House Financial Services on the International Financial System
House Financial Services Committee
“The Annual Testimony of the Secretary of the Treasury
On the State of the International Financial System”
Tuesday, March 17, 2015
Key Topics & Takeaways
- FSB: Rep. James Himes (D-Conn.) asked if FSB Chair Carney assumes that national authorities will “obey” when he tells FSB members he expects cooperation and implementation. Lew said it has always been clear that national regulators retain authority and control.
- Costs of Regulation: Rep. Patrick McHenry (R-N.C.) asked if the FSOC has undertaken any study on the cumulative costs of FSOC and Federal Reserve regulations. Lew replied that he is not sure there has been any study, but that he is confident regulators are attentive to the cumulative impacts of regulations as they take additional steps. He added that there has been a clear goal of internalizing risks within firms, and that having higher capital is just part of the solution.
- Volcker Rule: McHenry asked if it is still too soon to review the Volcker Rule. Lew answered that it is not yet in effect, so it is premature to try to assess its full impact. He commented that he does believe there has been some movement by firms to get ready for the rule.
- SIFI Designations: Ross cautioned that additional capital standards for asset managers could have a significant impact on Americans saving for retirement and asked if the FSOC takes this into account in its deliberations. Lew said the FSOC employs a careful analysis, and that it has come to realize that there are more concerns with the specific practices of asset managers rather than with the firms themselves.
- Dodd-Frank Fixes: Rep. Randy Hultgren (R-Ill.) pointed out that President Obama has said he would veto any bills undoing rules for Wall Street. He said this White House opposition to even modest changes suggests that nothing Congress passes will be signed by the president, even though former Rep. Barney Frank himself has said the Dodd-Frank Act has flaws. Hultgren urged that Dodd-Frank should not be treated “as the Ten Commandments.”
Speakers
- Jacob Lew, Secretary, Department of the Treasury
Opening Statements
In his opening statement, Chairman Jeb Hensarling (R-Texas) said the national debt is one of the greatest threats to economic stability in the U.S., and expressed disappointment that Secretary Jacob Lew’s written testimony fails to address the problem. He was very critical of increases to the national debt under President Obama, but commented that “in fairness,” many European countries have also seen dramatic increases. Hensarling added that indebted countries turn to the International Monetary Fund (IMF), which depends on U.S. taxpayers, for assistance, and stated that this creates “too big to fail” on a global scale.
Hensarling was also very critical of the Financial Stability Board (FSB) and the Financial Stability Oversight Council (FSOC), saying the organizations “wield immense power and operate without transparency or accountability.” He called the FSB “a secretive coalition of global bureaucrats” that use the FSOC as a “conduit” to export its ideals to the U.S. Hensarling opined that the U.S. does not need a “one-world view of risk imported from Europe.” He said the FSOC rubberstamps decisions from the FSB is a relationship that “doesn’t seem like coordination, but capitulation.”
In her opening statement, Ranking Member Maxine Waters (D-Calif.) stressed the need for Congress to ratify the IMF’s quota reforms. She warned that the U.S. risks losing influence as other countries become frustrated and doubt American ability to lead on global economic issues.
Rep. Bill Huizenga (R-Mich.) noted that European Commissioner for Financial Services Jonathan Hill has called for a shift of focus from the regulatory environment to a pro-growth agenda and supported the same shift in the U.S. He also questioned why American taxpayers’ money should be used by the IMF in bailouts of other countries.
Rep. Gwen Moore (D-Wis.) noted the Treasury’s aggressive stance to deter tax fraud and money laundering, but called on Lew to “double down and be more surgical” so as not to complicate legitimate remittances.
Testimony
In his testimony, Jacob Lew, Secretary of the Department of the Treasury, said international institutions such as the IMF, World Bank and regional development banks are critical to economic growth and promoting U.S. interests. He called on Congress to pass the IMF quota reforms in order to solidify the U.S. position as a global leader. He warned that other countries are questioning American commitment to the multilateral institutions it helped to create, and are responding by exploring the creation of new and parallel institutions.
Question and Answer
Hensarling pointed out that Lew has said in the past that the FSB acts by consensus, and asked whether this meant that the Treasury Department consented to FSB standards such as the total loss-absorbing capacity (TLAC) proposal. Lew answered that the U.S. has played a leadership role in having TLAC enacted.
Hensarling understood this to mean that the Treasury Department consented, and then asked if Treasury also consented to FSB exemptions from the proposal for large Chinese banks. Lew repeated that the FSB acts by consensus, but said he was not familiar with the specifics of the exemptions for Chinese banks.
