[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]





 
                PROMOTING FINANCIAL STABILITY? REVIEWING

                   THE ADMINISTRATION'S DEREGULATORY

                    APPROACH TO FINANCIAL STABILITY

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 5, 2019

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 116-71
                           
                           
 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                          
 
 
 
                           ______                      
 
 
              U.S. GOVERNMENT PUBLISHING OFFICE 
 42-631PDF            WASHINGTON : 2020 
 
 
                           

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 MAXINE WATERS, California, Chairwoman

CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
BRAD SHERMAN, California             ANN WAGNER, Missouri
GREGORY W. MEEKS, New York           PETER T. KING, New York
WM. LACY CLAY, Missouri              FRANK D. LUCAS, Oklahoma
DAVID SCOTT, Georgia                 BILL POSEY, Florida
AL GREEN, Texas                      BLAINE LUETKEMEYER, Missouri
EMANUEL CLEAVER, Missouri            BILL HUIZENGA, Michigan
ED PERLMUTTER, Colorado              STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut            ANDY BARR, Kentucky
BILL FOSTER, Illinois                SCOTT TIPTON, Colorado
JOYCE BEATTY, Ohio                   ROGER WILLIAMS, Texas
DENNY HECK, Washington               FRENCH HILL, Arkansas
JUAN VARGAS, California              TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey          LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas              BARRY LOUDERMILK, Georgia
AL LAWSON, Florida                   ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam            WARREN DAVIDSON, Ohio
RASHIDA TLAIB, Michigan              TED BUDD, North Carolina
KATIE PORTER, California             DAVID KUSTOFF, Tennessee
CINDY AXNE, Iowa                     TREY HOLLINGSWORTH, Indiana
SEAN CASTEN, Illinois                ANTHONY GONZALEZ, Ohio
AYANNA PRESSLEY, Massachusetts       JOHN ROSE, Tennessee
BEN McADAMS, Utah                    BRYAN STEIL, Wisconsin
ALEXANDRIA OCASIO-CORTEZ, New York   LANCE GOODEN, Texas
JENNIFER WEXTON, Virginia            DENVER RIGGLEMAN, Virginia
STEPHEN F. LYNCH, Massachusetts      WILLIAM TIMMONS, South Carolina
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota

                   Charla Ouertatani, Staff Director
                   
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    December 5, 2019.............................................     1
Appendix:
    December 5, 2019.............................................    55

                               WITNESSES
                       Thursday, December 5, 2019

Mnuchin, Hon. Steven T., Secretary, U.S. Department of the 
  Treasury, and Chairperson, Financial Stability Oversight 
  CounciL (FSOC).................................................     4

                                APPENDIX

Prepared statements:
    Mnuchin, Hon. Steven T.......................................    56

              Additional Material Submitted for the Record

Waters, Hon. Maxine:
    Written statement of Public Citizen..........................    58


                     PROMOTING FINANCIAL STABILITY?

                     REVIEWING THE ADMINISTRATION'S

                        DEREGULATORY APPROACH TO

                          FINANCIAL STABILITY

                              ----------                              


                       Thursday, December 5, 2019

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Maxine Waters 
[chairwoman of the committee] presiding.
    Members present: Representatives Waters, Maloney, Sherman, 
Meeks, Scott, Green, Cleaver, Perlmutter, Himes, Foster, 
Beatty, Heck, Vargas, Gottheimer, Lawson, Tlaib, Porter, Axne, 
Casten, McAdams, Ocasio-Cortez, Wexton, Lynch, Adams, Dean, 
Garcia of Illinois, Garcia of Texas, Phillips; McHenry, Wagner, 
Lucas, Posey, Luetkemeyer, Huizenga, Stivers, Barr, Tipton, 
Williams, Hill, Emmer, Zeldin, Loudermilk, Davidson, Kustoff, 
Hollingsworth, Gonzalez of Ohio, Rose, Steil, Gooden, 
Riggleman, and Timmons.
    Chairwoman Waters. The Committee on Financial Services will 
come to order.
    Without objection, the Chair is authorized to declare a 
recess of the committee at any time.
    Today's hearing is entitled, ``Promoting Financial 
Stability? Reviewing the Administration's Deregulatory Approach 
to Financial Stability.'' I want to inform all concerned that 
this hearing will end at 1 p.m., per the request of Secretary 
Mnuchin.
    I now recognize myself for 4 minutes to give an opening 
statement.
    Today, I welcome back Secretary Mnuchin. We are here to 
discuss the Trump Administration's actions that have undermined 
and not promoted our nation's financial stability. As I have 
said many times before, I am very concerned about this 
Administration's actions to eliminate important protections for 
consumers, investors, and our economy. It appears that our 
banking regulators are following the deregulatory blueprint 
that the Treasury Department, under Secretary Mnuchin's 
leadership, has mapped out point by point, and are rolling back 
many of the critical reforms Democrats made to prevent another 
financial crisis. If these rollbacks continue, there will be 
grave consequences for financial stability and our economy.
    The 2008 financial crisis was devastating for our nation: 
11 million Americans lost their homes; $13 trillion in wealth 
was lost; and nearly 9 million Americans lost their jobs. As 
chairwoman of this committee, I am committed to doing 
everything that I can to ensure that we do not repeat the 
mistakes of the past, as I have now seen twice how the road of 
deregulation leads to financial crisis.
    The focus of this hearing is the Financial Stability 
Oversight Council, or FSOC. We created FSOC as part of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act to 
eliminate regulatory gaps and to ensure the government could 
identify and mitigate risk to our economy. After the financial 
crisis, FSOC designated several large non-bank financial 
companies for enhanced oversight, including AIG, the well-known 
poster child for the financial crisis. Under the Trump 
Administration, however, FSOC ceased supervision of all of 
these non-banks, and advanced an activities-based approach that 
amounts to more deregulation, willfully ignoring how 
catastrophic the failure of a large financial institution would 
be for the financial system and the economy.
    The Trump Administration also cut FSOC's budget and reduced 
its staff by half. It has also reduced the budget and staff of 
the Office of Financial Research (OFR), which collects data and 
conducts research and analysis to aid FSOC in its important 
work. Along the way, the Trump Administration has fleeced the 
American taxpayers with their tax scam, which contained more 
big giveaways to the nation's largest banks. All of these steps 
put Wall Street's bottom line first and Main Street back at 
risk. And make no mistake, the risks are growing. Climate 
change, cybersecurity, leverage lending, hedge funds, and the 
rapid emergence of big tech in the financial system, led by 
Facebook, are all concerns that must be taken seriously. Today, 
Secretary Mnuchin will also once again be asked to explain the 
harmful actions of the Trump Administration to the American 
public.
    With that, I now recognize the ranking member of the 
committee, the gentleman from North Carolina, Mr. McHenry, for 
4 minutes for an opening statement.
    Mr. McHenry. Thank you, Madam Chairwoman. And, Secretary 
Mnuchin, thank you for being here in your capacity as Chair of 
the Financial Stability Oversight Council, and I appreciate the 
work you are doing in leading the Financial Stability Oversight 
Council. I do also think that the timing of this hearing would 
have been more favorable if Members had been given more time to 
read your report that was released yesterday, but that is a 
timing issue here that we have to contend with. My colleagues 
on both sides of the aisle haven't had ample time to review the 
important work that the Council has done in this report.
    So I think instead of just the political debate about 
regulatory changes that the Administration has done, I think 
this oversight of the Financial Stability Oversight Council is 
really important. The issue of stability, financial stability, 
and security is really important. Yesterday, prudential 
regulators testified before this committee on similar issues. 
During that hearing, I stated my concern with the transition 
from the reliance on the London Interbank Offered Rate (LIBOR) 
over to the Secured Overnight Financing Rate (SOFR). I think 
the issues that we have and concerns that we have there are 
about financial stability, and it is also magnified by recent 
Federal Reserve (Fed) actions in the repo market, that we could 
see more of at the end of the year. I also encouraged Vice 
Chairman Quarles to continue his review of the regulatory 
regime to ensure that safety and soundness and promoting 
economic growth are prioritized in their measures. And, I would 
like to hear your thoughts on the repo market as well. I think 
it is very important for us to hear from you on that.
    But back to this question about LIBOR to SOFR, LIBOR's 
underlying bank reference rate is for about $200 trillion in 
financial contracts worldwide, and it is set to be phased out 
as a bank reference rate by 2021 and replaced with SOFR. Given 
the recent volatility in the repo markets, I am concerned about 
the subsequent volatility on mortgages, auto loans, business 
loans, and other consumer loans as a new reference rate is 
derived from secured overnight financing. Additionally, 
transferring LIBOR-based legacy contracts to SOFR will 
undoubtedly require financial institutions to renegotiate with 
customers. This is also an issue of financial stability and 
economic growth.
    Finally, Secretary Mnuchin, I wrote to you last month 
regarding an issue that I believe is an alarming issue of 
potential consequence, and that is the financial transaction 
tax. This is not a honeypot of money that just comes from 
heaven. This will be a tax based off of buying or selling 
stocks, bonds, or other financial instruments that many are 
talking about as a new way to derive revenue for the Federal 
Government, and the rhetoric is that it will hit only the 
wealthiest. The reality is that average, everyday investors, 
especially mutual fund investors and those who are saving for 
retirement, will be severely impacted by this nefarious tax. 
And, in fact, one study indicates that a typical mutual fund 
investor will have to save an additional $600 per year or work 
an additional 2 years to achieve the same retirement goals. I 
would like to hear from the Financial Stability Oversight 
Council and from OFR on this matter. I think it is important 
that our government have an analysis of what this would do to 
our markets and our investors.
    I look forward to your testimony, and I thank you for being 
here before the committee.
    Chairwoman Waters. I now recognize the gentleman from New 
York, Mr. Meeks, who is also the Chair of our Subcommittee on 
Consumer Protection and Financial Institutions, for 1 minute.
    Mr. Meeks. Thank you, Chairwoman Waters. Mr. Secretary, 
welcome. I will repeat to you what I stated to Governor 
Brainard and OFR Director Falaschetti when they testified at a 
hearing I chaired in September on financial stability. I was 
serving on this committee at the depths of the financial 
crisis, and I never, ever want to be put in a position again 
where the Treasury Secretary comes to the Floor of the House 
and tells us that we literally have days to save the U.S. 
economy from total collapse. I never again want to engage with 
constituents who are losing their homes and their life savings 
through no fault of their own, but because regulators and the 
Administration had completely lost track of systemic risk in 
the economy.
    Mapping, quantifying, containing, and building contingency 
plans for systemic risk is not and should not be a partisan 
issue, and should not be a means for scoring political points. 
This matters to every American family who is saving for 
retirement, or to put a child through school, and I hope that 
we can do this in an intellectual, honest manner devoid of 
political partisan influence. I yield back.
    Chairwoman Waters. Thank you. I now recognize the 
subcommittee ranking member, Mr. Luetkemeyer from Missouri, for 
1 minute.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman, and welcome, 
Secretary Mnuchin. I really appreciate you being here to 
testify today. Just yesterday, we had the prudential regulators 
before this committee discussing a myriad of issues--from 
regulatory rightsizing, to the Community Reinvestment Act, to 
future pending regulations--that the financial services 
industry is facinright now, as you well know. As you are the 
head of FSOC, which serves as the body where regulators come 
together to discuss overall financial stability, I am looking 
forward to discussing how FSOC is addressing the different 
matters affecting our financial system today.
    Major areas of concern include Current Expected Credit 
Losses (CECL), cybersecurity, fintechs, the repo market, and 
LIBOR. All of these things will have a significant effect on 
both consumers and the economy and deserve the full attention 
of FSOC. I look forward to discussing these issues, and with 
that, I yield back the balance of my time.
    Chairwoman Waters. Thank you. At this time, I want to 
welcome to the committee our witness, Steven T. Mnuchin, the 
Secretary of the Treasury. He has served in his current 
position since 2017. Mr. Mnuchin has testified before the 
committee on previous occasions, and I believe he does not need 
any further introduction. Secretary Mnuchin, you will be 
recognized for 5 minutes for an oral presentation of your 
testimony. And without objection, your written testimony will 
be made a part of the record.
    You are now recognized for 5 minutes to present your oral 
testimony.

 STATEMENT OF THE HONORABLE STEVEN T. MNUCHIN, SECRETARY, U.S. 
    DEPARTMENT OF THE TREASURY, AND CHAIRPERSON, FINANCIAL 
               STABILITY OVERSIGHT COUNCIL (FSOC)

