trade context is the ideal place for that to be done.”
“The
people at the table are not necessarily the right people, and the mechanisms
already exist in the G-20,” he added.
Asked
what the outcome of his meeting with European officials was back in November,
Lew acknowledged that Europeans “do make the argument that it should be in the
trade agreement,” but from the U.S. standpoint, “we make the argument that it
should be in the G-20 and the FSB.”
Lew
noted the pressure in trade agreements to lower standards on various issues,
“and that’s something that we just think is not acceptable” for financial
services.
Trans-Pacific
Partnership Agreement
Waters
also expressed concerns that the Trans-Pacific Partnership (TPP) talks “could
create rules affecting technology development that would supplant domestic
regulation.”
Lew
replied that the question was more appropriate for the U.S. Trade
Representative, but did mention that watering down U.S. regulatory standards
“is not appropriate in trade agreements in terms of protecting our financial
markets, our financial system and our economy.”
“I
do think, separately, we have to discuss what does it mean to harmonize across
international boundaries,” he said, before repeating the importance of the
international community reaching U.S. regulatory standards.
Inclusion
of currency manipulation discipline in the TPP Agreement
Reps.
Emanuel Cleaver (D-Mo.), Gary Peters (D-Mich.), Daniel Kildee (D-Mich.) asked
Lew for his and the Administration’s position on an inclusion of currency
manipulation discipline in the TPP agreement, and efforts to safeguard U.S.
competitiveness abroad.
Lew
replied that progress has been made working through the G-20 and G-7,
particularly getting countries to agree to the U.S. position that “currencies
should be market determined, exchange rates should be market determined, and
that the tools that governments use should be domestic tools for domestic
purposes.”
“Any
agreement reached has to be built on the principles that we have worked to
reach in places like the G-20,” he said, adding that the G-20 is “an
appropriate place” to push for such principles.
In
response to a follow up question from Cleaver, Lew responded that Treasury has
seen “real progress in terms of the exchange rate approaching, not reaching,
the point that we’re pressing them to get to.” Treasury will continue to press
on this issue, Lew concluded.
Lew
said he made it “exceedingly clear”, in discussions with officials from Japan
and China, that market determined exchange rates are “a matter of
necessity in order for us to have our bilateral relations continue to improve.”
Financial
Literacy and Education Commission
Questioned
on the progress with the Financial Literacy and Education Commission (FLEC) by
Rep. Rubén Hinojosa (D-Texas), Lew replied that he has worked closely with Richard
Cordray, Director of the Consumer Financial Protection Bureau (CFPB) and that
financial literacy “is a matter of importance to us personally.” Lew noted the
CFPB’s progress in creating tools for financial literacy, especially the
simplified mortgage disclosure forms that are easier to understand.
Volcker
Rule (in general)
Rep.
Scott Garrett (R-N.J.) asked Lew whether the final rule negatively impacts the
corporate bond market, to which Lew replied that the rule reflects an
“important balance” in making sure the taxpayer is protected and that the
financial sector “will be able to manage” the implementation of the rule.
Rep.
Jim Himes (D-Conn.) expressed concern with the final rule regarding the
exemption of proprietary trading in sovereign bonds, and the exemption for muni
bonds, adding that these exemptions still allow banks “to invest in securities
which could be very, very risky and quite volatile over time.”
Lew
responded that the initial concern was the treatment of U.S. treasuries, and
the potential impact the rule would have had on bank’s relationships with other
foreign nationals and their sovereign debt.
Lew
mentioned that the rule provides for greater accountability as CEOs have to
come up with a plan for implementing the provisions of the rule that is
consistent with the intent of the rule. Nevertheless, “there’s going to be
questions of interpretation,” Lew acknowledged, adding that this was
“deliberately left” to be worked out between regulators and firms to strike the
right balance in order to avoid shutting down “a very important … sovereign
market, including the market for U.S. treasuries.”
