The House Financial Services Committee on Tuesday, April 9, 2019, held a hearing on "The State of the International Financial System," for which the only witness was Treasury Secretary Steven Mnuchin. Testimony and other materials from the hearing are posted here.

In her statement, Chairman Maxine Waters (D-CA) said she was concerned that the International Development Association (IDA), an arm of the World Bank, is transferring $2.5 billion through its new Private Sector Window to the International Finance Corporation "and is subsidizing private firms selected without competition on the basis of unsolicited proposals. The PSW is likely to prioritize financial returns over positive development impacts, which will be difficult to monitor." Waters also expressed concern that Treasury had let Russian oligarch Oleg Deripaska "off the hook" from sanctions targeting bad actors, and that Treasury's delisting agreement "sends exactly the wrong message to Deripaska, other Russian oligarchs, and [Vladimir] Putin himself because Deripaska will still wield a great deal of influence over his previously sanctioned companies … . Moreover, Congress mandated several sanctions to be placed on Russia that Treasury has still not implemented."

Secretary Mnuchin's prepared testimony is available here.

Questions

Russia sanctions. In her questions, Chairman Waters said Treasury's actions on Russia sanctions had benefited a former business associate of Mnuchin's, Leonard Blavatnik. Waters asked if Mnuchin had sold his shares in RatPac-Dune Entertainment to any "Russian oligarchs." Mnuchin said Blavatnik is not Russian and that he had never met any Russian oligarchs, but he declined to reveal the "third party" to whom he had sold his shares.

'Hard Brexit.' In an exchange with Ranking Member Patrick McHenry (R-NC), who said he was concerned that the US may not be prepared for the consequences if Britain exits the European Union without any sort of agreement, Mnuchin said, "I have been working very closely with the Financial Stability Oversight Council [FSOC] and the appropriate regulators to make sure that our financial institutions are prepared for a hard Brexit. We need to be prepared for a hard Brexit as a very realistic outcome." Mnuchin said he has coordinated with the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC to ensure the US financial system is prepared if the UK leaves the EU without a deal, which could have a cascading effect on US firms that have swaps deals with overseas counterparties. "I think US financial institutions are prepared, but I think there could be significant disruptions in the markets and in trade as a result of a hard Brexit," Mnuchin said.

Later in the hearing, Blaine Luetkemeyer (R-MO) noted that a front-page chart in the Wall Street Journal two weeks ago showed European banks at 70% of their book value and US banks at roughly 10% above their book value, "which tells me that banks are in good shape … and that European banks are in trouble." With Brexit coming up, Luetkemeyer asked if Mnuchin saw this as a concern. Mnuchin said, "There's no question that US banks are much better capitalized than European banks. There's no question that the US economy is much stronger that what's going on in Europe."

Shell companies. In her questions, Carolyn Maloney (D-NY) cited a bill she has sponsored that would require companies to identify their beneficial owners to curb money laundering by shell companies. The House was unable to pass an anti-money laundering bill in the last Congress after the GOP majority removed a provision on beneficial ownership. Maloney said that committee members have been working on a bipartisan basis to reach an agreement on this issue, "and I think we are very close to an agreement." Mnuchin told her he thinks Congress is "generally" headed in the right direction here and that "I hope not to be back again next time without this solved."

Debt ceiling. In an exchange with Nydia Velazquez (D-NY), Mnuchin said President Trump is not interested in holding an increase of the debt ceiling "hostage" to force Congress to pass funding for a wall on the southern border or for any other reason. He urged Congress to pass a debt ceiling quickly. (The previous debt limit suspension expired in March; the "extraordinary measures" Treasury has used to continue borrowing under the limit are estimated to last until September or October. "The president has no interest to holding this hostage to any issue … The president would like to have this passed as soon as we can," Mnuchin said.

President's tax returns. When Chairman Waters and other Democrats asked if Treasury is planning to send Congress the President's tax returns by next week's deadline, Mnuchin said, "We will follow the law; we are reviewing it with our internal legal department … Our legal department has consulted with the White House … that is not taking direction from the White House, I don't see it as interference." Mnuchin said the department had never sought permission from the White House on the question of whether to release President Trump's tax returns: "We would not ever ask for the White House's permission on this, nor did they give us the permission." Rep. Maloney said the communications between Treasury and the White House over the request for Trump's returns was "deeply troubling."

Ex-Im Bank. In his questions, Bill Huizenga (R-MI) said a law passed by Congress last year regarding the Export-Import Bank included a requirement for the president to substantially reduce other countries' export subsidies, including Europe's support for Airbus. Mnuchin told him the president is "very interested" in getting a quorum at Ex-Im. On foreign subsidies, Mnuchin said conversations on that have taken place within the forums of the G-7, the G-20 and the OECD.

CECL standard, GSE reform. In his questions, Rep. Luetkemeyer said the Financial Accounting Standards Board's proposed CECL accounting standard would affect numerous aspects of the US economy. Luetkemeyer said he is concerned especially about the rule's effect on Fannie Mae and Freddie Mac, arguing that they would have to come up with $100 billion to meet a 2% capital reserve on $5 trillion in loans. "The only way to build that kind of [reserve] is to raise G-fees on loans, which would have a dramatic effect on the economy," he said. Mnuchin said, "This is something we are discussing very closely in the FSOC. On GSEs, I hope that's an area where we can work on a bipartisan basis for GSE reforms."

Capital rules for insurers. In his questions, Ted Budd (R-NC) noted that the International Association of Insurance Supervisors (IAIS) is holding an upcoming meeting in Abu Dhabi. He asked if Mnuchin would "force" the IAIS at that meeting to "formally recognize the US regulatory system for insurers and our aggregated capital approaches being developed by insurance commissioners in the 50 states and the Federal Reserve," and if they refused, would he ask the IAIS to delay adoption of the international capital standards to a later date? Budd said US insurers "need some regulatory certainty so they don't have to spend the next five years waiting to know if the US regulatory system will be sufficient for the IAIS." Mnuchin said he was hesitant to make a formal commitment, but he was willing to meet with Budd's office and that he was focused on the US regulatory system for insurers. Sean Duffy (R-WI) also focused on the IAIS rules in his questions.

Toward the end of the hearing, Secretary Mnuchin and Chairman Waters had a brief dispute about whether the hearing would be gaveled out in time for him to attend a meeting in his office with "a foreign dignitary" from Bahrain. Mnuchin said he had already stayed for longer than previous Treasury Secretaries usually had for such hearings. "If this is the way you want to treat me, then I'll rethink whether I'll voluntarily come back here to testify, which I've offered to do," he said. Waters said that the committee would release him if necessary but compel him to return for two additional sessions in May. In the end, Mnuchin agreed to stay for two more questioners and was released at 5:30 pm.

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