    Secretary Mnuchin. Thank you very much. Chairwoman Waters, 
Ranking Member McHenry, and members of the committee, thank you 
for inviting me today to discuss the Financial Stability 
Oversight Council's 2019 annual report and other priorities of 
the Treasury Department. The report is the product of extensive 
collaboration among Council members, and I appreciate the hard 
work by the staffs of the Treasury Department and other member 
agencies. The report provides Congress and the public with the 
Council's analysis of financial and regulatory trends and its 
assessment of the potential risk to U.S. financial stability. 
It also provides recommendations to enhance the integrity, 
efficiency, competitiveness, and stability of the U.S. 
financial markets.
    Since the publication of the Council's last annual report 
in December 2018, the U.S. economy has continued to perform 
extremely well. Economic growth in the United States far 
exceeds our G-7 trading partners, and unemployment rates are 
near a 50-year low, including unemployment levels at or near-
level lows for African Americans, Hispanic Americans, Asian 
Americans, and women. Wages are rising faster for hardworking 
families, corporate and consumer delinquency and default rates 
are low, and financial conditions remain stable.
    This year's annual report discusses a number of risks we 
continue to monitor, but I want to highlight cybersecurity as 
one of the most important issues for the Council, regulators, 
and the private sector. Financial firms heavily rely on 
information technology, which creates great efficiencies for 
consumers and businesses, but also increases the risk that a 
serious cybersecurity incident could negatively affect the 
economy and potentially have implications for U.S. financial 
stability. We make specific recommendations in the report on 
this important topic including, among other things, that 
government and industry should work together to constantly 
update and share best practices to ensure that we are treating 
cybersecurity as a vital national and economic security 
priority.
    The report also provides a strong message to market 
participants about the need to prepare for a transition away 
from LIBOR as a reference rate. Failure to prepare adequately 
could cause significant disruptions across financial markets 
and to borrowers, even the widespread use of LIBOR. We 
recommend that market participants formulate and execute 
transition plans that any new instruments that reference LIBOR 
should include fallback language to mitigate the risk in the 
event that LIBOR becomes unavailable. We also encourage 
financial regulators to evaluate the effects of new financial 
products on financial stability, including potential risks from 
digital assets and distributed ledger technologies. We will 
continue to use the Council's working group on these issues to 
promote consistent regulatory approaches to identify and 
address potential risks while promoting American leadership and 
financial services innovation.
    Turning to another of Treasury's key priorities, we will 
continue working with this committee on meaningful housing 
finance reform to foster competition for the benefit of 
consumers, protect taxpayers from future bailouts, and 
facilitate a smooth transition for the Government-Sponsored 
Enterprises (GSEs) out of conservatorship. I am proud of the 
work we have done, with President Trump's leadership, to create 
a resilient, thriving, and prosperous economy. Thank you, and I 
look forward to answering your questions.
    [The prepared statement of Secretary Mnuchin can be found 
on page 56 of the appendix.]
    Chairwoman Waters. Thank you very much. I now recognize 
myself for 5 minutes for questions.
    Secretary Mnuchin, I want to go straight to a discussion 
about hedge funds. In November 2016, when the last public 
update on the Hedge Fund Working Group's progress was issued, 
FSOC outlined 5 date limitations that needed to be addressed to 
better understand the risk posed by hedge funds. At times, in 
the lead-ups to past crises, activities and losses in the hedge 
fund sector have proven significant leading indicators. For 
example, Bear Stearns' hedge funds with subprime exposure 
collapsed in the summer of 2007, signaling the impending 
subprime crisis.
    When was the last time the Hedge Fund Working Group 
convened? Why has the working group not met more frequently 
during your tenure as FSOC's Chair? What is the status of the 
limitations identified in FSOC's last public update? Does FSOC 
now have access to the data previously identified in 2016 so 
that it can assess whether hedge funds are a source of systemic 
risk to the economy? If not, why hasn't FSOC taken any steps to 
address this information gap over the past 3 years?
    This is very important. We have members of this committee 
who are trying to make some decisions about hedge funds. We 
have members of this committee who think there are some who are 
operating in good faith, but there are many who are not. We are 
worried about hedge funds that take over fire departments, and 
hospitals, and other city services. We are worried about hedge 
funds that take over fire departments and the response time is 
slowed down. We are worried about hospitals closing down. So 
why don't you talk to us about what you know about what is 
happening with the working group that was supposed to convene, 
and help us to deal with this issue?
    Secretary Mnuchin. Thank you very much. Let me first 
highlight that on page 94 of the report, we specifically talk 
about hedge funds. So, this is something that the staff is 
monitoring. Since we have moved to an activities-based approach 
as opposed to an industry approach, we are monitoring all of 
the activities that hedge funds participate in as part of our 
risk management. And one of the areas, in particular, we 
focused on that I know the committee has highlighted is 
leveraged lending. I also would say that fortunately, the hedge 
fund industry has de-levered significantly. But I appreciate 
your concerns, and we will continue to monitor carefully all of 
the activities of hedge funds.
    Chairwoman Waters. Can you make a distinction for us 
between the hedge funds and the private equity funds? Are they 
involved in the same kinds of operations and acquisitions?
    Secretary Mnuchin. Normally, they are not, Madam 
Chairwoman, and we do specifically also on page 94 break out 
private equity funds. The difference is that mostly, and, 
again, the majority of the hedge funds are in liquid markets, 
and the majority of private equity funds are buying companies 
or illiquid assets. And because of that, typically the private 
equity funds are structured as very long-term funds, and the 
hedge funds are normally subject to annual liquidity, which 
does create additional risk that we are--
    Chairwoman Waters. Thank you for that clarification. When 
was the last time the Hedge Fund Working Group convened?
    Secretary Mnuchin. I can check on that for you and get back 
to you, but as I suggested, we have really focused on 
activities. The activities are being monitored as opposed to 
specifically the Hedge Fund Working Group, but we will get back 
to you on that.
    Chairwoman Waters. Do you know the status of the 
limitations identified in FSOC's last public update?
    Secretary Mnuchin. Yes, and, again, as I have suggested, we 
specifically had a comment on hedge funds and private equity 
funds in the report, and that is something that the Council is 
focused on.
    Chairwoman Waters. Does FSOC now have access to the data 
previously identified in 2016 so that it can assess whether 
hedge funds are a source of systemic risk to the economy?
    Secretary Mnuchin. Some of that data we do have access to, 
and some of the data we have determined is no longer relevant.
    Chairwoman Waters. I yield back the balance of my time. The 
gentleman from North Carolina, Ranking Member McHenry, is 
recognized for 5 minutes.
    Mr. McHenry. Secretary Mnuchin, as you well know, and as 
the FSOC report here notes, in the past few months we have seen 
significant volatility in the repo markets. And I know there is 
speculation about what sort of combination of things occurred 
that created this volatility. There is speculation that there 
is a combination of regulatory effects that are impacting 
monetary policy, and that there are regulatory and supervisory 
actions that are unduly disincentivizing banks that are 
required to hold cash at the Fed, from using their cash 
reserves when the market needs liquidity the most. The Office 
of Financial Research (OFR) is starting to collect data on repo 
transactions--that is a positive--and the Council directed 
agencies to undertake a focused review. So as the Chair of 
FSOC, do you believe the spike in repo rates signals a need to 
examine the overarching regulatory regime for potential risks 
to financial stability?
    Secretary Mnuchin. Let me first say we share your concern 
about those 2 days when there was a significant spike. As 
recently as yesterday, we had the Federal Reserve Bank of New 
York, which is responsible for market operations, give a 
present to FSOC. I have met with Chairman Powell multiple 
times. We have talked about this as recently as this morning. 
We have discussed in our weekly meeting making sure that the 
Fed is prepared for year-end activities so that there are ample 
reserves.
    I think it was a result of many different issues that came 
together in one day, one of them being, as you have outlined, 
certain regulatory issues. Banks are required to have excess 
overdrafts for intraday, so this is not normal liquidity, but 
this is intraday liquidity. There was also the impact of the 
Federal Reserve holds the Treasury cash account. We had a large 
payment of taxes, so, effectively, you had money coming out of 
banks going into the Treasury account, which drained reserves. 
But I can assure you this is something FSOC is very focused on, 
and this is something that in my role as Treasury Secretary, 
Chair Powell and I are working together on.
    Mr. McHenry. Okay. So along those lines, the impact of 
regulation can impact monetary policy. And in this 
circumstance, when you have Federal regulations demanding that 
banks hold assets, and then they believe they should not use 
those because of regulation, that becomes problematic. And so, 
I think a systemic review of this to ensure that that intraday 
activity can be dealt with adequately is really important. The 
Wall Street Journal highlighted the question of tax payments, 
that there was a deadline, and the timing of the deadline on 
tax payments had an implication for the market, as you just 
mentioned. On a going-forward basis, is Treasury reviewing some 
of those timing issues?
    Secretary Mnuchin. We are, and we are working very closely 
with the Federal Reserve, as I said, to make sure that there 
are ample reserves both associated with the Treasury cash 
accounts, and we are working with the bank regulators on what 
could have been regulatory issues that caused that spike during 
the day, without creating anything that provides longer 
financial risks.
    Mr. McHenry. Thank you. And in 2019, again, in yesterday's 
report, FSOC outlined and highlighted that ending LIBOR's 
reference rate is a concern to financial stability, and 
recommends that member agencies work closely with market 
participants to identify and mitigate risks during the 
transition from LIBOR to SOFR. Do you believe that financial 
regulators are adequately prepared for this transition?
    Secretary Mnuchin. I can assure you that this is something 
that we are very, very focused on. It is a risk, as you have 
highlighted, and we have outlined. Yesterday, just as an 
example, Chair Powell, myself, Randy Quarles, and members of 
the OCC, the FDIC, and others met with 10 bank CEOs to 
specifically talk about this issue of LIBOR and the transition. 
We are working closely with the SEC because we are also very 
concerned about securities and how securities will transition 
in the role of trustees. We may need to come back to Congress 
at some point and suggest some regulatory language in law to 
deal with this, but I can assure you this is one of the top 
risks that we are very focused on.
    Mr. McHenry. Thank you, and thank you for your response on 
my request on the financial transaction tax as well. We will 
follow up.
    Chairwoman Waters. Thank you. The gentlewoman from New 
York, Mrs. Maloney, who is also the Chair of our Subcommittee 
on Investor Protection, Entrepreneurship, and Capital Markets, 
is recognized for 5 minutes. Oh--
    [laughter]
    Mr. Sherman. I believe your statement is accurate for at 
least a week.
    Chairwoman Waters. Why did you give me this?
    [laughter]
    Mr. McHenry. Madam Chairwoman, do you have an announcement?
    Mrs. Maloney. Thank you so much, and thank you so much for 
your leadership, Madam Chairwoman. And I want to thank the 
Secretary for your continued leadership and support of the 
Corporate Transparency Act, the Beneficial Ownership Act, that 
recently passed out of this committee with strong bipartisan 
support. It would not have happened without your support, so I 
wanted to thank you. Law enforcement in my home State of New 
York, and across the country, considers this bill to be their 
top priority to combat terrorism financing and to make us 
safer, so I want to thank you. I do not think it would have 
passed without your support. I am very grateful.
    My first question concerns the Federal Reserve, which 
recently warned about the ballooning corporate debt, which sits 
at nearly $10 trillion. That is about half the size of our 
overall economy. And there is a particular focus on the growth 
of the near junk BBB bonds and the continued rise of leveraged 
lending. Personally, I am very concerned that a lot of this 
debt is being used for financial risk taking and stock 
buybacks. I am also troubled to see that in the CLO market, 
there has been a wave of downgrades, and there are questions as 
to whether there is enough data on the CLO market. So, I have 
two basic questions. First, does the FSOC have a grasp on the 
global leveraged loan market, and, specifically, who actually 
holds most of the outstanding CLOs? And second, other than 
monitoring, what is FSOC doing to keep the surge of risky 
corporate debt in check? Thank you.
    Secretary Mnuchin. First of all, thank you for your work on 
beneficial ownership and your acknowledgement of our 
contribution. We are currently working with the Senate, and we 
look forward to bipartisan support turning this into law.
    Mrs. Maloney. Thank you.
    Secretary Mnuchin. Specifically, as it relates to your 
issue, let me just first say that the leveraged lending market 
is something that FSOC is very focused on. We have had several 
presentations at FSOC. We have a group within FSOC of all the 
different regulators that are looking at this. It is one of the 
things as part of an activities-based approach that we are 
monitoring the risk. The first issue we have examined is what 
is the exposure in OCC and FDIC banks, and I am pleased to 
report that a lot of the leveraged lending has moved out of the 
banks market to the CLO market, as you have commented. The CLO 
market does have long-term capital associated with it. It is 
something that we are carefully monitoring. And I would also 
just comment, you are right, there has been a very large 
issuance of BBB bonds. I don't think that has been used for 
stock buybacks. Most of the stock buybacks have been done out 
of cash and not additional leverage, but we are monitoring the 
BBB market also carefully.
    Mrs. Maloney. Well, thank you. I want to make sure you use 
every tool available to understand their connectedness to our 
overall economy. You have recently talked about LIBOR and SOFR 
in our hearing today. Do you think that the recent issues in 
the repo market indicate that SOFR might be more volatile than 
anticipated? We have seen a lot of turbulence that has raised 
some questions about it.
    Secretary Mnuchin. No, I am concerned about the transition 
from LIBOR to SOFR, and that is something that we are very 
focused on because it is a regulatory issue, it is a technology 
issue, and it is a legal issue. As it relates to SOFR and the 
volatility in those 2 days, over a long period of time it would 
not have a big impact on SOFR. But the thing we like about SOFR 
is that it is a market that can't be manipulated. It is highly 
liquid, and it is demonstrated and calculated unlike the LIBOR 
markets.
    Mrs. Maloney. That sounds like it is a good move. My time 
has expired or is getting close to being expired, and I look 
forward to working with you to pass the beneficial ownership 
bill. Thank you. I yield back.
    Chairwoman Waters. The gentlewoman from Missouri, Mrs. 
Wagner, is recognized for 5 minutes.
    Mrs. Wagner. Thank you, Madam Chairwoman. And, Secretary 
Mnuchin, thank you for testifying before our committee today. 
We have seen proposals to implement a financial transaction tax 
in both the House and the Senate. And in addition, a number of 
Democrat presidential candidates have either endorsed or are 
considering a financial transaction tax. These proposals would 
place taxes on financial transactions typically involving 
stocks and bonds and derivatives. This tax would result in 
fewer trades and would leave market participants to look for 
other ways to avoid the tax. This will both reduce capital 
gains taxes, and might lead to other forms of tax evasion. 
Additionally, a financial transaction tax has already been 
tried internationally, and the results have been very poor. In 
Italy, the tax just raised 159 million euros of a targeted 1 
billion euros in its very first year. In Sweden, a tax was 
imposed in the 1980s, and by 1990, more than 50 percent of all 
Swedish trading had moved offshore to London.
    While proponents of the financial transaction tax argue 
that it would only affect the wealthy, that is simply not the 
case. This tax would impact all investors, most specifically 
and including millions of Main Street investors, saving and 
investing in mutual funds, a retirement account, a child's 
education, or maybe a pension plan. Secretary Mnuchin, what 