Next, Hensarling stated that Lew previously testified that the FSB does not make any rules for national governments, and that each nation has the power to make its own decisions. However, he asked why the FSB would feel the need to issue exemptions if its proposals are just “preliminary suggestions.” Lew said the FSB works towards highs standards, and that the U.S. helped to drive forward the TLAC proposal.
Raising a memo in which FSB Chairman Mark Carney declared that he expected full, consistent and prompt implementation of FSB proposals, and that the FSB would exercise “enhanced monitoring” of the implementation, Hensarling asked if the Treasury Department consented to the memo. Lew said he would have to see the specific memo, but that the Treasury Department does want the largest financial institutions to have deep reserves to protect taxpayers.
Rep. James Himes (D-Conn.) asked if FSB Chair Carney assumes that national authorities will “obey” when he tells FSB members he expects cooperation and implementation. Lew said it has always been clear that national regulators retain authority and control.
Access to Credit
Waters said the Dodd-Frank Act took key steps to address the issues of unregulated mortgage credit and predatory lending, but that credit is now too limited. She asked whether Congress should pass legislation to grant small financial institutions more exemptions from Consumer Financial Protection Bureau (CFPB) rules to promote access to credit. Lew agreed that credit has gotten too tight as part of a larger trend in the financial services industry of greater conservatism than was intended by reform. He added that it is important to maintain the regulatory structure while ensuring access to credit.
Capital Standards for Insurers
Huizenga asked how Treasury justifies the fact that international discussions on capital standards for insurers have undercut state regulators, and what can be done to encourage transparency. Lew said there has been “lots of give and take” between state regulators and national voices, and that the FSB is taking comment, but Huizenga countered that just taking comment is very different from giving the state regulators a seat at the table.
Rep. Blaine Luetkemeyer (R-Mo.) said he was thankful to hear Lew say that insurers should have unique capital standards, and asked if this means the FSOC intends to regulate insurers according to the standards in place today. Lew said the FSOC would only regulated firms it has designated, and that international standards would only apply to firms subjected to Fed oversight.
Transatlantic Trade and Investment Partnership
Huizenga asked why the Treasury Department has refuses to engage on the regulatory side of financial services in negotiations towards the Transatlantic Trade and Investment Partnership (TTIP). Lew said the Treasury Department has been very clear with its European counterparts that market access negotiations are appropriate, but that prudential standards should not be subject to trade negotiations. He said there are many international conversations already to promote high standards, and that such standards should not be permitted to be challenged under a trade pact.
IMF Quota Reform
Rep. Stephen Lynch (D-Mass.) asked if the IMF quota reform would have any effect of the voting weight or influence of the U.S. Lew responded that the reform preserves the U.S. position and provides for some reallocation between Europe and emerging economies. He repeated that it is important to approve the reform because impatience around the world is becoming “extremely high” with the U.S. being the only country standing in the way of completion.
Rep. Patrick McHenry (R-N.C.) asked if the FSOC has undertaken any study on the cumulative costs of FSOC and Federal Reserve regulations. Lew replied that he is not sure there has been any study, but that he is confident regulators are attentive to the cumulative impacts of regulations as they take additional steps. He added that there has been a clear goal of internalizing risks within firms, and that having higher capital is just part of the solution.
McHenry said the FSOC is creating more problems by diminishing liquidity, and asked if this is a concern. Lew said the FSOC is concerned about maintaining liquid markets in the U.S.
Rep. Stephen Fincher (R-Tenn.) said the U.S. is going “well beyond” international standards for capital and liquidity rules. He said the effects of uncoordinated mandates on financial markets are seen in the real economy. He noted several reports of diminished liquidity as a result of regulations, and questioned when it would be “time to get worried.” He asked if there is any data-driven reexamination of the combined effects of regulations being undertaken by U.S. regulators.
Lew said liquidity has been one of the great strengths of U.S. markets, so it is an important concern. He rejected analyses that the October 15th volatility and liquidity episode was data-driven and warned against jumping to the conclusion that it was the result of regulation. He defended regulation as having made the financial system safer and more resilient.
Fincher countered that the liquidity problem has been made worse and that regulations are “drying up the market and not allowing banks to loan money to people.”
McHenry asked if it is still too soon to review the Volcker Rule. Lew answered that it is not yet in effect so it is premature to try to assess its full impact. He commented that he does believe there has been some movement by firms to get ready for the rule.
McHenry asked if the significant volatility in some government bonds and diminished liquidity on October 15th of last year may have been related to the Volcker Rule. Lew said he is “reluctant to attribute causality to any one thing” because the evolution of the market is driven by many factors.
