GOP members tout tax bill's benefits; Mnuchin takes questions on SIFI designations, Volcker Rule, GSE reform, cybersecurity, Equifax hack, Russia sanctions, other issues

On February 6, 2018, the House Financial Services Committee held a hearing to receive the annual report of the Financial Stability Oversight Council (FSOC). The only witness was Treasury Secretary Steven Mnuchin. Testimony from the hearing is available here.

In his statement, Chairman Jeb Hensarling (R-TX) praised President Trump for signing the recent tax reform bill, telling Mnuchin "how grateful we are to you and to the president for your leadership and for helping make this act signed into law. It is truly, truly historic." Hensarling cited recent announcements of investments, employee bonuses, wage increases and 401(k) expansions by JPMorgan, Comerica, Nationwide, Visa and BB&T related to the tax bill. He said that it was "ironic, but totally predictable, that equities markets would now swoon over the prospects of higher interest rates and possible inflation associated with a breakout of economic growth. Artificially low interest rates may have benefited some on Wall Street, but they haven't been particularly helpful to Main Street." Hensarling said that despite the effects of tax cuts, "for the last eight years, our economy has been drowning in a sea of complex, onerous, expensive and job-crushing Washington red tape." Hensarling said the FSOC has "proved it can … harm our economy through its designation of SIFIs," mentioning the Council's previous designation of GE Capital as a systemically important firm, which led to the company's being "eviscerated," and the FSOC's "dangerous, unlawful" designation of MetLife, which was overturned by a court ruling.

In her statement, Ranking Member Maxine Waters (D-CA) said she is "very concerned that the Trump Administration seems to be determined to remove all non-bank systemically important financial institutions from FSOC supervision, regardless of what threats those institutions may pose to our economy." Waters also said Mnuchin's "handling of inquiries from committee Democrats has been completely unacceptable," referring to what she described as the Secretary's failure to respond adequately to questions about the finances of President Trump and his family and associates, "and their involvement with Russian government officials and oligarchs … The Secretary seems to think that referring us to other committees is a satisfactory answer to our questions. It is not." Waters said she is also "very concerned about the Trump Administration's inaction on the sanctions passed with broad bipartisan support by Congress in 2017, to punish Russia for interfering in our democracy."

In his prepared statement, Treasury Secretary Mnuchin repeated most of the statement he had made at last week's similar hearing on the FSOC annual report before the Senate Banking Committee, with its emphasis on addressing cybersecurity risks. Mnuchin urged Congress to pass legislation raising the debt limit "as soon as possible," noting that he had notified Congress in a letter last week that he was extending the debt issuance suspension period (DISP) until February 25. He said he supports efforts to develop a new system for housing finance, as well as bicameral efforts to modernize the Committee on Foreign Investment in the United States (CFIUS) through S. 2098 and HR 4311.

Questions

In what appeared to be a planned effort during the hearing, most Republican members of the committee began their questions by sharing anecdotal stories from their districts about constituents who had experienced financial benefits from the recently enacted tax reform law.

GSE reform. In his questions, Chairman Hensarling led Mnuchin through a series of questions about what might happen if Congress fails to agree on a housing finance reform bill and the president appoints a new director of Fannie Mae and Freddie Mac's regulator, the Federal Housing Finance Agency, next year when current Director Mel Watt's term is up. Mnuchin agreed with Hensarling that a new FHFA director would have "broad, sweeping powers" and could 1) discontinue the GSEs' Home Affordable Refinance Program [HARP]?, 2) suspend all GSE contributions to the Housing Trust Fund; and 3) "choose not to enforce the statutory housing goals of the GSEs, if he finds that 'the achievement of the housing goal was or is not feasible.' " Hensarling said he hoped "all within earshot have listened carefully to what might happen if we choose not to engage in GSE reform."

SIFI designations. Mnuchin told Hensarling that FSOC plans to re-evaluate the last remaining SIFI designation, that of Prudential Financial, "in the near future, this year," and the Council will be working with the Financial Services Committee on "revised guidelines for designations" of large non-bank financial firms. Later in the hearing, Blaine Luetkemeyer (R-OH) asked if the FSOC has considered using the Federal Reserve's approach of applying a "systemically important risk indicator score" to institutions, noting that this is a feature of a bill he has sponsored (HR 3312) that would overhaul the Council's SIFI designation process. Mnuchin said he wasn't familiar with that approach, "but we will look into that. And I think that's something that we should consider."

Ann Wagner (R-MO) also focused on SIFI designations, asking Mnuchin what steps Treasury plans to take to "to make the designation process more transparent and ensure the FSOC is held accountable to Congress." Mnuchin said now that Treasury has issued a report making recommendations on how to change the designation process, "We'll now be working with the [Financial Services] Committee on suggestions in terms of changing the criteria [for designation] … We'll have to put out a notice of rulemaking before we enforce it. But this is something we're very focused on for this year.

Volcker Rule. In his questions, Bill Huizenga (R-MI)said the Volcker Rule, a part of the Dodd-Frank Act that bans banks from engaging in proprietary trading for their own accounts or owning private funds, has "had a chilling effect on the liquidity in the markets and U.S. financial institutions." Mnuchin agreed and said Treasury is "working with the regulators to try to have better definition around the law and the rule so that people can interpret it." But he said he did not agree with Huizenga it would "make sense" for one regulator to take the lead in interpreting that guidance. Huizenga cited an example of a Michigan energy company that owns an industrial loan company (ILC) in Utah, which led to its being considered a banking entity. Mnuchin agreed that it would not pose a systemic risk if the Volcker Rule were changed such that it no longer applied to non-financial parents of ILCs.