sort of impact could imposing a financial transaction tax have 
on the U.S. financial system?
    Secretary Mnuchin. Thank you for raising that issue. I 
share your concern about this potential tax. I think, as you 
know, that the United States is the leader in financial 
services, in capital markets, and people come from all over the 
world to raise capital in the United States. So, I am very 
concerned that would destroy our capital markets, and that 
American holders of mutual funds would bear the majority of the 
cost. Mr. McHenry actually also inquired and wrote to us about 
this, and we have committed to do some work internally and on 
an interagency basis to study this to see if we can try to come 
up with some research on what the impact would be.
    Mrs. Wagner. Do you believe it would reduce liquidity?
    Secretary Mnuchin. As I said, I think it would be quite 
detrimental on many aspects, both liquidity.
    Mrs. Wagner. No, volatility. Market volatility.
    Secretary Mnuchin. I think we may have less market 
volatility here because we won't have a market here.
    Mrs. Wagner. Right.
    Secretary Mnuchin. As you mentioned, it will go to London, 
to Hong Kong, and to other places where we clearly don't want 
it to be right now.
    Mrs. Wagner. And how would this impact overall U.S. 
economic growth, Mr. Secretary?
    Secretary Mnuchin. It would be a burden on economic growth, 
and, more importantly, it would be a burden on all the American 
taxpayers who already pay taxes and hold mutual funds and have 
their savings and their retirement in mutual funds.
    Mrs. Wagner. There are millions, as I said, of Main Street, 
hardworking Americans in my own 2nd District of Missouri who 
would be greatly impacted by this. Could this tax result in 
fewer trades and lead market participants to look for other 
ways to avoid the tax, the kind of tax evasion that we have 
seen internationally in other countries?
    Secretary Mnuchin. I believe it would. It would move money 
offshore. It would disproportionately hurt pensions, 401(k)s, 
and people who are saving for retirement.
    Mrs. Wagner. Do you believe, sir, that the cost to the 
Treasury of issuing Federal debt could increase because of the 
potential increase in trading cost and the reduction in 
liquidity that would occur if this tax were, in fact, imposed?
    Secretary Mnuchin. If the tax were put on U.S. Government 
securities, it would clearly just raise the cost of the 
government borrowing. There is no question.
    Mrs. Wagner. So, Federal debt would even be affected by 
this?
    Secretary Mnuchin. It would.
    Mrs. Wagner. Thank you. I look forward to your study, and 
we do hope that FSOC will do more work and research so that we 
can be very clear before moving forward with a horribly 
regressive and detrimental financial tax like this. Thank you 
so much for your time, and I yield back, Madam Chairwoman.
    Chairwoman Waters. Thank you. The gentleman from 
California, Mr. Sherman, who is poised to become the next Chair 
of our Subcommittee on Investor Protection, Entrepreneurship, 
and Capital Markets, is recognized for 5 minutes.
    Mr. Sherman. I thank the Chair. The gentlewoman from 
Missouri brings out a number of concerns about a financial 
transactions tax. There are pros and cons of that tax, but I 
did make a list of all the problems she had with the financial 
services tax, and every single one of them would be avoided 
with a wealth tax. So I will put you in touch with the 
academics on our side who are helping Elizabeth Warren 
produce--
    Mrs. Wagner. If the gentleman will yield, I can't wait for 
that debate.
    Mr. Sherman. I will not yield, because I think we know 
where you stand on this.
    [laughter]
    A lot of questions divide us ideologically, and then there 
are the simple ones where we can do something important for the 
economy, and we just put it off and we put it off. And we 
ignore the fact that even if we get it done by the very last 
minute, we have caused a harm to the market. And a trillion 
here, and a trillion there, adds up to real money. We have 
LIBOR instruments out there relying on the LIBOR index to the 
tune of roughly $10 trillion, and the LIBOR rate will not be 
published, or may very well not be published, after 2021.
    Mr. Secretary, you said in your opening statement, ``We 
recommend any new instruments that reference LIBOR should 
include fallback language to mitigate the risk in the event 
that LIBOR becomes unavailable.'' Good, but that still leaves 
us with $2 trillion of the LIBOR-based contracts that will 
still be outstanding at the end of 2021. They have already been 
written, these LIBOR legacy instruments, and we can't amend 
these instruments without the consent of every participant. 
That is impossible. I am working on legislation that would 
solve this problem and link these LIBOR-denominated instruments 
to the secured overnight financing rate so far.
    But it occurs to me you might be able to tell me that we 
don't need legislation. Does Treasury have the authority to 
issue regulations, or does any Executive Branch agency have the 
authority to issue regulations, to simply say if you have a 
LIBOR contract and it doesn't provide for a backup rate, here 
is how to do the calculations? And if you don't have the 
authority, do you want the authority?
    Secretary Mnuchin. Yes. First of all, again, let me 
acknowledge that I agree that this is a bipartisan issue. This 
is something we should work on. And the work on this predated 
me coming to Treasury, so this has been a long time. And as I 
mentioned earlier, we may come back to Congress and suggest 
that you pass legislation--
    Mr. Sherman. I would ask you, this is not on your 2021 
calendar. This should be on your December calendar or your 
January calendar.
    Secretary Mnuchin. I agree with you--
    Mr. Sherman. I look forward to working with you. I need to 
know whether you need legislation. I need to know what you 
need, and we need to make sure that there aren't $2 billion of 
debt instruments outstanding where people cannot determine what 
interest is supposed to be paid. And I want to move on because 
I do chair the Asia Subcommittee for another week, and we 
focused on China. China could end up with $1.5 billion of World 
Bank loans. This is under discussion now. China's income has 
already exceeded the level where they should be eligible for 
these loans.
    The Chinese government has enough money to put a million 
Uyghurs behind bars and to build a military complex that 
destabilizes the world. So it seems like maybe China should 
only be able to borrow money in the private markets at private 
market rates. Now, I know the United States won't support World 
Bank loans to China, but I am asking, what are you doing to 
stop those loans? Are we simply making academic arguments, or 
are we making it clear that our future involvement in certain 
World Bank activities is dependent upon not giving 
concessionary loans to China?
    Secretary Mnuchin. Again, thank you for raising this issue, 
which I also think there is a bipartisan consensus on. David 
Malpass, who is now the World Bank president, when he was 
working for me as Under Secretary, as part of our reforms 
package we negotiated with the World Bank, with the prior 
leadership there. We negotiated significant reductions in China 
lending with the path to get below $1 billion. They have been 
below $1 billion this year. Yesterday, we submitted our 
objection to the current country plan, so we look forward to 
following up with you.
    Mr. Sherman. Thank you.
    Chairwoman Waters. The gentleman from Florida, Mr. Posey, 
is recognized for 5 minutes.
    Mr. Posey. Thank you, Madam Chairwoman, and Ranking Member 
McHenry, for holding this hearing on systemic stability. For 
many of us who grew up after the Great Depression, the first 
experience we had with severe systemic instability was the last 
financial crisis. At this time, we often watch the classic 
movie, It's a Wonderful Life, where we experience the drama of 
a run on the banks with George Bailey, the hero of the movie 
played by Jimmy Stewart, who saves the small town savings and 
loan from the bank run. The last crisis taught us that we no 
longer live in the world of Jimmy Stewart banks. Runs on other 
financial system liabilities, like money market funds, may 
often threaten far greater consequences today than bank runs.
    Markets for assets make a lapse in dramatic ways and 
destroy the ability of financial institutions to fund their 
assessment holdings and meet the survival constraints imposed 
by liquidity and even solvency. We often hear the words, ``you 
can't be too careful,'' but the reality is that in recognizing 
our financial system, we can be so careful that we stifle its 
innovation, restrict credit and finance, slow economic growth, 
and inhibit jobs for people. We must strike a balance between 
the risk of return, and we must look to those balanced 
solutions to keep our economy on a path towards sustained 
growth. Mr. Secretary, please let me commend you for your 
leadership in working with other key regulators to finalize 
reforms related to the proprietary trading provisions of the 
Volcker Rule. Thank you.
    As you know, our banking history was different from banks, 
where banks focused on trade capital and played a limited role 
in long-term capital markets. In this country, banks always had 
a role in capital markets and the investments that made our 
economy a mighty engine of growth, the intercontinental 
railroad, shipping, and a host of other industries. I believe 
banks have a key role to play in venture capital, and the 
Volcker Rule is restricting that vital function. I recently 
joined other members of this committee in sending a letter to 
you and other key stability regulators asking that you move 
quickly to issue a proposed rule to amend the covered fund 
provisions of the Volcker Rule. Specifically, we asked you to 
revise the overly-broad definition of a ``covered fund'' to 
exclude venture capital and other long-term funds.
    Mr. Secretary, this statute makes you, as Chair of FSOC, 
responsible for coordinating rulemaking. Are the financial 
regulators and the Department of the Treasury working on 
changes to the covered funds provision? And if so, could you 
please provide us with an insight on the timing for such a 
proposal?
    Secretary Mnuchin. Thank you. First, let me just 
acknowledge what you said, that a healthy banking system is 
critical to our economy, and our banks have de-risked and built 
up significant amounts of capital. So, the regulators have 
already made some proposed changes to the Volcker Rule that 
won't create undue risk, but will create more liquidity in 
certain markets. And we are working with them, as you 
suggested, on the covered fund issue as well. Thank you.
    Mr. Posey. Any idea what the timeline would be on that?
    Secretary Mnuchin. I would hope it will be over the next 90 
to 120 days, but we will get back to you.
    Mr. Posey. Do you expect much criticism in that regard?
    Secretary Mnuchin. I am not going to speculate, but any 
proposed rulemaking will be open to public comment, and we will 
take those comments into consideration.
    Mr. Posey. Very good. I wanted to talk about some of the 
climate change regulations, but I only have a minute left. And 
I just wondered if you could give me your assessment on the 
usefulness of taking the short-term stress testing discipline 
into a much longer period realm of climate change. Does that 
make any sense to you?
    Secretary Mnuchin. It does not. I'm sorry. Can you repeat 
your question? I want to make sure I heard it correctly. I said 
it does not, but I want to make sure.
    Mr. Posey. I just wonder what your assessment is on the 
usefulness of taking the short-term stress testing discipline 
into the longer-term realm of the climate change requirements?
    Secretary Mnuchin. Let me just say that I have vast 
expertise on a lot of different things, but climate is not one 
of them, but I think the banks have a difficult enough time on 
modeling different risks. I think long-term climate risk is 
something that is subject to a lot of different views, and as 
long as there is proper disclosure, I think that is adequate.
    Mr. Posey. Very good. I thank you, and my time has expired. 
I yield back.
    Chairwoman Waters. Thank you. The gentleman from New York, 
Mr. Meeks, who is also the Chair of our Subcommittee on 
Consumer Protection and Financial Institutions, is recognized 
for 5 minutes.
    Mr. Meeks. Thank you, Madam Chairwoman. Mr. Secretary, I 
think that we can agree--as I said in my opening statement, I 
am really concerned. It was one of the things that shocked me 
as a Member of Congress when Secretary Paulson came on the 
Floor talking about how our whole economy was going to drop. 
And so with FSOC, we are trying to look forward to try to 
figure out what is going on and what will happen in the future. 
I have some real concerns because, as I look at the Chinese 
growth stalling, as I look at how the European economies are 
slowing, with some entering recession, I look at Brexit looming 
and what effects that Brexit may have, and then all of the 
turmoil that is going on in Latin America, it gives me real 
concerns. And when I look at some of the forecasts, America and 
the U.S. economy is slowing also.
    History may not repeat itself, but sometimes it certainly 
rhymes, and I fear that over the next few years, for the 
economy it may rhyme a little too much for me with the past 
decade. And so I am hoping that the Administration is going to 
look well ahead of what takes place and have certain formulas 
that they put in place in case there is a tremendous problem, 
like when I look at the debt stock of corporations, and even 
colleges and universities, has ballooned. An important share of 
this debt is in the form of leveraged loans and covenant-lite 
loans. And there seems to be a real risk of a downgrade cliff, 
and that a growing share of this debt is just barely above 
junk.
    I am hoping--do you have some models to show what would 
happen to employment, homeownership, and the broader economy if 
these loans were downgraded loans en masse in the event of a 
downturn in the economy? And also, what would it affect and how 
would it affect the retail sector, for instance? Is there any 
model that you have? Can you tell us, because I am really 
concerned about these leveraged loans that are out there?
    Secretary Mnuchin. First, let me just say we share your 
concerns on financial stability. I worked for Secretary Paulson 
for a long time, and I speak to him regularly, and I hope we 
are never in that type of a time period again. Specifically as 
it relates to leveraged lending and covenant lite, we do share 
your concerns. We are monitoring those risks. Those are the 
types of activities we are carefully looking at. We have 
studied it very carefully as it relates to the banks, and, 
again, we are very comfortable that there is very limited 
exposure in the banks. As it relates to specifics of the impact 
on employment and retail sales and other areas, we will get 
back to you on our thoughts on that.
    But, again, my view is that it is minimal because the 
exposure is outside of the banking industry and shouldn't have 
the type of contagion and risk that occurred during the 
financial crisis.
    Mr. Meeks. Thank you for that, and I do get concerned 
sometimes, too, because now that it is outside of the financial 
or the banking system, we try to put certain things in place 
for the banking system so that we can make sure that see 
systemic risk before, and we could then make sure that we could 
downsize it to what was necessary. But outside where we may 
not, I want to make sure that we are watching what is happening 
on the outside also because I don't want this to catch us by 
surprise. I think that is tremendously important.
    Secretary Mnuchin. I agree, and I assure you we are.
    Mr. Meeks. Also, when I looked at what devastated me in 
this financial crisis, it is a reminder that recessions and 
crises don't hit all sectors and demographics of the economy 
equally. For example, if you look at my district, and Black and 
minority communities, they overwhelmingly lost wealth, lost 
jobs, and were foreclosed upon at disproportionately high 
rates, and many of them haven't fully recovered yet. In fact, 
minority banks failed at 2\1/2\ times the rates of non-minority 
banks, and they have also yet to recover. So, I was wondering, 
as FSOC considers systemic risk and the risk of financial 
disruptions, how much consideration is given to the manner in 
which the burden falls on low-income and minority segments of 
the economy, and how do you quantify this, and what has it done 
to seek to address this? You have 23 seconds to address this, 
if you can do it.
    Secretary Mnuchin. Sure. Let me make me two comments, and 
we are happy to follow up with you on another one. But one, 
housing reform is something we are very focused on, 
particularly because of the disproportionate impact on certain 
communities. And also on minority-owned banks, we have a 
program at Treasury, a mentorship program, that we are working 
on. But I look forward to following up with you.
    Chairwoman Waters. The gentleman from Missouri, Mr. 
Luetkemeyer, is recognized for 5 minutes.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman. First, I 
would like to thank the Secretary for responding to a letter 
that I and 20 of my colleagues sent to you recently regarding 
CECL. Looking at the minutes of FSOC's meeting yesterday, I can 
see that you directed OFR to examine all current research on 
the matter and report back. I think this will enable some light 
to be shed on the standard which I believe is detrimental to 
our industry as well as our consumers and our economy, and we 
are looking forward to following up with OFR just to make sure 
the process is conducted quickly. And I look forward to working 
with you on issues that I think are going to be pointed out by 
this research. So, thank you for doing that and responding to 
our request.
    The first issue I want to talk about today is with regards 
to the new digital currency, Libra, that is being proposed by 