Rep. Randy Hultgren (R-Ill.) asked Lew if he would support exempting banks below certain asset thresholds from the Volcker Rule. Lew replied that only banks engaged in proprietary trading are affected by the rule, and that the goal is to make all financial institutions safer.
Currency Manipulation
Rep. Brad Sherman (D-Calif.) lamented that every time he asks why the U.S. is not sanctioning China for currency manipulation, he is told that China is making progress and “cheating less.” He commented that the law is clear, and that if China is still manipulating its currency then it must be designated. He asked Lew why he has not carried out the law. Lew answered that the Treasury Department is engaged directly with China and has made “enormous progress.”
Rep. Daniel Kildee (D-Mich.) said currency manipulation is the central issue when it considering the ability of American companies to compete, particularly in the auto sector. He urged that getting the Trans-Pacific Partnership deal done should not come at the expense of addressing such a central problem. Lew agreed that countries engaging in currency manipulation must be pushed back, but stated that the proper forum for such discussions are on a bilateral basis and through the G-20 rather than in trade agreements. He cautioned that some monetary policies such as quantitative easing might be interpreted by some states as a form of currency manipulation.
AML and Too Big to Jail
Sherman noted that some foreign banks have “conspired” with Americans to cheat on U.S. taxes, and asked if anyone is going to jail, or whether the Treasury has put together a criminal case against anyone. Lew said the Treasury has “been clear that no one is above the law,” to which Sherman responded, “But no one is in jail.”
Rep. Gregory Meeks (D-N.Y.) asked what should be made of the number of banks that have faced heavy fines recently as part of the Treasury Department’s anti-money laundering (AML) programs. Lew said AML rules are very important and that the Treasury has worked hard to communicate with institutions and counterparts abroad to ensure there are systems in place to stop illicit activity while allowing legitimate transactions to continue.
Meeks asked if banks must “know their customer’s customer.” Lew replied that banks are responsible for where money is coming from and where it is going, and that they understand what suspicious transactions are.
Rep. Randy Neugebauer (R-Texas) commented that the Dodd-Frank Act designated that financial institutions with over $50 billion in assets would be considered systemically important, but that there is bipartisan support for raising this threshold, which he said was set arbitrarily and without analysis. He stated that Section 115 of Dodd-Frank enables the FSOC to review the $50 billion threshold and recommend that it be raised, and asked whether such a review has been completed. Lew said the FSOC has been attentive to the differences between small, medium, and large-size institutions. He said he is not aware of a formal review, but that regulators have flexibility in terms of the standards they apply to firms of different sizes.
Neugebauer said he is surprised that there has been no review of the threshold given bipartisan support. Lew said his focus as chair of the FSOC has been the implementation of all the provisions of Dodd-Frank, but that he has encouraged regulators along the way to take note of the differences between institutions of different sizes.
Asked by Neugebauer if he agrees that the review needs to take place and that the current threshold is not the right number, Lew said moving the limit is not the only solution, and that institutions of differing sizes should be looked at “appropriately.”
Rep. Carolyn Maloney (D-N.Y.) noted that she sent a letter to the FSOC urging reforms to the designation process, and that her suggestions were adopted last month. She commented that this would suggest that the FSOC has been accountable to Congress and can engage constructively. She asked for a description of the process that led to the FSOC’s reforms, and whether the reforms strike the right balance between providing companies with a fair process and preserving the FSOC’s ability to identify and mitigate risk.
Lew responded that Maloney’s suggestions were one of a number of sources on input from an open process of consultation. He said the changes demonstrate that the FSOC wants to have a process in which parties know where they stand and in which the flow of information is as efficient as possible. He added that there was a great deal of communication before the rule change, but that the changes provide good clarification moving forward.
Hultgren asked if the Administration would support modifying the $50 billion threshold for systemic designation. Lew said there is substantial regulator flexibility and that he does not believe legislative fixes are needed.
Rep. Dennis Ross (R-Fla.) expressed concern that the FSOC reforms did not go far enough, and that a nonbank financial institution still does not have any guidance to be made aware that they might be designated or how to avoid designation. He asked if the priority should be to address systemic risks rather than just putting more firms under Fed oversight. Lew said the FSOC now has a more refined approach and that it has tried to expand transparency to increase communication.
Ross cautioned that additional capitals standards for asset managers could have a significant impact on Americans saving for retirement and asked if the FSOC takes this into account in its deliberations. Lew said the FSOC employs a careful analysis and that it has come to realize that there are more concerns with the specific practices of asset managers rather than with the firms themselves.
GSEs
Rep. Michael Capuano (D-Mass.) noted that Fannie Mae and Freddie Mac received $187 billion in taxpayer-funded bailout money, but have now repaid over $220 billion. He asked what has been done with the difference. Lew answered that it has become part of the general fund.