Rep.
Spencer Bachus (R-Ala.) asked Lew whether any other country was considering
adopting a version of the Volcker Rule, saying “We’ve adopted the rule
prohibiting proprietary trading. The rest of the world has not. Does that
concern you?”
Lew
replied that the fundamental objective was to “meet the challenge of making
sure that we’re taking the steps we need to safeguard the U.S. financial
system, the U.S. economy, and then try to bring the world to that high
standard.”
Lew
would not give a straight answer, but did state that other countries will have
to make their own judgments and that the U.S. will “continue to make the case.”
Towards
the end of the hearing, Lew mentioned that Germany and France “have their own
form of rules here,” and that the U.S. is not the only country dealing with
proprietary trading.
Volcker
Rule – Who is the Enforcer?
Reps.
Patrick McHenry (R-N.C.) and Patrick Murphy (D-Fl.) questioned Lew on who the
primary enforcer is of the Volcker Rule.
Lew
replied that he would submit to McHenry in writing an answer to McHenry’s
question as to who is the primary enforcer for the Volcker Rule.
In
response to Murphy, Lew said regulators regulate different entities “based on
their characteristics.” Nevertheless, Lew acknowledged that the regulatory
structure “sometimes does create some shades of difference between entities
based on what regulator has jurisdiction over them and what the characteristics
of the entity are.”
He
added, “I think there is an underlying issue in our regulatory system, that it
is a complicated system that divides up responsibility amongst many different
regulatory authorities.” That being said, Lew stated that it was unprecedented
to have five agencies come together on the same rule text on the same day.
Rep.
Garland “Andy” Barr (R-Ky.) questioned whether the Volcker Rule is “capable of
consistent management,” noting Federal Reserve Governor Sarah Raskin’s remarks
about how Section 619 of the Dodd-Frank Act “certainly doesn’t … specify
enforcement standards.” He asked Lew how five separate regulators with
divergent philosophies are supposed to enforce the rule on a consistent basis.
Lew
repeated that the five regulators coming together on identical rule text “is
enormous progress”. Lew said he thinks “we’re going into this stronger than
anyone might have expected.”
OFR
Report on Asset Managers as SIFIs
Reps.
Patrick Murphy (D-Fl.) and Gary Miller (R-Calif.) expressed concerns about the
recent Office of Financial Research (OFR) study,
Asset Management and Financial Stability.
Miller
asked Lew whether he agreed with the statement in the study that asset
manager’s activities “differ in important ways from commercial banking and
insurance activities.” Miller added that “asset managers act primarily as
agents: managing assets on behalf of clients as opposed to investing on the
managers’ behalf. Losses are borne by – and gains accrue to – clients rather
than asset management firms.”
Lew
replied, saying there is “no doubt they are different,” though the question “is
whether or not there are systemic risks that rise to the level of designation.”
Similar to his response to Murphy, Lew said the OFR study is not a “regulatory
undertaking” but an analytical study that will be considered along with other
analysis.
Lew
stated, “I think that we deal with a complex financial system where we have
many different players that have different functions. They sometimes look more
similar in some cases than others. But to acknowledge that they’re different
seems to me to be necessary to understand what each of them are. And the
question as to whether or not there are issues of systemic risk has to flow from
the character of what each organization is. And we can’t be afraid to ask the
questions.”
Rep.
John Delaney (D-Md.) also remarked in his opening comments that he did not
think asset managers should be deemed systemically important.
EXIM
Bank Reauthorization
Rep.
Garland “Andy” Barr (R-Ky.) asked Lew about the Export-Import Bank’s (EXIM)
mission, to which Lew replied that the bank seeks to promote opportunities for
U.S. exports and provide a level playing field in allowing the U.S. industry
“to compete in a fair way.”
In
response to a question from Denny Heck (D-Wash.), Lew responded that without
the EXIM Bank, U.S. companies would face an unlevel playing field “because so
many companies have programs like this.”