Facebook. We had Mr. Zuckerberg in here recently, and he 
explained his intentions and how this is all going to take 
place. Since then, China has made an announcement with regard 
to their own digital currency, and there have been some calls 
for the Fed to issue its own currency. And I would just like 
for you to give us your position on it, and where you see it 
going, and what your thoughts may be on it, because it does 
seem to have some legs.
    Secretary Mnuchin. Sure. Let me just comment that when 
people talk about digital currencies, it is a large, vastly 
different area, and different sectors have different things. 
Specifically as it relates to Libra, we have had probably a 
dozen meetings with Facebook. We have shared our concerns. It 
is part of the reason why they are slowing down their movement 
forward. We have discussed it at the G-7 and the G-20. If 
Facebook wants to get into digital payments, that is fine, and 
that may be good for their customer base and good for a lot of 
Americans who don't have access to banks. We want to make sure 
if they do it, they are doing it in a way that is fully 
compliant with our BSA/AML, and that in no way can this be used 
for terrorist financing and illicit activities.
    Mr. Luetkemeyer. Okay. But the Chinese have decided to get 
into this as well. And so the last half of my question was, 
there has been some thought process about the Fed getting into 
it and having their own digital currency. Is this something you 
see as necessary? Something you don't want to get into? 
Something that shouldn't be there? Where do you see this going?
    Secretary Mnuchin. Again, I would differentiate what China 
is doing from what a Bitcoin or a Facebook would do. What China 
is doing is really issuing digital currency in lieu of physical 
cash, and they can track all that, so they will be able to 
track where that goes. That is different than a Bitcoin. It is 
no different than in the U.S.--if money is sent on the Fed wire 
system, it can be tracked, and money through Swift has 
identifiers. So, again, I would differentiate kind of what 
central banks are doing from what a Libra or a Bitcoin is 
doing.
    As it relates to the Fed, and Chair Powell and I have 
discussed this at length, I think we both agree for the near 
future in the next 5 years, we see no need for the Fed to issue 
digital currency. And that is because, again, we have a very 
sophisticated system. The Fed is working on an electronic 
payment system. We need to make sure there is a real-time 
electronic payment system in the U.S. But thank you for your 
concerns.
    Mr. Luetkemeyer. Okay. I appreciate the response. 
Yesterday, we had a hearing here in the committee, and there 
were a number of questions with regards to credit unions buying 
out banks. It seems that that is a little bit of a trend here 
in the last 12 to 14 months. In fact, the comment was made 
yesterday that I think there are 28 that have already been 
purchased this year with another 14 more in the hopper, I 
understand. The IRS is in your purview, Mr. Secretary. This 
means that those 28 banks, plus perhaps those other 14, are 
going to going to come off the rolls as taxpayers. It is going 
to dent the Treasury sum, obviously not much, but some, and 
there doesn't seem to be any resistance from the standpoint of 
the FDIC and/or the credit union regulators to not allow this 
to happen.
    So, it is continuing to be approved. It is continuing to 
happen. In fact, I was having a discussion last night with 
somebody, and they said, well, maybe the banks need to start 
buying credit unions, throw the charter out the window and 
become a credit union, and they can avoid taxes. I don't know 
if that is doable, but there are some people starting to think 
outside the box because they are looking at this as a tax 
loophole. From your standpoint, do you see concerns from the 
standpoint of credit unions buying out banks? Is this just 
another part of a merger situation that is going on in this 
country, or is there a trend? Is it a tax evasion situation? 
How do you view this?
    Secretary Mnuchin. We will follow up with the FDIC on this 
issue and monitor it. It is not something that has caught my 
attention because fortunately it is on still small scale. But I 
appreciate you raising the concern, and we will follow up with 
the FDIC.
    Mr. Luetkemeyer. This past week, there was an announcement 
of a $700 million bank that was bought out by a $10 billion 
credit union.
    Secretary Mnuchin. Yes.
    Mr. Luetkemeyer. So this is going to continue to grow, and 
it is going to be a concern, I think, that needs to be on your 
radar. Thank you for your response.
    Chairwoman Waters. The gentleman from Georgia, Mr. Scott, 
is recognized for 5 minutes.
    Mr. Scott. Secretary Mnuchin, how are you? I want to make 
sure I am clear on your level of concern about the continued 
volatility in the repo market and its impact on the calculation 
of SOFR, the Secured Overnight Financing Rate, which, as you 
know, is a designated replacement rate for LIBOR. Now, I 
listened to your response to Mr. McHenry and also to the 
gentlelady from New York, and I want to be clear because I read 
your report, FSOC's 2019 financial stability report. Here is 
what you said: ``Market participants with significant exposure 
to LIBOR remain vulnerable if they do not sufficiently prepare 
all the way to the end of 2021.'' What did you mean by that, 
and what did you mean by ``prepare?'' What are you doing to 
help the industry participants prepare?
    Secretary Mnuchin. Again, let me just emphasize two 
different issues that are related in a way, as you said. I am 
concerned about what happened in the repo markets. That is not 
just a concern for SOFR. That is a broader concern because we 
rely on these repo markets, and it impacts many, many 
individuals and institutions, so we have had active discussions 
with the Fed on that issue. That does impact the LIBOR 
transition, but the LIBOR transition is a much broader problem, 
and, as I said, as recently as yesterday, we convened a group 
of the banks and the regulators on this.
    Mr. Scott. What did you mean by, ``they will remain 
vulnerable?''
    Secretary Mnuchin. Well, if banks and trustees and security 
holders don't prepare for the transition, there are trillions 
of dollars that people could wake up in 2021--
    Mr. Scott. And by ``prepare,'' you mean to do what?
    Secretary Mnuchin. It is a list of everything from prepare 
technology so that they have the ability, prepare the legal 
analysis, prepare a transition. People literally have hundreds 
of thousands of transactions, and, as I said, part of this may 
be coming back to Congress and asking you to pass legislation 
in part of this because there may be serious legal issues that 
we are still exploring.
    Mr. Scott. let's go overseas for a moment. I am very 
concerned about Brexit and the particular impact that Brexit 
will have on our businesses, on our financial markets, 
particularly because of the uncertainty we are seeing around 
the whole deal of delays after delays, and the failure of them 
to come up with a clean deal. So what I want to get from you, 
as our Treasury Secretary is, how concerned are you about this 
situation with Brexit and the impact that this uncertainty is 
having on our cross-border transactions with our financial 
market participants?
    Secretary Mnuchin. I would say that I am moderately 
concerned. I have been discussing this issue for the past 3 
years with my counterparts at the Bank of England as well as 
the regulators, and the finance minister who is the Chancellor 
of the Exchequer. It is a significant risk to the U.K. It could 
have carry-on risk to the U.S. We are working with the 
regulators on those risks. We have managed through some of 
those, and some of those are still open. But as I have 
encouraged the U.K., they need to resolve this one way or 
another.
    Mr. Scott. Also in your report, concerning that, you 
highlight the potential for risk and that they will have 
significant spillover effects in the United States, should 
there be a no-deal Brexit, particularly with regard to the 
cross-border transactions. What did you mean by that?
    What would be the potential with no deal? What would be 
better for us or worse, no deal or deal, in your mind?
    Secretary Mnuchin. Let me just say I respect the people of 
the U.K. They can decide whether they want to be in Brexit or 
they don't want to be in Brexit. The risk is making sure that 
whichever case, there is a coordinated transition.
    Mr. Scott. Thank you, Mr. Secretary.
    Chairwoman Waters. The gentleman from Oklahoma, Mr. Lucas, 
is recognized for 5 minutes.
    Mr. Lucas. Thank you, Madam Chairwoman.
    And thank you, Mr. Secretary, for appearing before this 
committee one last time before year's end.
    Secretary Mnuchin, in the Council's annual report, it 
recommended that the government and the private sector should 
have more effective information-sharing practices. Could you 
expand on how agencies can best work with financial 
institutions to address cybersecurity concerns without 
inhibiting the growth of emerging technologies?
    Secretary Mnuchin. As I highlighted in my opening comments, 
cybersecurity is one of my most important priorities. While I 
think the industry is well-prepared, we can never be prepared 
enough. The bad people continue to operate. We need to make 
sure that our financial markets are not only protected for 
today, but are protected for the future. And it is a 
coordinated response between private companies, public 
companies, and the intel community, as well as the Treasury and 
the regulators.
    Mr. Lucas. Mr. Secretary, in what ways is FSOC and its 
members educating the general public on cybersecurity risk, 
particularly, as you noted, those coming from bad actors and 
bad actors abroad, too?
    Secretary Mnuchin. Our focus is less on educating the 
general public and more on making sure that the banks are 
educated, that they have the best practices. The general public 
will be protected as long as the banks and the financial system 
is protected, and that is what we work on every single day.
    Mr. Lucas. One last question, and I am thinking of my 
colleague discussing Brexit for a moment. You are in a unique 
position, with your finger on the national economy, a 
businessperson of much experience. Could you speak for a moment 
about potentially how much better the United States-Mexico-
Canada Agreement (USMCA) deal is for American workers and why 
it is essential for the economy that we act swiftly on that in 
this body?
    Secretary Mnuchin. Yes. First of all, let me say I hope 
that Congress passes that between now and the end of the year. 
I know Ambassador Lighthizer, the Speaker, and others are 
working closely on this, and this will be a terrific win for 
American workers, and for the American economy.
    Our largest trading partners are Mexico and Canada. These 
economies are interlinked. This is a great step for growth.
    Mr. Lucas. Thank you, Mr. Secretary. And with that, Madam 
Chairwoman, I yield back.
    Chairwoman Waters. Thank you very much. The gentleman from 
Colorado, Mr. Perlmutter, is recognized for 5 minutes.
    Mr. Perlmutter. Mr. Secretary, it's good to see you.
    My questions are going to go back towards the repos, the 
repurchases, because there are some red flags here. Last year, 
banks had the most profits they have had in forever, in part 
because of the big tax cuts and stuff like that, but huge 
profits. And at the same time, we saw the excess reserves of 
the banks decline by 35 percent since 2017, and at the same 
time as the Fed and Treasury were sort of shrinking the balance 
sheet, all of a sudden over the last few months have had to 
expand it again.
    I don't understand how those all come together, and if you 
could try explaining that again, I would appreciate it. Because 
we have big profits, shrinking reserves, and now expansion of 
the balance sheet again.
    Those are the kinds of things that I think we have FSOC in 
place to monitor. What is it that is really driving this on a 
bigger scale, if you could tell us?
    Secretary Mnuchin. I am happy to address it again because 
it is a very important issue, and I don't want to minimize it. 
Again, as recently as yesterday at FSOC, we had a presentation 
from the Federal Reserve Bank of New York. I think there are a 
lot of different issues that came together on those 2 days that 
caused the spike. It was not any one single issue. But we are 
studying it carefully to make sure that this doesn't occur 
again and to make sure it doesn't occur on a prolonged basis.
    The banks are having very good profits mainly because the 
U.S. economy is performing very well. I don't think this has to 
do with an issue of bank profits. This has to do with an issue 
of bank liquidity. The banks had plenty of liquidity. The banks 
had enough liquidity to go in and take up the repo, but they 
didn't want to do it. And the reason they didn't want to do it 
had to do with different regulatory tests that fit together.
    So, the liquidity test was fine. It was different ratios 
that they were worried about hitting and tripping. So, again, 
this was partially a Treasury issue of Tax Day. It was 
partially a regulatory issue. It was partially a reserves 
issue.
    And then just to comment, as you said, the Fed has been 
shrinking the balance sheet, which I think makes sense because 
as they went out of quantitative easing, they didn't need a 
giant. That was for the financial crisis. And what they are 
doing now doesn't impact the growth of the balance sheet by 
buying securities. It is really a cash management function 
around the repo markets.
    But these are all very complicated issues that were 
intertwined, and we continue to work on them.
    Mr. Perlmutter. But those were sort of the things that led 
up to the recession 10 years ago, that all of a sudden, there 
was this illiquid setting of our banks, and then everybody 
started getting nervous and the auction rate securities went to 
heck, and everything else started closing in. And I guess it 
just doesn't add up for me. We are making money over here, but 
all of a sudden, the reserves are shrinking like crazy.
    We try to shrink the balance sheet, but now we are 
expanding it again. And it isn't just 2 days. It has been 
happening for several months now.
    Secretary Mnuchin. Again, I can assure you that the 
technical issues that happened around this have nothing to do 
with the financial crisis. The financial crisis was driven 
primarily by real losses in real estate markets, in highly 
leveraged securities. This issue is all about the government 
repo market.
    And again, when we talk about the reserves at the banks, 
the excess reserves, most of those excess reserves are locked 
up at the Fed because of regulations that require the banks to 
have so much excess liquidity--
    Mr. Perlmutter. But let me slow you down for a second 
because as we--I asked my staff to just kind of give me some 
numbers on student loans, on auto loans, and on corporate debt. 
We are at $1.6 trillion in student loans: 44 million Americans 
have student loans, with almost $30,000 as the average debt.
    Auto loans were at $1.26 trillion: One hundred seven 
million Americans have auto loans, and seven million Americans 
are more than 3 months behind.
    And corporate debt, we are at $10 trillion, $1.3 trillion 
in leveraged loans, $1.2 trillion in junk bonds. There is a lot 
of lending going on out there. And so the question is, are we 
getting overextended again? And that is what I am worried 
about.
    Chairwoman Waters. The gentleman from Colorado, Mr. Tipton, 
is recognized for 5 minutes.
    Mr. Tipton. Mr. Secretary, did you want to answer that?
    Secretary Mnuchin. Thank you.
    What I was just going to comment on is I think it is a good 
thing that we have a lot of lending, a healthy economy. And 
again, I really do think that this bank issue is a highly 
technical issue, but it is something we are very focused on.
    And student loans, that is a longer subject that we are 
studying carefully. We share certain concerns on the student 
loan market right now.
    Mr. Tipton. Thank you, Mr. Secretary, and I appreciate you 
taking the time to be here and speaking to that specific point.
    The ability to be able to have access to capital, to be 
able to get this economy moving, and I think it is worthy of 
note that in the first 1,000 days that you have been in office 
with President Trump, you have been able to implement historic 
tax reform, and you have been able to take extraordinary steps 
to safeguard national security, making strides to being a 
better steward of taxpayer dollars.
    And it is important to note that our free market system, 
with the help of tax reform and other deregulatory policies 
that have come out of Congress and the Trump Administration, 
has helped to be able to stimulate my State's economy in 
Colorado. In the past year alone, Colorado employers have 
created 43,800 jobs. Nearly 67,000 Coloradoans have found jobs. 
In fact, in my State, the unemployment rate is at 2.6 percent.
    As you noted in your testimony, we are at a 50-year low on 
unemployment in this economy right now. We have policies that 
are actually making this capitalistic system work. Main streets 
in rural America is of primary concern to me. That is my 
district. And as you probably know, in many cases when we are 
looking at economic recovery after downturns, it is rural 
America that is last to come out of that recovery. And if 
another downturn comes, they are the first to be able to lead 
the way in to distressed economies.
    And I am really pleased to be able to report to you that in 
my district, we are now starting to see property move in some 
of these rural areas. We are starting to see the economies 
move, jobs being created through the opportunity of our system, 
and I appreciate the efforts that you and the Administration 
have made to address that.
    Would you agree, when we look at the overall economy--low 
unemployment, historic low unemployment in so many demographic 
groups that we have, the opportunity that we are seeing in this 
country--is this a good, positive sign for my State of Colorado 