Capuano asked how long the Treasury Department would “hold Fannie and Freddie hostage” by not allowing them to recapitalize or pay off their debt. He called for the Treasury to “stop using this as a piggy bank.” Lew said this depends on when Congress will move forward with housing finance reform. He said the Administration has worked closely in the development of proposals, particularly in the Senate.
China
Rep. Ed Royce (R-Calif.) asked about developments in China, noting that U.S. firms continue to compete on an unlevel playing field with serious limits on ownership and significant regulatory pressures such as recently introduced bank technology rules. He also asked about the Bilateral Investment Treaty (BIT) negotiations with China, specifically on progress on arbitration that would give American companies a “real chance” to resolve differences outside of the court system in China.
Lew said the bank technology requirements are “very problematic” and that he has written to Chinese leadership expressing his concerns. On arbitration, Lew said this is a concept that the U.S. needs to “strenuously push” because deciding issues in Chinese courts is “not a fair way to do it.”
Rep. Al Green (D-Texas) asked Lew for an assessment of the Dodd-Frank Act and whether it would have made a difference during the financial crisis. Lew answered that the Dodd-Frank Act has significantly improved the safety of the financial system, and specifically mentioned the Federal Deposit Insurance Corporation’s orderly liquidation authority and fund as tools that would help avoid taxpayer bailouts. He added that there is still work to do and that reform is “never finished” because the financial system is “always moving.”
Green asked how important living wills are, and Lew called them very important because they give systemically important firms a plan to address serious problems on their own. He said it should not be surprising that it is taking a long time to complete credible living wills.
Asked by Green whether he is amenable to working with Congress to make improvements to the Dodd-Frank Act, Lew said he is always open to working to improve the soundness of the financial system, but that he will not be open to questioning whether the basic approach of regulation should be reconsidered.
Hultgren pointed out that President Obama has said he would veto any bills undoing rules for Wall Street. He said this White House opposition to even modest changes suggests that nothing Congress passes will be signed by the president, even though former Rep. Barney Frank himself has said the Dodd-Frank Act has flaws. Hultgren urged that Dodd-Frank should not be treated “as the Ten Commandments.”
Community Banks
Rep. Frank Lucas (R-Okla.) pointed out that there has been an accelerating decline in community banks’ market share since the crisis, and asked if it is either time for regulators to use the flexibility permitted by Dodd-Frank or if Congress should respond to provide regulatory relief. Lew said there has been a great deal of attention paid to treating community banks differently, and that the trend of consolidation among community banks predates the passage of the legislation.
Rep. Steve Stivers (R-Ohio) asked how much time the FSOC spends in its meetings discussing the plight of community banks, and whether it is on the agenda. Lew said community banks are discussed every time housing finance and rules are considered. Stivers insisted that community banks merit a standalone agenda item at every meeting.
DOL Fiduciary
Stivers asked if the Treasury has coordinated with the Department of Labor (DOL) on its proposed fiduciary standard. Lew commented that there has been some inter-agency discussion on policy, but that it is a DOL rulemaking.
Cybersecurity
Rep. Joyce Beatty (D-Ohio) asked what the Treasury is doing with the IMF and its foreign counterparts in the area of cybersecurity. Lew said the U.S. has much to do on its own before getting to the international question, and that the Treasury has been working with the financial services sector to make sure best practices are put in place. He added that there is a real need to collect and share information, and that there is legislation pending that would be very beneficial.
Debt Ceiling
Rep. Mick Mulvaney (R-S.C.) asked Lew to assure financial markets that interest on U.S. sovereign debt would be paid despite hitting the debt ceiling. Lew said that if Congress does not extend the debt limit, the Treasury would not have the ability to meet all U.S. debt obligations for the first time in American history. He said the Treasury could technically make some payments, but that the consequences of making some payments but not others could not be known.
Mulvaney asked if Lew has checked whether the Treasury has the technical ability to pay interest on sovereign debt. Lew said it does not have the technical ability to go through all U.S. obligations and choose which to pay. He stated that his job “is to pay all the bills,” and that he cannot protect the full faith and credit of the federal government while having to choose what obligations to pay.
Investor-State Dispute Settlement
Himes asked if Congress should be concerned that investor-state dispute settlement (ISDS) might open an extrajudicial path to changing the U.S. financial regulatory structure. Lew commented that the U.S. has never lost an ISDS case because it has an evenhanded system of law that is durable to challenges. He said the subjection of foreign banks to the Dodd-Frank Act is well-based in law. He added that ISDS would be beneficial for companies’ and investors’ abilities to defend their interests abroad.