Application
of Banking Standards on Insurance Companies
Reps.
Randy Neugebauer (R-Texas), Bill Foster (D-Ill.), Dennis Ross (R-Fl.), and Gary
Miller (R-Calif.) expressed concerns about the application of banking standards
on the insurance industry.
Lew
responded that “where there’s an appropriate need for regulation, we ought to
be sensitive to the differences between insurance companies and other financial
institutions.” Regulators are “looking at being flexible as they use the tools
they have” and “to the extent that there is a need for regulation of insurance
companies, it ought to reflect the characteristics of insurance companies.”
On
concerns the Financial Stability Oversight Council (FSOC) could apply banking
standards to insurance companies, Lew responded that the FSOC’s responsibility
is not to implement but to make a determination on whether or not there is
systemic risk and then have the various regulators use their tools as
appropriate.
“We
understand that banks and insurance companies are not identical,” Lew said.
On
concerns that federal supervision of non-bank systemically important financial
institutions (SIFIs) could potentially require insurance firms to change
accounting procedures, from what is currently reported to the state, to what
could be reported to federal regulators, Lew replied that regulators “are
sensitive to the fact that there is an ongoing regulatory structure” and “these
are issues they’re working their way through.”
Miller
noted the Federal Reserve’s previous view that Section 171 of the Dodd-Frank
Act constrains regulator’s ability to tailor standards to non-bank business
models, like insurance. Miller expressed concern that despite acknowledgment of
the problem, Treasury has taken the position not to do anything until after
implementation is completed.
Lew
replied that regulatory agencies are looking at the discretion they have within
their current statutes and noted there may be disagreement about how much
flexibility regulators have. That being said, whether agencies have enough
flexibility “is the question,” Lew said, but added “I think we have to wait and
see if it is enough.”
QM
Standards, Conforming Loan Limit
Rep.
Keith Rothfus (R-Pa.) touched on Lew’s recent remarks at a Pew Charitable Trust
event where he praised CFPB’s implementation of new qualified mortgage (QM)
standards, in addition to criticizing the Committee for trying to institute
reforms to the CFPB. Rothfus then mentioned how constituents and organizations
back in his district have expressed alarm with the new QM standards and that
the standards, as written, would significantly harm the housing market and the
economy.
In
response to the concerns, Lew said Cordray is working through the final details
“and I believe that many of those concerns can be addressed.”
Rep.
Brad Sherman (D-Calif.) briefly mentioned that the higher conforming loan limit
in his area, as well as other high-cost areas, actually make money for Fannie
Mae and Freddie Mac, “and thus for the federal government.” Any potential cuts
would increase the national debt, he added.
Taxation
Rep.
Al Green (D-Texas) focused on income inequality and provided numbers on hedge
fund manager pay. He noted that “speculative pay” is taxed at a lower rate than
ordinary income, and asked Lew if there are any policies that could be
implemented to prevent the expansion of such “speculative pay.”
Lew
acknowledged that earned and unearned income are taxed differently, and that
raising the top rates was one way of trying to deal with this differential.
However,
Lew said “I think we have to have a tax system that encourages investment. We
have to have a tax system that encourages people to work. And I think we have a
lot more work to do.”
Rep.
Brad Sherman (D-Calif.) touched on the California system of apportionment for
international taxation and asked for Lew’s commitment to talk about such a
system “to cut the Gordian knot and eliminate the transaction-by-transaction
approach and instead say that if a company is 50 percent based in the United
States, we ought to tax 50 percent of its worldwide income.”
Lew
responded that he would be “happy to continue the conversation.”
TBTF
Sherman
stated in his remarks that too big to fail (TBTF) is “too big to exist,” and
questioned whether regulators, including the Treasury secretary, would actually
break up a TBTF bank before “you and I pass a law requiring it.”
For
more on the hearing, please click
here.