and for America as a whole?
    Secretary Mnuchin. It is, indeed. And it is actually the 
bright spot of global growth.
    Mr. Tipton. And I think that is something that is going to 
be important for us as a Congress, as a nation, to be able to 
keep our eyes on. Despite some of this historic growth, we have 
some of our colleagues across the Capitol and in Governor's 
mansions across the country who are trying to upend our 
capitalistic system that has benefitted the majority of 
Americans in this country.
    The economic engine that we have in this nation is 
something to be celebrated and to create those opportunities in 
front of us. We should not be pursuing socialistic policies to 
be able to redistribute income, to be able to slow that down, 
but rather, policies that are going to be making sure that 
every American has that opportunity to be able to reach their 
highest and best potential, as God has given them the ability 
to be able to do.
    I would like to encourage you and the Administration to 
continue those policies that are creating opportunity for so 
many Americans, and to reject those that are going to be 
seeking to be able to redistribute income, to build out bigger 
government, more programs rather than empowering people with 
their own resources to be able to build for that bigger, 
better, and brighter future.
    Again, I appreciate you taking the opportunity to be here 
today, and for your work on this economy, and I want to wish 
you and your family the best for the holidays.
    Thank you, and I yield back.
    Mr. Perlmutter. [presiding]. Thank you. The gentleman from 
Colorado yields back. The gentleman from Connecticut, Mr. 
Himes, is recognized for 5 minutes.
    Mr. Himes. Thank you, Mr. Chairman.
    And thank you, Mr. Secretary, for being here.
    I would love to use my 5 minutes to have you reflect a 
little bit on shadow banking, and in particular the 
intersection of shadow banking and the mortgage system. I am of 
a tenure, I was sworn in, in January of 2009, when this 
committee wasn't sure that Citibank, for example, would remain 
solvent until probably a couple of quarters had gone by and all 
the implications. And of course, so much of that was due to 
irresponsible underwriting in the mortgage market.
    In your report, which I have not had a ton of time to 
absorb, you actually make specific mention and, in fact, Box B, 
nonbank mortgage origination servicing, here the message is 
pretty clear, which is that nonbanks are now originating, it 
looks like more or less than half of mortgages, and those 
mortgages are disproportionately, significantly 
disproportionately going into the GSEs.
    That makes me nervous because, of course, the GSEs are 
guaranteed by the full faith and credit of the United States 
and the American taxpayer. This feels to me like a little bit 
of a replay in which institutions that maybe don't have the 
underwriting discipline of banks are out there writing a lot of 
mortgages, sure that those mortgages will then be securitized.
    I have sort of a general question, and then a specific 
question. My general question is, what sort of visibility do 
you think you and the other regulators have into the quality of 
the overall underwriting? And specifically, we spend a lot of 
time in this committee, and tried to reflect in Dodd-Frank, the 
notion of retention, meaning you actually eat your own cooking 
with respect to the underwriting.
    And I have a suspicion that a lot of these nonbanks are 
actually not retaining exposure, but that, in fact, they are 
transferring it to the GSEs. So, generally, what kind of 
visibility do you have? And more specifically, are these 
nonbanks underwriting competently?
    Secretary Mnuchin. Let me say that we do have concerns, and 
that is why we have highlighted it. The good news is we do have 
visibility, and the main reason we have visibility, as you 
pointed out, a lot of these loans are being sold to the GSEs. A 
lot of these loans are being guaranteed by FHA. One of the 
things we want to do as part of housing reform is we are 
concerned, both at FHA and at the GSEs, that the underwriting 
criteria is deteriorating, and the loan-to-values are 
increasing. So, we are working with the FHFA and we are working 
with HUD on those issues.
    The other area of concern that we have is that the mortgage 
servicing business, which used to be dominated by banks, is now 
dominated by nonbanks. And one of the problems is the nonbanks 
don't have the liquidity to advance on mortgages that the banks 
had. So, this is something that FSOC is very carefully 
studying.
    I can also tell you, in my role on the FHFA board, we are 
studying this as well. I would say it is not at the point where 
we are nervous of the levels that it was 10 years ago, but it 
is a significant concern, and that is why we are carefully 
following it. And we will come back with additional 
recommendations, and I think there is a lot that both HUD and 
FHFA can do to cut down these risks.
    Mr. Himes. Let me follow up. You have a sentence here in 
Box B that says that loans originated by nonbank lenders have, 
on average, marginally higher debt-to-income ratios and lower 
borrower credit scores than those originated by banks.
    So it feels to me--and again, I haven't had a chance to 
study this--like there is a little bit of an adverse selection 
going on here inasmuch as lower-credit mortgages are being 
guaranteed by the GSEs, but that the higher-quality mortgages 
are perhaps staying outside of the GSE structure. Am I right in 
inferring that from the report?
    Secretary Mnuchin. Not necessarily. What is occurring is 
because a lot of the loans that the banks are originating are 
being sold to the GSEs. But if you look at the loans that the 
banks are originating, they are better-quality loans than the 
nonbanks. So if you look at what the GSEs are buying, the 
higher loan-to-level are from the nonbanks, and we are 
concerned about that.
    The good news is the bank regulators made sure that banks 
weren't originating bad loans and just selling them. So, that 
goes back to your original comments.
    And by the way, these should be bipartisan concerns. These 
should concern all of us.
    Mr. Himes. No, no. I completely agree, and I am glad to see 
this focus. I would emphasize again just drawing on what it 
felt like. My own State of Connecticut has only now in the 
aggregate recovered economically from the impact of what 
occurred in 2007 and 2008. So I appreciate you highlighting 
this, and I hope that if you need us to help with GSE reform or 
whatever, that we will be involved rather than surprised.
    And I yield back the balance of my time.
    Secretary Mnuchin. We do need your help on GSE reform. So, 
we look forward to working with you.
    Mr. Perlmutter. The gentleman from Connecticut yields back. 
The gentleman from Texas, Mr. Williams, is recognized for 5 
minutes.
    Mr. Williams. Thank you, Mr. Chairman.
    It's good to have you here, Mr. Secretary. Full disclosure 
again about me--car dealer, retailer, Main Street, and Texas. 
And I want to thank you for taking time out of your busy 
schedule to come up here to answer these questions.
    By my count, this is the fourth time that you have appeared 
before this committee, and I know I have asked you this 
question before. But this is politics, and things up here in 
Washington seem to change hour by hour and minute by minute. So 
before I continue with my questions, I must ask you again, are 
you a capitalist or a socialist?
    Secretary Mnuchin. I am pleased to report I am still a 
capitalist.
    Mr. Williams. And I am pleased to hear that. Thank you.
    Now while our country is moving in the right direction 
economically, I am worried that we are not paying enough 
attention to the national debt, which recently surpassed $23 
trillion. The net interest payment on this debt is estimated to 
reach around $400 billion during this fiscal year and could 
account for over 10 percent of the GDP by the end of 2020.
    Federal Reserve Chairman Jerome Powell stated in November 
that our debt is on an unsustainable path that will cripple our 
ability to respond to a recession. In addition to Chairman 
Powell's comments, I have heard from former senior military 
officers, including some who served at Fort Hood in my 
district, that our debt is one of the greatest national 
security threats that they see facing the nation.
    So the fact is we need to cut government spending, and we 
need to get serious operating within our means. So, Mr. 
Secretary, can you elaborate on the threat that our mounting 
national debt has on financial stability?
    Secretary Mnuchin. I would say that today it doesn't have 
much of a threat because we are the reserve currency of the 
world, and I think relative to this side of the GDP, it is 
sustainable. But what I would say is we need to grow our 
revenues faster than we grow our expenses. And I think, as you 
know, when the President came in, he presented a balanced 
budget. He wanted to increase military spending and decrease 
nonmilitary to pay for it.
    To get a bipartisan deal done, we increased both. I was 
part of this with Speaker Pelosi just negotiating the recent 
deal, but over time, we need to look at government spending.
    Mr. Williams. It is no secret economic growth has been 
slowing throughout the world. The International Monetary Fund 
revised its global growth estimates down to 3 percent for 2019 
when just 2 years ago, the world's economy was growing at a 
rate of 3.8 percent.
    But even as the global growth slows, the United States 
continues to outperform other developed economies, as you have 
talked about today, across the globe. And I can tell you again, 
being in the retail business, being on Main Street America, 
business is as good as I have ever seen it, and I appreciate 
that. So, Secretary Mnuchin, what factors are contributing to 
our growth outpacing our European counterparts?
    Secretary Mnuchin. I think there is no question it is the 
economic policies of the Trump Administration. It has been a 
combination of tax cuts, regulatory relief, and better trade 
deals. And that is what we are focused on.
    Mr. Williams. Unemployment currently, as we know, exists at 
3.6 percent. And earlier this year, the top economist at 
Goldman Sachs predicted that this number could fall to as low 
as 3.25 percent by the end of 2020. So what concrete actions 
would you recommend we take in Congress to help make this 
prediction become a reality?
    Secretary Mnuchin. I would suggest you continue on 
bipartisan support of USMCA. That is the most important thing 
on the economic side the Congress can do between now and the 
end of the year.
    Mr. Williams. I totally agree with you. Next, data security 
is one of the greatest threats to our financial system as our 
economy becomes more digital. Because of congressional 
inaction, many States have adopted their own data privacy 
standards. Unfortunately, for many businesses in my district, 
they are going to be forced to comply with various standards in 
order to operate their businesses in all 50 States.
    I know you have addressed this before, but as it is 
important for the businesses in my district that we talk about 
this, what would be the value of having a single Federal data 
security standard?
    Secretary Mnuchin. I think it is something we should look 
at very carefully. Just as there are national banking 
standards, I think data is something that is very critical. And 
also, by the way, this is an issue on a global basis. We want 
to make sure that localization doesn't stymy growth in 
transactions.
    Mr. Williams. Before I close, again, thanks for being here. 
I want to applaud the Treasury Department's work in standing up 
for U.S. interests during recent negotiations with European 
regulators over insurance capital standards. We cannot allow 
bureaucrats in Brussels to write unworkable rules and 
regulations that would hurt insurance companies in our country.
    Keep up the good work, and I yield back the balance of my 
time.
    Mr. Perlmutter. The gentleman from Texas yields back. The 
gentleman from Illinois, Mr. Foster, is recognized for 5 
minutes.
    Mr. Foster. Thank you, Mr. Chairman, and thank you, 
Secretary Mnuchin.
    There are so many new, emerging threats to financial 
stability today from cryptocurrency projects such as Libra, to 
ballooning levels of corporate debt, leveraged lending, and 
questions about the accuracy of ratings from bond rating 
agencies, in addition to climate-related risk, and the 
concentration of cloud services providers, just a very long 
list. And that is why I am very concerned that the Treasury's 
budget and staffing levels for FSOC and the Office of Financial 
Research have been greatly reduced under your watch.
    Compared to the Fiscal Year 2017 budget, the Trump 
Administration's Fiscal Year 2020 budget would result in about 
half of the staff for FSOC and OFR. So, Secretary Mnuchin, do 
you really think that it is a wise idea to cut the FSOC and OFR 
staff levels in half?
    Secretary Mnuchin. I do. And the reason for that is 
because, one, you have been successfully increasing our 
Treasury staff outside of FSOC, as well as the other 
regulators. We rely upon one of the things that FSOC does is, I 
think it can have a smaller group of core people, and most of 
the work is done on a coordinated basis through all of the 
agencies. So, that is really why we are comfortable doing that, 
and we are trying to be prudent on expenses.
    Mr. Foster. Well, it seems very short-sighted to me to cut 
the resources that are desperately needed to make sure that we 
even reduce the risk of the sort of financial crisis that we 
lived through.
    So you are unwilling to commit to doing anything to restore 
those budgets. Is that correct?
    Secretary Mnuchin. I would never say I am unwilling to 
commit. We are happy to come up and explain to you what our 
thinking is. Again, we are just trying to save taxpayer 
dollars. We are not trying to do anything that would create 
more financial instability. If we thought we needed those 
resources, we would keep them.
    Mr. Foster. Well, okay. I believe that we need to give FSOC 
and the OFR the funding and personnel they need to carry out 
what I regard as their very important missions, and that is why 
I have introduced the Enhanced Financial Stability Research and 
Oversight Act, which I am hopeful that we are going to be 
marking up in committee within a few weeks here.
    This is a common-sense measure that just tries to restore 
the minimum funding levels that we had in 2017. It is pretty 
simple because we cannot foresee and prevent the next crisis if 
we do not have the personnel around to actually do the work, 
including the coordination of collecting the data, analyzing 
the risk, and performing the essential research.
    Anyway, I just hope my colleagues will support me in this 
important effort. I think it is short-sighted to cut back those 
essential functions.
    Now another point that I alluded to earlier is that, 
increasingly, big tech firms like Amazon, Google, and others 
are pushing into financial services and products, including 
cloud computing services for the largest banks. And according 
to a recent readout of the FSOC meeting, cloud computing was a 
topic of discussion.
    My first question is, in your view, does FSOC have the 
authority it needs to designate a cloud provider as being a 
non-bank systemically important financial institution (SIFI) 
market utility?
    Secretary Mnuchin. At this point--and this is a very fact-
specific situation--the answer is no. But it is something we 
have discussed at the FSOC and--
    Mr. Foster. But do you have the authority? If you come to 
the conclusion that they should be designated, do you feel that 
you have the authority?
    Secretary Mnuchin. If we came to the conclusion.
    Mr. Foster. Right. Okay. I have a real worry that the 
concentration of cloud providers--it would be an interesting 
thought experiment to say what happens if, for example, there 
was not too long ago a story on Bloomberg about the possibility 
that the Chinese had put little hardware bugs in very widely 
used equipment inside cloud utilities.
    And so if that is discovered at a single cloud utility 
where they have to replace a big fraction of their hardware and 
have to be down for potentially months while that happens, to 
actually think what that would do to our economy if AWS went 
down for a month or two.
    Secretary Mnuchin. As I highlighted earlier, cybersecurity 
is a big focus of ours, and part of the reason why we are 
focused on the cloud is because we share your concerns. We want 
to make sure that no one financial institution is dependent 
upon, and would be taken down by, a cloud provider.
    Mr. Foster. In my remaining time, I just want to thank you 
for your response to the letter that Congressman Loudermilk and 
I sent to you having to do with digital identity solutions. And 
I think that there is an essential government role there to 
leverage--as was the Administration's position--the REAL ID Act 
to allow citizens who wish to have a way to authenticate 
themselves in a secure manner online.
    I think that is a fundamental necessity in a modern 
economy, and I think there is an essential job for the Federal 
Government to provision that basic identity and many 
opportunities for the private sector to leverage additional 
features on top of that. I want to thank you for your response, 
and I encourage you to continue.
    I yield back.
    Mr. Perlmutter. The gentleman from Illinois yields back. 
The gentleman from Arkansas, Mr. Hill, is recognized for 5 
minutes.
    Mr. Hill. Thank you, Mr. Secretary. It's great to have you 
back to the committee. I appreciate all of your leadership, and 
I just was so interested in listening today. And thanks to the 
regulators that we talked to yesterday for their swift 
implementation of S.2155 on regulatory reform. We appreciate 
Treasury's leadership on that.
    In your work on strict sanctions around the world, in 
Venezuela, North Korea, Iran, and Russia, you have demonstrated 
a lot of leadership there. And of course, tax reform has been 