For more information on this 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:2015
House Financial Services Committee
“The Annual Testimony of the Secretary of the Treasury
On the State of the International Financial System”
Tuesday, March 17, 2015
Key Topics & Takeaways
- FSB: Rep. James Himes (D-Conn.) asked if FSB Chair Carney assumes that national authorities will “obey” when he tells FSB members he expects cooperation and implementation. Lew said it has always been clear that national regulators retain authority and control.
- Costs of Regulation: Rep. Patrick McHenry (R-N.C.) asked if the FSOC has undertaken any study on the cumulative costs of FSOC and Federal Reserve regulations. Lew replied that he is not sure there has been any study, but that he is confident regulators are attentive to the cumulative impacts of regulations as they take additional steps. He added that there has been a clear goal of internalizing risks within firms, and that having higher capital is just part of the solution.
- Volcker Rule: McHenry asked if it is still too soon to review the Volcker Rule. Lew answered that it is not yet in effect, so it is premature to try to assess its full impact. He commented that he does believe there has been some movement by firms to get ready for the rule.
- SIFI Designations: Ross cautioned that additional capital standards for asset managers could have a significant impact on Americans saving for retirement and asked if the FSOC takes this into account in its deliberations. Lew said the FSOC employs a careful analysis, and that it has come to realize that there are more concerns with the specific practices of asset managers rather than with the firms themselves.
- Dodd-Frank Fixes: Rep. Randy Hultgren (R-Ill.) pointed out that President Obama has said he would veto any bills undoing rules for Wall Street. He said this White House opposition to even modest changes suggests that nothing Congress passes will be signed by the president, even though former Rep. Barney Frank himself has said the Dodd-Frank Act has flaws. Hultgren urged that Dodd-Frank should not be treated “as the Ten Commandments.”
Speakers
- Jacob Lew, Secretary, Department of the Treasury
Opening Statements
In his opening statement, Chairman Jeb Hensarling (R-Texas) said the national debt is one of the greatest threats to economic stability in the U.S., and expressed disappointment that Secretary Jacob Lew’s written testimony fails to address the problem. He was very critical of increases to the national debt under President Obama, but commented that “in fairness,” many European countries have also seen dramatic increases. Hensarling added that indebted countries turn to the International Monetary Fund (IMF), which depends on U.S. taxpayers, for assistance, and stated that this creates “too big to fail” on a global scale.
Hensarling was also very critical of the Financial Stability Board (FSB) and the Financial Stability Oversight Council (FSOC), saying the organizations “wield immense power and operate without transparency or accountability.” He called the FSB “a secretive coalition of global bureaucrats” that use the FSOC as a “conduit” to export its ideals to the U.S. Hensarling opined that the U.S. does not need a “one-world view of risk imported from Europe.” He said the FSOC rubberstamps decisions from the FSB is a relationship that “doesn’t seem like coordination, but capitulation.”
In her opening statement, Ranking Member Maxine Waters (D-Calif.) stressed the need for Congress to ratify the IMF’s quota reforms. She warned that the U.S. risks losing influence as other countries become frustrated and doubt American ability to lead on global economic issues.
Rep. Bill Huizenga (R-Mich.) noted that European Commissioner for Financial Services Jonathan Hill has called for a shift of focus from the regulatory environment to a pro-growth agenda and supported the same shift in the U.S. He also questioned why American taxpayers’ money should be used by the IMF in bailouts of other countries.
Rep. Gwen Moore (D-Wis.) noted the Treasury’s aggressive stance to deter tax fraud and money laundering, but called on Lew to “double down and be more surgical” so as not to complicate legitimate remittances.
Testimony
In his testimony, Jacob Lew, Secretary of the Department of the Treasury, said international institutions such as the IMF, World Bank and regional development banks are critical to economic growth and promoting U.S. interests. He called on Congress to pass the IMF quota reforms in order to solidify the U.S. position as a global leader. He warned that other countries are questioning American commitment to the multilateral institutions it helped to create, and are responding by exploring the creation of new and parallel institutions.
Question and Answer
Hensarling pointed out that Lew has said in the past that the FSB acts by consensus, and asked whether this meant that the Treasury Department consented to FSB standards such as the total loss-absorbing capacity (TLAC) proposal. Lew answered that the U.S. has played a leadership role in having TLAC enacted.
Hensarling understood this to mean that the Treasury Department consented, and then asked if Treasury also consented to FSB exemptions from the proposal for large Chinese banks. Lew repeated that the FSB acts by consensus, but said he was not familiar with the specifics of the exemptions for Chinese banks.