Later, Chairman Hensarling moved to clarify what he believed was a miscommunication between Huizenga and Mnuchin on the "lead regulator" question. Hensarling asked, "Would you advocate that a single regulator take the lead on rule-writing and interpretation of Volcker, as long as the other regulators continued to have a role in the examination process?" Mnuchin said, "Yes, thank you, Mr. Chairman, for clarifying that. So I would support there being a lead agency — some people have suggested that be the Fed — and then have the other agencies play a supporting role so that there could be better coordination and better leadership on it."

French Hill (R-AR) later noted that he has sponsored a bill (HR 4790) that would "improve regulatory harmonization and coordination … and relieve banks under $10 billion from the complexity of the Volcker Rule." He asked if Mnuchin would personally support and advocate for the bill. Mnuchin said, "Absolutely." Hill said, "When you have Federal Reserve Bank presidents in the country saying they can't even administer the rule to tell a bank if they're in compliance with it or not, we got a problem. So I appreciate your leadership, but it's an FSOC matter that we get that harmonization."

Cybersecurity. Blaine Luetkemeyer (R-MO) noted that the FSOC annual report recommended creating a private-sector council of executives to study cybersecurity risks, and asked for some details on what the FSOC was working on in that area. Mnuchin said the Council's top priorities here are protecting financial infrastructure; "making sure the various different regulators are working together, that they're pooling their resources to focus on this issue"; developing the proper public-private partnerships to be able to exchange information and best practices; and conducting "tabletop exercises in case there is an event." When Luetkemeyer said there was a "patchwork of rules and laws" in the U.S. on cybersecurity and when to notify consumers of data breaches, and noted that federal agencies have also been hit by large-scale cyberattacks, Mnuchin said he agreed about "the need for streamlining … I am participating, along with [the Department of Homeland Security] and other groups, at the National Security Council on cyber to make sure that we are coordinated across government, because … we are not immune from these issues ourselves, and making sure that what we learn from attacks against us, we are also using to protect private industry."

Equifax hack. In his questions, David Scott (D-GA) noted press reports that CFPB Acting Director Mick Mulvaney has "pulled back any investigations into Equifax, the largest, most significant cybersecurity attack in this nation's history — 145 million American families having their birthdays, their Social Security number, all of that vital information out in the open." Mnuchin told him, "I'm only familiar with what I also read in the press. I haven't spoken to Director Mulvaney about it, but I will … it is something I am to discuss with him, and we will take up at FSOC."

Stress tests for asset managers. In his questions, Bruce Poliquin (R-ME) noted that last year's report from Treasury on risks posed by asset managers had recommended "completely eliminating stress testing for non-bank financial institutions, like mutual funds and insurance companies." Poliquin said a bill he sponsored in this area, HR 4566, had passed the committee with bipartisan support. Mnuchin said, "I do agree with — as we put it in the Treasury report, yes."

$50 billion asset threshold for banks. In his questions, Tom Emmer (R-MN) said that it is "insane" for Dodd-Frank to have established a threshold for asset size, "whether it's $50 billion or $250 billion," above which banks come under enhanced supervision. He asked Mnuchin to discuss how "failing to tailor these evaluations to the institution" has affected banks' ability to do business. "Just to start with," Mnuchin told him, "on size, a $50 billion bank and a $1 trillion bank have very different risks. But you could have two banks that are the same size, and one could be a 'plain vanilla' bank that does community lending, and the other one could be a complex bank with lots of derivatives." Emmer asked if Mnuchin would support codifying into legislation how regulators evaluate banks risks, "as opposed to an arbitrary threshold." Mnuchin said he would, "and I look forward to working with you on it."

Orderly liquidation authority. In his questions, Dave Trott (R-MI) criticized Dodd-Frank's creation of orderly liquidation authority (or OLA, in Title II) for winding down a large, failing bank, saying it would be more appropriate to devote a new subchapter of the bankruptcy code to dealing with insolvent financial institutions instead of "political appointed bureaucrats sitting in secret in a private room." In his answer, Mnuchin noted that "one of the executive orders that the president signed was for us to review [OLA]. And we expect we will be coming out, within the next month, with our report and our recommendation. So, once we do that, I look forward to talking to you about it."

Russia sanctions. In her questions, Ranking Member Waters led Mnuchin through a 10-minute series of questions about why the president had not implemented new sanctions on Russia despite being given the authority to do so under a law passed by Congress last year; which departments of the government are developing different sanctions; and why CIA Director Mike Pompeo recently met with senior officials of Russian intelligence services.

IPOs. In his questions, Bill Huizenga (R-MI) asked Mnuchin to list "the three top impediments" that are chilling the market for initial public stock offerings (IPOs) in the U.S. Mnuchin said a report issued by Treasury last year featured "an extensive review of different things that we think can make it easier for companies to access the public markets, particularly smaller companies, with proper regulation."

If you have questions, or need additional information, please feel free to contact Will Heyniger or Bob Schellhas at Washington Council Ernst & Young at (202) 293-7474.

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