talked about extensively. So we are grateful for your 
leadership as our Treasury Secretary.
    I want to turn and mention a couple of things that we have 
talked about today. On the repo market that Mr. Perlmutter 
talked about and the ranking member, I think the concern is 
that the New York Fed is not supporting the repo market, they 
are the repo market. I think that is the challenge.
    And we don't see the bank reserves that are more than 
adequate, billions more than needed--on JPMorgan, for example, 
$120 billion in daily cash held at the Fed on a $60 billion 
cash requirement, and yet they are not entering that repo 
market. So I am pleased that yesterday at the FSOC meeting, you 
talked about this, because I do think supervision is an issue 
here. And the stigma attached with something that was a regular 
part of our business lives, which is running a daily, interday 
daylight overdraft at the Fed.
    On mortgage servicing, I appreciated your comment there. 
Again, that business shifted out of the bank sector to the 
nonbank sector because of Dodd-Frank. And for the 5 years that 
I have served in Congress, I have tried to get the Obama 
Administration and the now Trump Administration to support the 
idea that mortgage servicing rights are not a derivative that 
should be treated in that manner.
    It is, as you know from your long career in mortgage 
finance, a natural companion to the origination of residential 
mortgages. So I hope FSOC will lend its weight to allow 
mortgage servicing to not have the capital penalty that they 
have in Dodd-Frank.
    Mr. Foster and I have had a lot of conversations about 
digital currencies. Fed Chairman Jay Powell just answered our 
letter on the idea of a digital token, and I think the concept 
is a little misunderstood.
    If we want a digital future in finance and we want to 
protect the preeminence of the American dollar as the reserve 
currency, this idea of a digital token is an important concept. 
And it is not anything except allowing our government to 
facilitate a blockchain transaction process legally in the 
future.
    We have Visa debit. We have Mastercard. We have Swift, 
Fedwire, the ACH system. All true, all have private sector 
participation in them and government participation. But this 
idea that there is a new rail created that is a blockchain rail 
that both banks and nonbanks can participate in to settle 
transactions through a token, it is coming our way faster than 
we like, perhaps faster than the 5-year timeframe you outlined. 
So I do think it is an important issue for the FSOC to continue 
to consider and also to have Treasury's view on, independent of 
what your agent over at the Federal Reserve thinks as you 
implement Article I's power on currency.
    Let me turn and ask you a question about World Bank issues 
that we were--we had a hearing a few weeks ago at the 
subcommittee on that topic, multilateral development 
institutions. There was no Treasury representative; there was 
an illness that day.
    And one thing I talked about in the hearing is the 
legislative mandates that are put on our managing director and 
our Governor to direct votes at the Fed. So my question to you, 
Mr. Secretary is, are you concerned that that kind of 
governance, to support or oppose a financing project, ties the 
hands of the United States in leading at the bank due to being 
forced to abstain on voting?
    Secretary Mnuchin. I am.
    Mr. Hill. And does Treasury have an amount, a record of 
those abstentions? And that long binder, I understand, of rules 
that our Governor has to follow, and is that something you 
could share with the committee and help educate the committee?
    Secretary Mnuchin. We can come back to you on that. It is a 
huge bureaucracy running all these tests, and we keep the data, 
so we can get back to you.
    Mr. Hill. Yes, what I hear, both from your former 
colleague, Mr. Mathis, and others is that it just reduces 
America's effectiveness to lead the bank. So I think we would 
be very interested in working with Treasury on a way to reduce 
those mandates, fine-tune the mandates, remove ones that are 
redundant, and have your leadership on that. Is that something 
you would be interested in helping us on?
    Secretary Mnuchin. We look forward to working with you.
    Mr. Hill. Good. Thank you, and I yield back, Mr. Chairman.
    Mr. Perlmutter. The gentleman from Arkansas yields back, 
and before I recognize the gentlelady from Ohio, I think we all 
want to wish the gentleman from Arkansas a happy 29th birthday.
    [applause]
    Mr. Hill. This is how I wanted to celebrate it.
    [laughter]
    Mr. Perlmutter. Okay. I would like to recognize now for 5 
minutes the gentlelady from Ohio, Mrs. Beatty.
    Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking 
Member. And thank you to our witness, Secretary Mnuchin.
    Let me start out by saying thank you for the information 
that I received from you on working with your Office of 
Minority and Women Inclusion (OMWI) Director, looking at the 
diversity information, and that was very much appreciated. So, 
thank you.
    Today, Mr. Secretary, I wanted to share with you that in 
yesterday's hearing with prudential regulators, several of my 
colleagues, including Congressman Cleaver, raised the issue of 
minority depository institutions (MDIs), specifically with the 
rate that they are disappearing. And as you know, since the 
financial crisis of 2008, the number of MDIs that fail is 31 
percent.
    At the end of 2018, we only had 149 of these institutions 
left. MDIs are incredibly important to the minority community 
that they operate in, and so I am introducing legislation today 
to codify the Treasury's Financial Agency Mentor-Protege 
Program, and it is known as the Expanding Opportunity for MDIs 
Act.
    And I also want to say that it was just brought to my 
attention that your staff had sent my office some comments and 
technical assistance on the bill last night. So, I am very 
appreciative of that. Can you briefly describe what the 
Treasury's Financial Agency Mentoring Program will seek to 
accomplish and how your Department came up with it?
    Secretary Mnuchin. First of all, thank you very much, and 
we were glad to assist on this.
    The Protege Program has worked very well, and the idea is 
to partner a minority bank with a large bank. And in that way, 
the minority bank can get resources and training and help to 
run their business.
    We share your concern. I think there should be an increase 
in opportunities for minority banks, not a decrease. This is 
something I am pleased about. I personally wrote and asked many 
of the big CEOs to help on this, and we look forward to--I know 
we did work with you on some technical issues, and we look 
forward to continuing to help you on this.
    Mrs. Beatty. I want to say, thank you. Was there a specific 
need that you thought you had to send the letters to the big 
banks? Do you think it would help them to be more engaged to do 
it or because you felt they weren't doing anything?
    Secretary Mnuchin. No, they were pleased. I would say, when 
we asked people to go into this Protege Program, people have 
been very receptive, and it has worked. And we look to scale 
this up, and we look to work with you on your potential 
legislation.
    Mrs. Beatty. Well, thank you. Because we have noticed that 
some of the larger banks whom I have been very critical of, 
their lack of working, increasing enough with their CRAs, 
participating on diversity and inclusion. So I would like to 
say, Mr. Chairman and Mr. Ranking Member, people ask us all the 
time, why do you talk so much about diversity and inclusion, 
and it is beyond just hiring people because of their race or 
ethnicity or gender. It is also about, if you have someone in 
the room and you are mentoring and you are working with people, 
it helps with the economy. It helps with jobs.
    Therefore, it crosses over that people can pay for their 
housing, because we have a lack of affordable housing. It helps 
them with healthcare. It helps them with daycare and childcare 
if they are in the room.
    Again, I would like to say thank you, and Mr. Chairman, I 
yield back the balance of my time.
    Mr. Perlmutter. The gentlelady yields back. The gentleman 
from Tennessee, Mr. Kustoff, is recognized for 5 minutes.
    Mr. Kustoff. Thank you, Mr. Chairman.
    And thank you, Mr. Secretary, for appearing today.
    We have had questions today about the U.S.-Mexico-Canada 
Agreement USMCA), and can I ask you, just in layman's terms, 
what is the effect to the economy if, in fact, Congress does 
pass the U.S.-Mexico-Canada Agreement? And conversely, what is 
the effect on the economy if we fail to pass the U.S.-Mexico-
Canada Agreement?
    Secretary Mnuchin. I would say if we pass it, we estimated 
it is in excess of 50 basis points a year in GDP, which is very 
significant. This would create additional jobs. This would 
create additional revenue for the government, additional 
revenue for consumers and businesses, and it modernizes trade 
with our two most important trading partners.
    I am not going to speculate on what would happen if you 
don't pass it, because I am highly encouraged that you will.
    Mr. Kustoff. I would like to share your enthusiasm, and I 
appreciate that.
    You received a question from Mr. Williams of Texas about 
the data localization and whether there should be a Federal 
standard. If I could, though, I would like to ask you about 
India. I know that you were recently in India, and we have read 
the press accounts about how India is trying to raise the bar 
as it relates to the data localization and, frankly, the 
restrictions on free trade as it relates to startups and other 
companies.
    Can you talk about what the barriers are for U.S. companies 
operating now in India and what effect that could have?
    Secretary Mnuchin. Again, in my recent trip, we had very 
specific conversations. We have been dealing with them over the 
last year on this issue. We want to make sure that U.S. 
companies are treated fairly and can compete.
    We have no issues if countries want to have local data for 
regulatory purposes, they do that. It is the issue of then 
eliminating data outside. And I think, as you know, we are in a 
global economy. We are in a scenario where data transfers. The 
data is processed in different places. So, this is a 
complicated issue that we continue to work on to make sure that 
our financial services companies are treated fairly.
    Mr. Kustoff. Not only financial services companies, but 
also other companies that are operating in India as well?
    Secretary Mnuchin. That is correct.
    Mr. Kustoff. And Treasury continues to work with the 
officials in India on that?
    Secretary Mnuchin. We do. And we are also working very 
closely with the Office of the United States Trade 
Representative (USTR) because it is a trade issue.
    Mr. Kustoff. Thank you, Mr. Secretary.
    We have talked about the benefits of the Tax Cuts and Jobs 
Act, which no doubt has been a tremendous benefit to our 
economy and to our folks who live in the Eighth Congressional 
District in Tennessee and across the country. One thing that we 
may not have gotten right in the Tax Cuts and Jobs Act is the 
Qualified Institutional Placement (QIP) as it relates to 
depreciation, and I think that is a technical fix, trying to 
resolve that.
    Could you talk about the effect of trying to resolve that 
in terms of depreciation from 39 to 15 years?
    Secretary Mnuchin. Let me just say this is something that I 
hope this committee and others will help us with on a 
bipartisan basis. This was clearly a technical mistake, and 
what happened for retailers was due to literally a technical 
mistake in the drafting, the amortization became longer as 
opposed to shorter. And I think everybody acknowledges on a 
bipartisan basis that this was a technical mistake.
    And this impacts an area of the economy, which is 
retailers. It is a big part of the economy. We have been trying 
to get this fixed. I would hope it is something that Congress, 
next year, will reconsider helping us work on. It was a simple 
mistake, and nobody is debating that.
    Mr. Kustoff. From your standpoint at Treasury, is it 
something that should be resolved sooner rather than later, or 
you would hope would be resolved sooner rather than later?
    Secretary Mnuchin. It is our number one, two, and three 
technical fix request.
    Mr. Kustoff. Thank you, Mr. Secretary. I yield back the 
balance of my time.
    Mr. Perlmutter. The gentleman from Tennessee yields back. 
Mr. Heck from Washington is recognized for 5 minutes.
    Mr. Heck. Thank you, Mr. Chairman.
    First, I want to join with my friend from Texas, Mr. 
Williams, in expressing my appreciation for the role that 
Treasury played in the international insurance negotiations. I 
happen to be one who believes that we ought to keep faith with 
the McCarran-Ferguson Act and that it is the best way to have a 
well-regulated, consumer-oriented insurance market. I think it 
has worked well. So, thank you, sir.
    I am also grateful that my friend across the aisle raised 
the issue of the Tax Cuts and Jobs Act. I would like to ask you 
about it. Obviously, at the time, small technical fixes 
necessary notwithstanding--and I am a cosponsor of that bill. I 
hope as well that we get to it--that we were promised that it 
would be a game changer. Actually, those were your words.
    This is going to be a game changer for business, and it was 
broadly held as something that would lead to increased business 
investment. It hasn't. There is the chart. That is the chart of 
the Bureau of Economic Analysis revealing that we basically had 
six quarters of a significantly downward trend of business 
investment and capital.
    And I am going to ask you why you think that is, and what 
it is you think we ought to do about it, especially given the 
promises that were made. But I want to say, first of all, why I 
care about this.
    I think it is pretty clearly established that there is a 
close relationship between increased productivity and increased 
wages. And let's face it, the data is in. We have been fairly 
stuck on wage growth for the better part of 30 years in this 
country, and while it is beginning to inch up, it is not really 
material in that increase.
    Every upward trend is appreciated, but we still do not have 
wage growth. And presumably, we do not have wage growth because 
we do not have increased productivity, presumably because we do 
not have increased business investment, which we were promised. 
So, Mr. Secretary, why not, and what should we do about it?
    Secretary Mnuchin. First of all, I agree 100 percent with 
you on the impact of wage growth. That has been one of our 
priorities. I kind of disagree with you; I think it actually 
has been significant. I think that for the first time in the 
last 10 years, we have seen wages growing and growing at a 
level that is meaningful to taxpayers. I think we have also--
    Mr. Heck. Would you care to cite the data, because it has 
not over consecutive quarters significantly outpaced the 
Consumer Price Index? And this is coming on the heels, I might 
remind you, sir, of basically 30 years of flatline.
    Secretary Mnuchin. Again, we are happy to give you the 
charts. But there is no question that wage growth has been 
increasing, and inflation has been very low. So, we are happy 
to get back to you with the data.
    Mr. Heck. But the question is that downward arrow. We were 
promised an upward arrow. We haven't gotten it.
    Secretary Mnuchin. To be honest with you, I can't really 
read that chart, other than I can read the capital spending.
    Mr. Heck. And do you see the blue arrow?
    Secretary Mnuchin. I got the blue arrow.
    Mr. Heck. That is not good, sir.
    Secretary Mnuchin. I got the blue arrow. I will say--
    Mr. Heck. That is business investment.
    Secretary Mnuchin. Again, I don't know how you are 
calculating that business investment.
    Mr. Heck. I am not. The Bureau of Labor Statistics is.
    Secretary Mnuchin. Well, you have obviously picked a slide 
that demonstrates a dramatic decrease. We are happy to come 
back to you with our own data. Look, there is no question--
    Mr. Heck. One of my favorite adages is that some people use 
facts and figures the way a drunk uses a lamppost to lean on, 
not to illuminate. I assure you, sir, I have not done that. 
This is the Bureau of Economic Analysis data. It is six 
consecutive quarters. I haven't in any way reshaped the bar 
graph or the line or the data in any way.
    We are on a downward trend in business investment and 
capital equipment, even though we were promised, as a 
consequence of the Tax Cuts and Jobs Act, that it would flower. 
And we need it for increased productivity for real increases in 
wages. Why haven't we gotten it? You promised it to us.
    Secretary Mnuchin. Mr. Heck, first of all, we are the only 
economy in the world that is showing continued growth. That is 
not coincidental. We are showing additional jobs. We are 
showing wages--
    Mr. Heck. Economic growth is 2 percent now.
    Secretary Mnuchin. Again, that--
    Mr. Heck. That is what you are bragging about, a revised 2-
percent forecast?
    Secretary Mnuchin. Those numbers, if you would let me 
respond, as opposed to screaming at me. Those numbers--
    Mr. Heck. Oh, no, sir. If I am screaming at you, you will 
know it. This is not screaming.
    Mr. Perlmutter. Gentlemen, please.
    Secretary Mnuchin. Those numbers were impacted partially by 
the Boeing impact. Those numbers were partially impacted by the 
strikes, and I would say they have also been impacted by a 
significant slowdown in global growth. And I think you are 
going to see growth quite significant in the pickup in the rest 
of the year and next year.
    So, there is no question American taxpayers are seeing the 
benefit of tax cuts.
    Mr. Heck. Thank you, sir.
    Mr. Perlmutter. The gentleman's time has expired. The 
gentleman from Georgia, Mr. Loudermilk, is recognized for 5 
minutes.
    Mr. Loudermilk. Thank you, Mr. Chairman.
    And Mr. Secretary, thank you for being here.
    First, I want to thank you for directing Treasury to put 
America first, and for standing strong for American interests 