Next, Hensarling stated that Lew previously testified that the FSB does not make any rules for national governments, and that each nation has the power to make its own decisions. However, he asked why the FSB would feel the need to issue exemptions if its proposals are just “preliminary suggestions.” Lew said the FSB works towards highs standards, and that the U.S. helped to drive forward the TLAC proposal.
Raising a memo in which FSB Chairman Mark Carney declared that he expected full, consistent and prompt implementation of FSB proposals, and that the FSB would exercise “enhanced monitoring” of the implementation, Hensarling asked if the Treasury Department consented to the memo. Lew said he would have to see the specific memo, but that the Treasury Department does want the largest financial institutions to have deep reserves to protect taxpayers.
Rep. James Himes (D-Conn.) asked if FSB Chair Carney assumes that national authorities will “obey” when he tells FSB members he expects cooperation and implementation. Lew said it has always been clear that national regulators retain authority and control.
Access to Credit
Waters said the Dodd-Frank Act took key steps to address the issues of unregulated mortgage credit and predatory lending, but that credit is now too limited. She asked whether Congress should pass legislation to grant small financial institutions more exemptions from Consumer Financial Protection Bureau (CFPB) rules to promote access to credit. Lew agreed that credit has gotten too tight as part of a larger trend in the financial services industry of greater conservatism than was intended by reform. He added that it is important to maintain the regulatory structure while ensuring access to credit.
Capital Standards for Insurers
Huizenga asked how Treasury justifies the fact that international discussions on capital standards for insurers have undercut state regulators, and what can be done to encourage transparency. Lew said there has been “lots of give and take” between state regulators and national voices, and that the FSB is taking comment, but Huizenga countered that just taking comment is very different from giving the state regulators a seat at the table.
Rep. Blaine Luetkemeyer (R-Mo.) said he was thankful to hear Lew say that insurers should have unique capital standards, and asked if this means the FSOC intends to regulate insurers according to the standards in place today. Lew said the FSOC would only regulated firms it has designated, and that international standards would only apply to firms subjected to Fed oversight.
Transatlantic Trade and Investment Partnership
Huizenga asked why the Treasury Department has refuses to engage on the regulatory side of financial services in negotiations towards the Transatlantic Trade and Investment Partnership (TTIP). Lew said the Treasury Department has been very clear with its European counterparts that market access negotiations are appropriate, but that prudential standards should not be subject to trade negotiations. He said there are many international conversations already to promote high standards, and that such standards should not be permitted to be challenged under a trade pact.
IMF Quota Reform
Rep. Stephen Lynch (D-Mass.) asked if the IMF quota reform would have any effect of the voting weight or influence of the U.S. Lew responded that the reform preserves the U.S. position and provides for some reallocation between Europe and emerging economies. He repeated that it is important to approve the reform because impatience around the world is becoming “extremely high” with the U.S. being the only country standing in the way of completion.
Rep. Patrick McHenry (R-N.C.) asked if the FSOC has undertaken any study on the cumulative costs of FSOC and Federal Reserve regulations. Lew replied that he is not sure there has been any study, but that he is confident regulators are attentive to the cumulative impacts of regulations as they take additional steps. He added that there has been a clear goal of internalizing risks within firms, and that having higher capital is just part of the solution.
McHenry said the FSOC is creating more problems by diminishing liquidity, and asked if this is a concern. Lew said the FSOC is concerned about maintaining liquid markets in the U.S.
Rep. Stephen Fincher (R-Tenn.) said the U.S. is going “well beyond” international standards for capital and liquidity rules. He said the effects of uncoordinated mandates on financial markets are seen in the real economy. He noted several reports of diminished liquidity as a result of regulations, and questioned when it would be “time to get worried.” He asked if there is any data-driven reexamination of the combined effects of regulations being undertaken by U.S. regulators.
Lew said liquidity has been one of the great strengths of U.S. markets, so it is an important concern. He rejected analyses that the October 15th volatility and liquidity episode was data-driven and warned against jumping to the conclusion that it was the result of regulation. He defended regulation as having made the financial system safer and more resilient.
Fincher countered that the liquidity problem has been made worse and that regulations are “drying up the market and not allowing banks to loan money to people.”
McHenry asked if it is still too soon to review the Volcker Rule. Lew answered that it is not yet in effect so it is premature to try to assess its full impact. He commented that he does believe there has been some movement by firms to get ready for the rule.
McHenry asked if the significant volatility in some government bonds and diminished liquidity on October 15th of last year may have been related to the Volcker Rule. Lew said he is “reluctant to attribute causality to any one thing” because the evolution of the market is driven by many factors.