during the recent international insurance negotiations. I 
think, and I think you agree, that we must be very cautious 
about imposing European capital standards on U.S. insurers. I 
am glad Treasury has registered its official opposition. So, I 
want to thank you for that.
    I would like to talk to you about the National Association 
of Registered Agents and Brokers, NARAB. In the 5 years that we 
have had NARAB, it has never been operational because the board 
of directors must be nominated by the President and confirmed 
by the Senate, and this hasn't been done.
    And the last time you were here, we discussed that, and you 
committed that you would speak to the President about how 
important it was to get these nominations done. And I just 
wanted to follow up and find out where we are on that process?
    Secretary Mnuchin. We have put in recommendations, and it 
is going through the process, and we will follow up with you 
again, as we have suggested.
    Mr. Loudermilk. Okay. And I appreciate that, if you could 
stay on top of it, because it is very timely. And I am 
concerned with the timeliness right now of the Senate because 
if we proceed with impeachment, as it appears we are doing, we 
are about to shut down the Senate for potentially 2 months or 
longer and not being able to get anything else done. So, I 
appreciate that.
    I am also ranking member of the committee's Artificial 
Intelligence Task Force, and earlier this year, we had a 
hearing regarding customers' digital identity. And the task 
force chairman and I recently sent a letter to you, asking to 
move forward with some of the recommendations of the 2018 
Fintech report, and I just wanted to find out what action 
Treasury has taken to work with the private sector on solutions 
to digital identity issues?
    Secretary Mnuchin. I think, as you pointed out, this is 
something that we identified early on. It is something that we 
continue to work on with the private sector. It is something I 
am also very interested in because of the IRS and from the 
government standpoint as well. So, it is something we look 
forward to continuing to work with you on. It is an important 
issue.
    Mr. Loudermilk. Okay. I appreciate that, and if you could 
keep us up-to-date on progress that is made, that would be very 
helpful to us as well.
    Also, in 2017, FSOC formed the Digital Assets Working 
Group, which is going to explore issues surrounding blockchain 
technology. I applaud you for doing that, but the one concern I 
have is that State banking regulators have been excluded from 
the working group. And Dodd-Frank specifies that nonvoting 
members of FSOC, such as State banking regulators, must not be 
excluded from FSOC activities.
    So I think it is important that we have our stakeholders in 
the States involved, and do you know why the State regulators 
have been excluded from the working group?
    Secretary Mnuchin. I don't, but it is not intentionally. I 
don't remember kind of whether they were excluded from the 
FSOC. I would say right now it is not an important issue, but 
if the State regulators want to be part of it, we will 
absolutely accommodate them.
    Mr. Loudermilk. Okay, I would appreciate it, again if you 
could keep us abreast of that.
    And I want to close out by thanking you for your part in 
this robust historic economy that we have. I see that we could 
even add another $68 billion into this robust economy if we 
could move forward with the USMCA, and I hope that very soon we 
can put the American people first and move forward with that.
    With that, I yield back, Mr. Chairman.
    Mr. Perlmutter. The gentleman yields back. The gentlewoman 
from Michigan, Ms. Tlaib, is recognized for 5 minutes.
    Ms. Tlaib. Mr. Secretary, thank you so much for coming 
before our committee again.
    As you know, my district is the third-poorest congressional 
district in the country, and the economic recession devastated 
my district. We are still recovering not only in Detroit, but 
even the Wayne County communities throughout my district.
    And one of the things that we did through Dodd-Frank, as 
you know, is create the Financial Stability Oversight Council. 
That kind of oversight of shadow banks is going to be critical, 
too-big-to-fail kind of banks and so forth.
    Under your tenure so far--and again, I would love to hear 
your vision of what you think this Council is supposed to do 
because so far under your tenure, Mr. Secretary, we dropped the 
appeal of the district court's decision in the MetLife lawsuit. 
I think there is not one single non-banking institution that is 
designated as too-big-to-fail, or what I believe we call, 
systemically important financial institutions (SIFIs).
    What is the direction that we are going in, if we are not 
doing any oversight? The whole purpose of Dodd-Frank was so 
that we don't have another downturn, an economic recession that 
led to predatory practices by these big banks.
    Secretary Mnuchin. First, let me say, I share your concern 
and your issues, and we are doing a lot on oversight. The 
committee is very focused--
    Ms. Tlaib. But you don't have anybody to regulate.
    Secretary Mnuchin. Again, the fact that companies haven't 
been designated--
    Ms. Tlaib. Not one single institution, correct?
    Secretary Mnuchin. Again, that is a good thing. That is 
because the companies deleveraged significantly.
    Ms. Tlaib. So you think MetLife, Prudential--none of those 
are too big-to-fail?
    Secretary Mnuchin. That is correct. As a matter of fact, 
they are a lot better capitalized, and by the way, GE Capital 
was de-designated prior to us coming here. So, part of the 
benefit of the designation was it encouraged all these 
companies to de-risk so they wouldn't be designated, and they 
wouldn't be regulated by the Fed, so that they have proper 
regulators.
    I want to be clear: The committee's job is to bring all the 
regulators together to make sure that the primary regulators 
are regulating these entities.
    Ms. Tlaib. But by dismissing the case, I believe, in the 
MetLife lawsuit, we don't have that much authority now that we 
have walked away by saying that they would fall under certain 
guidelines for oversight.
    Secretary Mnuchin. Actually, that is not the case at all. 
We have the same authority as we always had. The only issue we 
have talked about is including a cost-benefit analysis, which 
we think was required by law.
    I just want to be clear: I view it as good news to the 
economy that we don't have anything designated. And if we were 
sitting here with lots of entities designated, that would be a 
major concern of ours.
    Ms. Tlaib. Mr. Chairman, if I may, I would like to submit 
for the record, ``Strengthening the Regulation and Oversight of 
Shadow Banks.''
    Mr. Perlmutter. Without objection, it is so ordered.
    Ms. Tlaib. Last question, and it might be out of whack, but 
this is important for me to understand. Do you believe in 
socialism for corporations?
    Secretary Mnuchin. Do I believe in socialism--
    Ms. Tlaib. Socialism for corporations.
    Secretary Mnuchin. --for corporations? No, I--
    Ms. Tlaib. A lot of people talk about socialism. I want to 
know, do you believe in it?
    Secretary Mnuchin. I do not believe in socialism for 
corporations.
    Ms. Tlaib. Thank you very much. I yield back.
    Mr. Perlmutter. The gentlewoman yields back. The gentleman 
from Ohio, Mr. Gonzalez, is recognized for 5 minutes.
    Mr. Gonzalez of Ohio. Thank you, Mr. Chairman, and thank 
you, Mr. Secretary, for being here.
    As you may know, I have been working with your staff on 
some World Bank reform issues, and I just want to thank you for 
your collaboration on that. To me, I think, when I look at the 
World Bank, the number-one issue is ensuring that China 
graduates from the loan program. It is unconscionable to me 
that my taxpayers, our taxpayers should, in any way, shape, or 
form, be subsidizing the Chinese growth model.
    And my understanding is that today, at this very moment, or 
maybe it has already happened, China's country partnership 
framework is going to get a vote at the bank. I couldn't access 
the document. That is not your fault. It wasn't on the bank's 
website. But my understanding is that it provides loans for $1 
billion in perpetuity and assistance in advancing the Chinese 
growth model internationally, a growth model that has social 
credit scores, interns its own people, and obviously, what is 
going on in Hong Kong. It's a huge issue for me.
    I guess my first question is, just at a basic level, do you 
agree with the graduation objective? Do you believe that China 
should be made to graduate at the World Bank?
    Secretary Mnuchin. I do.
    Mr. Gonzalez of Ohio. And then, second, as a follow-up, 
what is the best way to ensure that occurs? Because right now, 
it feels like we have our hands tied behind our back. Despite 
the fact that we are the largest shareholder and have veto 
authority, it still feels like we have no ability to affect 
this. So, how can we do it?
    Secretary Mnuchin. I don't think that is the case. I think 
that, again, as I mentioned earlier, this is something that 
David Malpass worked on with the World Bank when he worked for 
me. This was his number-one issue in reforms. Now at the World 
Bank, and leading the World Bank, he has worked with China.
    China actually, I understand, is cash flow-positive this 
year, meaning there is more cash coming into the World Bank 
than cash going out. I believe they are going to be under $1 
billion this year, and he is working towards them--and by the 
way, in the China program, as I have said, our executive board 
member has objected to the program, and I think that gets read 
in, and ultimately, that will be on the World Bank's website.
    Mr. Gonzalez of Ohio. Yes, and I guess he objected, but we 
do technically have veto power, right? Can you explain how that 
would work so that--
    Secretary Mnuchin. Just to be clear, we don't have veto 
power over every single loan or veto power over a specific 
statement. We have veto power over capital allocations and 
other issues. But again, I have great confidence in David 
Malpass. He understands this issue. He is working with China on 
this issue. We all share the same objectives.
    Mr. Gonzalez of Ohio. Yes. And I appreciate it. I certainly 
appreciate the progress, right? But for me, even a dollar is 
too much for our taxpayers to be contributing to China.
    As you may know, I have also recently introduced 
legislation to support the policy that you just articulated to 
transition China off of bank lending. I appreciate your staff's 
feedback and I look forward to further collaboration.
    Another section of my bill deals with debt transparency 
with respect to the Belt and Road Initiative. I see providing 
debt management assistance as a vital piece of our national 
strategy, with some of our partners and allies sharing the same 
concerns regarding China's lending practices.
    Can you talk about the current strategy and efforts to 
provide debt management assistance at the World Bank and the 
International Monetary Fund (IMF) to borrowing countries of the 
Belt and Road Initiative? And what are we doing to get other 
partners and allies fully onboard?
    Secretary Mnuchin. We have a lot of support on this issue 
both from the leadership of the World Bank and the leadership 
of the IMF, as well as the G-7. Everybody supports debt 
transparency. It is very important that China play by these 
common rules, and we have had very direct discussions with 
them.
    Mr. Gonzalez of Ohio. Thank you.
    Secretary Mnuchin. And as conditions of certain IMF 
programs, without me going into specifics, we have demanded 
complete transparency on exposure.
    Mr. Gonzalez of Ohio. Thank you, and I look forward to 
continuing to work with your staff on these issues. I think 
they are critically important.
    Shifting a bit to the Volcker Rule, I sent you and the 
prudential regulators a letter this week about the importance 
of establishing a regulatory framework that promotes investment 
opportunities in startups and small businesses. I know the 
Volcker regulations are considering revisions to the covered 
funds portion of the Volcker Rule.
    For me, prior to this job, I ran a Silicon Valley tech 
startup. It is very easy to acquire capital in that industry, 
in that section of the country, and less so where I am from in 
Northeast Ohio, and whom I represent.
    Can you talk about your thoughts on this specific issue and 
how it would impact private capital flowing into communities 
outside of places like Silicon Valley?
    Secretary Mnuchin. I commented on this earlier, but we are 
working on the regulators, and I hope over the next 3 to 6 
months we can address this. I do think it is something 
important and will help small businesses. In no way is it going 
to impact systemic risk.
    Mr. Gonzalez of Ohio. Thank you, and thank you for your 
leadership. I yield back.
    Mr. Perlmutter. The gentleman yields back. The gentleman 
from Illinois, Mr. Casten, is recognized for 5 minutes.
    Mr. Casten. Thank you, Mr. Chairman. And thank you, 
Secretary Mnuchin, for being here today. I introduced H.R. 
5194, the Climate Change Financial Risk Act, with Senator 
Schatz, of course, introducing the companion bill in the 
Senate, to create a climate change risk subcommittee within 
FSOC and to report annually on systemic risks of climate change 
to the financial system. The reasons for that are, and I am 
sure you know this, but just to reiterate for everyone here, 
from 2016 to 2018, average economic losses from natural 
disasters were $150 billion. I just returned from Madrid. The 
goal of the Paris Agreement is to stay under 1\1/2\ degrees of 
additional warming. We are not globally on that target right 
now. We are not even at 2 degrees. Right now, if we don't 
change direction, we are at 4 degrees of warming. Eight degrees 
of warming is within the zone of possibility. At 8 degrees, 
Manhattan feels like Qatar, essentially. It is really 
unpleasant. At 4 degrees of warming, the global losses could 
hit $23 trillion per year.
    There are already predicted to be 311,000 homes that will 
be regularly inundated by 2045, and millions by the end of the 
century. This dwarfs the financial crisis, and presumably a lot 
of those homes will be subject to 30-year mortgages. So by any 
analysis, that is systemically disastrous, and I want to just 
follow up. You expressed doubt earlier in this hearing about 
whether bank stress testing was necessary to assess the impacts 
of the climate crisis. Have you consulted with any climate 
scientists in the course of coming to that conclusion?
    Secretary Mnuchin. So, again, let me just preface, I have 
expertise on a lot of issues, but climate is not one of them.
    Mr. Casten. No, no. That is why I am asking whom you 
consulted with.
    Secretary Mnuchin. I think there is a place and a role to 
study the climate issues and the impact on the economy. I don't 
think FSOC is that place, and I think there are plenty of other 
areas.
    Mr. Casten. Does the Office of Critical Infrastructure 
believe that there is no systemic risk from the climate crisis, 
because you are not an expert in cyberterrorism either, but 
presumably we do look at those--
    Secretary Mnuchin. Actually, I have become an expert in 
cyberterrorism. I spent a lot of time on that because that is 
my primary responsibility.
    Mr. Casten. I don't mean to criticize your expertise, but I 
am saying there are systemic risks that the Office of Critical 
Infrastructure has concluded. So, have they concluded that 
climate change is not a systemic risk?
    Secretary Mnuchin. I don't believe they have concluded that 
it is a systemic risk. I don't know in the negative if they 
have concluded it the other way, but let me just comment, 
outside of the United States, there are some areas where 
climate issues are very, very, very significant. So, I think 
the U.S. has made a lot of progress on this.
    Mr. Casten. No, we haven't. We are not on a sustainable 
path, but let me just throw out some numbers. Likely sea level 
rise, we already know if we went to zero CO2 tomorrow, we still 
have another 2 feet baked in. Realistically, we probably have 
meters measured in. So at the likely sea level rises of the 
best analyses, there are $900 billion worth of U.S. homes that 
are underwater by the end of the century. That is at current 
values. They would be worth a lot less by the time they go 
underwater. Has FSOC analyzed how that would impact the 
financial system?
    Secretary Mnuchin. Not to my understanding, it hasn't.
    Mr. Casten. Okay. The projected private investor losses 
globally, depending on the warming scenario, somewhere between 
$4.2 and $13.8 trillion, depending on the scenario. Has FSOC 
estimated the effect on systemic financial stability from those 
losses?
    Secretary Mnuchin. Again, as I have commented earlier, and 
you have obviously spent a lot of time on this and I appreciate 
that, there is a place and role to analyze these. I think that 
the issue for FSOC is to make sure that banks have proper 
disclosure, but I don't believe this is a systemic risk that 
warrants FSOC review, but I will discuss it with the committee. 
You have brought it up. I am happy to discuss it with the 
committee.
    Mr. Casten. Okay. The concern, and just as I think about 
these things, obviously none of us are rooting for this. But if 
I am an insurer and I am looking at these risks out in the 
future at some point, not right now when I only have a 1-year 
policy in front of me. But when we start to get to the point 
where those policies are coming due, I am going to start 
changing my risk profiles. I am going to stop insuring certain 
sectors. We have seen what the maps of the country look like, 
and where you will not want to live, and where we are going to 
have crop failures, and it is impossible for me to see a 
scenario where those don't become systemic risks.
    Just before I left for Paris, I watched ``Planes, Trains, 
and Automobiles'' with my daughters, and I am reminded of that 
scene where they are driving down the road the wrong way and 
everybody says, you are going the wrong way. They don't even 