Rep. Randy Hultgren (R-Ill.) asked Lew if he would support exempting banks below certain asset thresholds from the Volcker Rule. Lew replied that only banks engaged in proprietary trading are affected by the rule, and that the goal is to make all financial institutions safer.
Currency Manipulation
Rep. Brad Sherman (D-Calif.) lamented that every time he asks why the U.S. is not sanctioning China for currency manipulation, he is told that China is making progress and “cheating less.” He commented that the law is clear, and that if China is still manipulating its currency then it must be designated. He asked Lew why he has not carried out the law. Lew answered that the Treasury Department is engaged directly with China and has made “enormous progress.”
Rep. Daniel Kildee (D-Mich.) said currency manipulation is the central issue when it considering the ability of American companies to compete, particularly in the auto sector. He urged that getting the Trans-Pacific Partnership deal done should not come at the expense of addressing such a central problem. Lew agreed that countries engaging in currency manipulation must be pushed back, but stated that the proper forum for such discussions are on a bilateral basis and through the G-20 rather than in trade agreements. He cautioned that some monetary policies such as quantitative easing might be interpreted by some states as a form of currency manipulation.
AML and Too Big to Jail
Sherman noted that some foreign banks have “conspired” with Americans to cheat on U.S. taxes, and asked if anyone is going to jail, or whether the Treasury has put together a criminal case against anyone. Lew said the Treasury has “been clear that no one is above the law,” to which Sherman responded, “But no one is in jail.”
Rep. Gregory Meeks (D-N.Y.) asked what should be made of the number of banks that have faced heavy fines recently as part of the Treasury Department’s anti-money laundering (AML) programs. Lew said AML rules are very important and that the Treasury has worked hard to communicate with institutions and counterparts abroad to ensure there are systems in place to stop illicit activity while allowing legitimate transactions to continue.
Meeks asked if banks must “know their customer’s customer.” Lew replied that banks are responsible for where money is coming from and where it is going, and that they understand what suspicious transactions are.
Rep. Randy Neugebauer (R-Texas) commented that the Dodd-Frank Act designated that financial institutions with over $50 billion in assets would be considered systemically important, but that there is bipartisan support for raising this threshold, which he said was set arbitrarily and without analysis. He stated that Section 115 of Dodd-Frank enables the FSOC to review the $50 billion threshold and recommend that it be raised, and asked whether such a review has been completed. Lew said the FSOC has been attentive to the differences between small, medium, and large-size institutions. He said he is not aware of a formal review, but that regulators have flexibility in terms of the standards they apply to firms of different sizes.
Neugebauer said he is surprised that there has been no review of the threshold given bipartisan support. Lew said his focus as chair of the FSOC has been the implementation of all the provisions of Dodd-Frank, but that he has encouraged regulators along the way to take note of the differences between institutions of different sizes.
Asked by Neugebauer if he agrees that the review needs to take place and that the current threshold is not the right number, Lew said moving the limit is not the only solution, and that institutions of differing sizes should be looked at “appropriately.”
Rep. Carolyn Maloney (D-N.Y.) noted that she sent a letter to the FSOC urging reforms to the designation process, and that her suggestions were adopted last month. She commented that this would suggest that the FSOC has been accountable to Congress and can engage constructively. She asked for a description of the process that led to the FSOC’s reforms, and whether the reforms strike the right balance between providing companies with a fair process and preserving the FSOC’s ability to identify and mitigate risk.
Lew responded that Maloney’s suggestions were one of a number of sources on input from an open process of consultation. He said the changes demonstrate that the FSOC wants to have a process in which parties know where they stand and in which the flow of information is as efficient as possible. He added that there was a great deal of communication before the rule change, but that the changes provide good clarification moving forward.
Hultgren asked if the Administration would support modifying the $50 billion threshold for systemic designation. Lew said there is substantial regulator flexibility and that he does not believe legislative fixes are needed.
Rep. Dennis Ross (R-Fla.) expressed concern that the FSOC reforms did not go far enough, and that a nonbank financial institution still does not have any guidance to be made aware that they might be designated or how to avoid designation. He asked if the priority should be to address systemic risks rather than just putting more firms under Fed oversight. Lew said the FSOC now has a more refined approach and that it has tried to expand transparency to increase communication.
Ross cautioned that additional capitals standards for asset managers could have a significant impact on Americans saving for retirement and asked if the FSOC takes this into account in its deliberations. Lew said the FSOC employs a careful analysis and that it has come to realize that there are more concerns with the specific practices of asset managers rather than with the firms themselves.
GSEs
Rep. Michael Capuano (D-Mass.) noted that Fannie Mae and Freddie Mac received $187 billion in taxpayer-funded bailout money, but have now repaid over $220 billion. He asked what has been done with the difference. Lew answered that it has become part of the general fund.
Capuano asked how long the Treasury Department would “hold Fannie and Freddie hostage” by not allowing them to recapitalize or pay off their debt. He called for the Treasury to “stop using this as a piggy bank.” Lew said this depends on when Congress will move forward with housing finance reform. He said the Administration has worked closely in the development of proposals, particularly in the Senate.
China
Rep. Ed Royce (R-Calif.) asked about developments in China, noting that U.S. firms continue to compete on an unlevel playing field with serious limits on ownership and significant regulatory pressures such as recently introduced bank technology rules. He also asked about the Bilateral Investment Treaty (BIT) negotiations with China, specifically on progress on arbitration that would give American companies a “real chance” to resolve differences outside of the court system in China.
Lew said the bank technology requirements are “very problematic” and that he has written to Chinese leadership expressing his concerns. On arbitration, Lew said this is a concept that the U.S. needs to “strenuously push” because deciding issues in Chinese courts is “not a fair way to do it.”
Rep. Al Green (D-Texas) asked Lew for an assessment of the Dodd-Frank Act and whether it would have made a difference during the financial crisis. Lew answered that the Dodd-Frank Act has significantly improved the safety of the financial system, and specifically mentioned the Federal Deposit Insurance Corporation’s orderly liquidation authority and fund as tools that would help avoid taxpayer bailouts. He added that there is still work to do and that reform is “never finished” because the financial system is “always moving.”
Green asked how important living wills are, and Lew called them very important because they give systemically important firms a plan to address serious problems on their own. He said it should not be surprising that it is taking a long time to complete credible living wills.
Asked by Green whether he is amenable to working with Congress to make improvements to the Dodd-Frank Act, Lew said he is always open to working to improve the soundness of the financial system, but that he will not be open to questioning whether the basic approach of regulation should be reconsidered.
Hultgren pointed out that President Obama has said he would veto any bills undoing rules for Wall Street. He said this White House opposition to even modest changes suggests that nothing Congress passes will be signed by the president, even though former Rep. Barney Frank himself has said the Dodd-Frank Act has flaws. Hultgren urged that Dodd-Frank should not be treated “as the Ten Commandments.”
Community Banks
Rep. Frank Lucas (R-Okla.) pointed out that there has been an accelerating decline in community banks’ market share since the crisis, and asked if it is either time for regulators to use the flexibility permitted by Dodd-Frank or if Congress should respond to provide regulatory relief. Lew said there has been a great deal of attention paid to treating community banks differently, and that the trend of consolidation among community banks predates the passage of the legislation.
Rep. Steve Stivers (R-Ohio) asked how much time the FSOC spends in its meetings discussing the plight of community banks, and whether it is on the agenda. Lew said community banks are discussed every time housing finance and rules are considered. Stivers insisted that community banks merit a standalone agenda item at every meeting.
DOL Fiduciary
Stivers asked if the Treasury has coordinated with the Department of Labor (DOL) on its proposed fiduciary standard. Lew commented that there has been some inter-agency discussion on policy, but that it is a DOL rulemaking.
Cybersecurity
Rep. Joyce Beatty (D-Ohio) asked what the Treasury is doing with the IMF and its foreign counterparts in the area of cybersecurity. Lew said the U.S. has much to do on its own before getting to the international question, and that the Treasury has been working with the financial services sector to make sure best practices are put in place. He added that there is a real need to collect and share information, and that there is legislation pending that would be very beneficial.
Debt Ceiling
Rep. Mick Mulvaney (R-S.C.) asked Lew to assure financial markets that interest on U.S. sovereign debt would be paid despite hitting the debt ceiling. Lew said that if Congress does not extend the debt limit, the Treasury would not have the ability to meet all U.S. debt obligations for the first time in American history. He said the Treasury could technically make some payments, but that the consequences of making some payments but not others could not be known.
Mulvaney asked if Lew has checked whether the Treasury has the technical ability to pay interest on sovereign debt. Lew said it does not have the technical ability to go through all U.S. obligations and choose which to pay. He stated that his job “is to pay all the bills,” and that he cannot protect the full faith and credit of the federal government while having to choose what obligations to pay.
Investor-State Dispute Settlement
Himes asked if Congress should be concerned that investor-state dispute settlement (ISDS) might open an extrajudicial path to changing the U.S. financial regulatory structure. Lew commented that the U.S. has never lost an ISDS case because it has an evenhanded system of law that is durable to challenges. He said the subjection of foreign banks to the Dodd-Frank Act is well-based in law. He added that ISDS would be beneficial for companies’ and investors’ abilities to defend their interests abroad.
For more information on this hearing, please click here.