know where we are going. We are going the wrong way. We know we 
are in the wrong lane. We know there are a couple of trucks 
coming down the highway at us. And if you don't think that FSOC 
should do it, I guess I respectfully disagree, and that is why 
we introduced the bill, because I think we need to look into 
these risks so that we can swerve while we still have time. 
Thank you. I yield back.
    Mr. Perlmutter. The gentleman's time has expired. The 
gentleman from Tennessee, Mr. Rose, is recognized for 5 
minutes.
    Mr. Rose. Thank you. Welcome, Secretary Mnuchin. It is good 
to have you here today, and thank you for taking time to visit 
with us. One of the defining tenets of our insurance industry 
is that it, is by and large, State-regulated. It is the 
strength of the country, and it is something we need to defend. 
Secretary Mnuchin, like so many of my colleagues here today, I 
want to thank you for your efforts to defend our State-based 
insurance regulatory regime, for your close and collaborative 
work with the State insurance commissioners, and for 
registering Treasury's official opposition to the International 
Capital Standard (ICS) in Abu Dhabi.
    I know there is still work to do on behalf of Team USA to 
ensure foreign bureaucrats don't dictate the rules for U.S. 
insurance regulations, so I appreciate your continued efforts 
on the ICS and hope you will continue to engage with Members of 
Congress and the State insurance commissioners as we move 
forward. Secretary Mnuchin, since the ICS was adopted, what are 
some of your main concerns with the current framework?
    Secretary Mnuchin. Let me say I am pleased to hear that 
there is bipartisan support on this issue. We do very much 
support the State regulatory mechanism for insurers, and we are 
concerned, and we have expressed these concerns, that although 
they are not required to be adopted, that it could force the 
industry in a way that is detrimental to our leadership and our 
State-based regulators.
    Mr. Rose. Thank you. Vice Chair Quarles said in his January 
2019 remarks at the American Council of Life Insurers that the 
Federal Reserve's building block approach, or BBA, could strike 
a better balance between entity-level and enterprise-wide 
supervision of insurance firms, which would facilitate the 
continued robustness of product availability here in the United 
States. I believe part of the intent behind developing the BBA 
was that it could be deemed comparable to the ICS. Mr. 
Secretary, are you familiar with the BBA?
    Secretary Mnuchin. I am not completely, but I will follow 
up with your office. We have a lot of people who are experts, 
as you know, and have spent time on this, and focused on it for 
me.
    Mr. Rose. Okay. Thank you. Do you think, based on what you 
know now, that the BBA framework could eventually be recognized 
as an outcome equivalent approach to the ICS, and would it be 
preferable, in your opinion?
    Secretary Mnuchin. Again, I want to get back to you on 
that, but I believe that is the case. But I want to get back to 
you on that issue.
    Mr. Rose. To reiterate, I believe it is important that we, 
as Members of Congress, also continue to voice our bipartisan 
support for the State-based insurance system. And so, along 
those lines, I want to thank my colleagues, Mr. Heck and Mr. 
Budd, for introducing the International Insurance Standards Act 
again this Congress, which I was proud to co-sponsor. Mr. 
Secretary, is there anything else that you are aware of that 
we, as Members of Congress, should be doing to help the USA's 
position on the ICS?
    Secretary Mnuchin. I think not, at the moment. You have 
been very supportive working with our office, and we have had a 
lot of bipartisan support as we work with Team USA to represent 
these issues.
    Mr. Rose. Thank you. Transitioning over to some other 
issues, I wanted to ask you about the FSOC's work on the 
transition away from LIBOR as a reference rate. LIBOR is set to 
be phased out as a bank reference rate by 2021. From the FSOC's 
September minutes, I understand LIBOR is the underlying 
reference rate for approximately $200 trillion in financial 
contracts worldwide. Secretary Mnuchin, I know this will likely 
cause a bit of disruption in our markets and that the 
Alternative Reference Rate Committee's preferred alternative to 
LIBOR is the Secured Overnight Financing Rate, or SOFR. What 
makes the SOFR a suitable alternative?
    Secretary Mnuchin. I think the most important issue is that 
we have a transition from all these loans and all these 
securities. The thing that we like about SOFR, and, again, this 
work predated me, is that it is a very liquid market. It can't 
be manipulated, and it is readily calculable. I met with a 
group of banks yesterday. There may also be, no different than 
there were LIBOR loans and there were prime loans, there may be 
more of a credit-oriented index that develops as well. But we 
are very focused on the transition.
    Mr. Rose. And in the remaining seconds here, as we 
transition from LIBOR to SOFR, what sort of outreach is 
Treasury doing to engage with stakeholders as attention to the 
LIBOR transition increases?
    Secretary Mnuchin. We have a huge group working on it. As I 
mentioned yesterday, myself, Chairman Powell, and a bunch of 
the regulators met with 10 of the CEOs, and we continue to have 
outreach working on this.
    Mr. Rose. Thank you, and I yield back.
    Mr. Perlmutter. The gentleman yields back. The gentlewoman 
from Virginia, Ms. Wexton, is recognized for 5 minutes.
    Ms. Wexton. Thank you, Mr. Chairman, and thank you, 
Secretary Mnuchin. It is nice to have you back with us today. 
In September, the House passed the Uyghur Human Rights Policy 
Act, which is bipartisan legislation that was authored by 
Senator Rubio and co-sponsored by 44 Senators and 130 U.S. 
Representatives, including many on this committee. This week, 
the House passed the Uyghur Intervention and Global 
Humanitarian Unified Response Act, or the Uygur Act. Both of 
these bills seek to hold officials in the Chinese government 
and the communist party responsible for the gross violations of 
human rights in China's Xinjiang Uyghur autonomous region, 
including the mass internment of over 1 million Uyghurs, as 
well as China's intimidation of U.S. citizens on American soil. 
The Uyghur Act passed 407-1. Would you recommend to President 
Trump that he sign these bills when they come across his desk?
    Secretary Mnuchin. I am not going to make any comments 
publicly about what my recommendation will be to the President 
one way or another, but that doesn't mean I am not recommending 
it.
    Ms. Wexton. Okay, because we are getting mixed signals from 
the White House officials, and reporting is suggesting that the 
Treasury Department, and you in particular, are responsible for 
blocking or slow-walking efforts to hold Chinese officials 
accountable.
    Secretary Mnuchin. No, that is not accurate.
    Ms. Wexton. Okay. Well, I am going to read from an article, 
an October 8, 2019, New York Times article, which I would like 
to submit for the record, Mr. Chairman.
    Mr. Perlmutter. Without objection, it is so ordered.
    Ms. Wexton. ``Senior officials in the National Security 
Council and in the State Department have pushed for the use of 
the entity list to target Chinese companies supplying 
surveillance technology to the security forces in Xinjiang. 
They have also urged Mr. Trump to approve sanctions that would 
penalize Chinese officials and companies involved in the 
abuses. The top American trade negotiators, including Treasury 
Secretary Steven Mnuchin, have cautioned against policies that 
would have upset trade talks.''
    Are you saying that is inaccurate reporting?
    Secretary Mnuchin. That is inaccurate reporting, and I 
think you know how we feel about the New York Times.
    [laughter]
    Ms. Wexton. But are you willing to sacrifice human rights 
abuses for the sake of trade talks, because it certainly 
appears that way?
    Secretary Mnuchin. Again, let me just say I am here to talk 
about financial stability, but I will respond to your question. 
I very much am concerned about human rights issues all over the 
world. We administer Global Magnitsky sanctions all over the 
world on sanctions. We administer things in China as in other 
places, but I am not going to make any comments on confidential 
discussions I have with the President on these or other 
subjects.
    Ms. Wexton. Related to that, back in April, I joined a 
number of other Members of Congress and the Senate in a letter 
addressed to you, Secretary Pompeo, and Secretary Ross urging 
the Administration to employ Global Magnitsky sanctions on 
senior policy leaders who were complicit in these gross 
violations and human rights abuses, including Chen Quanguo, who 
is the so-called architect of the roundup of Uyghurs, and we 
never received a response from Treasury or from you. So while I 
have you here, what is the status of Global Magnitsky sanctions 
on Chen Quanguo and other senior party leaders in China?
    Secretary Mnuchin. I thought State had responded for that 
letter on behalf of all of us. We will get back to you.
    I thought State responded from all of us, but as a general 
comment, we don't make comments on future sanctions at all, 
although I will tell you, whenever we get letters, we take 
these things seriously.
    Ms. Wexton. And that letter was sent in April, more than 6 
months ago. We have gotten no response, and there has been no 
action by Treasury.
    Secretary Mnuchin. Again, if the letter was written to all 
three of us, it is common that one agency responds if it is an 
interagency issue. It is not common that we all respond. Again, 
did the State Department respond to you?
    Ms. Wexton. Yes, but they did not respond on Treasury's 
behalf--
    Secretary Mnuchin. Again, the way we work on interagency 
issues is the primary agency that is responsible for an issue 
responds. And, again, I won't comment on future sanctions other 
than to say that article is inaccurate.
    Ms. Wexton. And while we are discussing human rights 
violations, I want to follow up on a question I asked you last 
time you were here, about 6 months ago. When is the 
Administration going to hold Mohammad bin Salman accountable 
for ordering the brutal murder of journalist, Jamal Khashoggi?
    Secretary Mnuchin. Again, I don't see what that has to do 
with financial stability, and you are also making certain 
assumptions. But I can tell you, because I was the official who 
went over after Secretary Pompeo, and, again, we had very 
direct discussions about our concerns on these issues.
    Mr. Perlmutter. The gentlelady's time has expired. The 
gentleman from Indiana, Mr. Hollingsworth, is recognized for 5 
minutes.
    Mr. Hollingsworth. Good afternoon. I really appreciate you 
being here and I appreciate your continued efforts at the 
Treasury Department to ensure that we get to those better 
outcomes we have always talked about for the American people, 
for the American economy, and for American competitiveness 
around the world. And I know from many of our dialogues and 
discussions, your passion for that very same topic.
    I did want to ask a little bit about some of the public 
debt market structure. I know you have had a lot of 
conversations about this. You have spoken publicly about it. 
But I wanted to better understand kind of where Treasury is 
with regard to disseminating data in the Treasury market. This 
is something that for every other asset class, for most other 
assets that are traded, you get both price and volume 
information after the fact, which has led to increased 
competitiveness, increased liquidity, and also lower 
transaction costs associated with that market. And I know 
Treasury has been looking into that for quite a while, and I 
think recently said that they were going to start 
disseminating, much after the fact, volume data, but were going 
to put out pricing data or volume data that were very close to 
those trades. I was curious why that decision was made when 
FINRA keeps all of that data? And are there further steps that 
are going to be taken to release more data around transactions 
in the Treasury market? That was a long-winded question, sorry.
    Secretary Mnuchin. No, no. Let me respond.
    Mr. Hollingsworth. Yes, please.
    Secretary Mnuchin. Look, this is a complicated issue, okay?
    Mr. Hollingsworth. Right.
    Secretary Mnuchin. First, let me just say, the U.S. 
Treasury market is one of the most liquid markets in the world. 
It has very small transaction costs, and obviously it 
facilitates our borrowing. So, our number one objective is to 
make sure that we not do anything that is detrimental to--
    Mr. Hollingsworth. I totally understand that, and I 
stipulate to you that it is a well-functioning market.
    Secretary Mnuchin. We have studied this carefully, and 
trying to balance the disclosure issues and whether that really 
is going to help or hurt the market. I will say, as you look at 
some of these other markets, and you look at the data, there is 
less liquidity in a lot of these other markets. Now, part of 
the reason why there is less liquidity, I will acknowledge, 
also has to do with the Volcker Rule to proprietary trade. When 
you look at transaction costs, you have to look at transaction 
costs in the context of overall liquidity. And we are happy to 
come and talk to you about it, but we want to make sure we get 
this right. And if it were clear to us that releasing all the 
data would create more liquidity and more transparency, we 
would be doing it.
    Mr. Hollingsworth. I certainly understand the do-no-harm 
philosophy, and I really appreciate that. And I stipulate to 
you, as you articulated very well, that it seems to be a well-
functioning market. There have been some blips along the way, 
October 2014 notably, right? It is hard for me to imagine, and 
I hope you might expound upon, the potential harm from 
transparency in price and volume data. I understand that you 
want to do no harm, but it is also hard for me to understand 
what that harm might be. Could you help me understand a little 
bit about that?
    Secretary Mnuchin. Again, I think there are times when we 
have gone back and looked at the data as it relates to other 
markets, okay?
    Mr. Hollingsworth. Yes.
    Secretary Mnuchin. There are times when releasing the data 
hurts liquidity. I would also say another interrelated issue is 
the advent of electronic trading, and a larger and larger 
portion of the government market is from people who invest 
virtually no capital, but take advantage of sophisticated 
algorithms.
    Mr. Hollingsworth. Right.
    Secretary Mnuchin. So, again, I want to make sure that the 
release of data actually is helping the market and not just 
creating arbitrage opportunities for people who want to do 
electronic day trading.
    Mr. Hollingsworth. I totally agree. I don't want to be 
pejorative to those who are taking advantage of those small 
arbitrage opportunities because they are helping to close the 
market, right in a real and meaningful way. And I don't want us 
to make a decision because we want to prevent somebody from 
being able to take advantage of that and not providing the 
transparency that the market may benefit from.
    And I agree it is well-functioning today. It is well-
functioning on many, many days. But I want to ensure that 
transparency is an important part of that market going forward, 
as do you, and I am certain that we share that passion. It is 
just sometimes hard for me to understand what harm might come 
on account of that. And I understand that you have looked at 
other markets and have seen some adverse impact of liquidity, 
but, as you well know, it is really hard to hold everything 
constant when you are looking at different time periods, 
different markets, different asset classes. And so, I respect 
the fact that you have a lot smarter people than me over at 
Treasury to look into that. I will follow up with a question 
for the record.
    But I wanted to transition really quickly and talk about 
the Taxpayer First Act that was signed into law in July. It 
included a provision that persons receiving return information 
must obtain the express permission of taxpayers. My question is 
really going to come down to, the law stipulates that it is to 
become effective on December 28, 2019. I think there has been 
some guidance from the IRS that that is for all transcripts for 
everything that is sold after December 28th by Fannie Mae and 
Freddie Mac, and it may apply to those things that are before 
December 28th. And I want to get some clarity around that as 
quickly as possible because it is important to the functioning 
of the--
    Mr. Perlmutter. The gentleman's time has expired.
    Mr. Hollingsworth. Thank you. I yield back.
    Mr. Perlmutter. The gentleman yields back. The gentlewoman 
from Iowa, Mrs. Axne, is recognized for 5 minutes.
    Mrs. Axne. Thank you, Mr. Chairman, and thank you, 
Secretary Mnuchin, for being here again today. I know that we 
have heard a lot of criticism about the 2017 tax cuts as 
primarily benefiting the richest Americans. I absolutely think 
that is accurate, but that is not what I want to focus on. What 
I am interested in looking at is how the IRS is treating the 
wealthy. The Wall Street Journal reported that IRS audit rates 
for people making more than $10 million a year have dropped 
more than 80 percent in just the last 4 years. Why are the top 
1 percent's tax returns being looked at so much less 
frequently?
    Secretary Mnuchin. That is actually not the case, and I am 
working with the IRS to release the data, because one of the 
issues is the way the IRS releases the data now is on closed 
cases, not open cases. But I can assure you, when I saw that 
article, I had the same concern, and I called up the 
Commissioner, and I said we should be doing more of these 
audits, not less. So, we are going to release this data in a 
transparent way to assure you that the people who are making 
the most money are getting high audit rates.
    Mrs. Axne. Well, that is fantastic to hear.
    Secretary Mnuchin. By the way, if you want to give us more 
money for enforcement, I am happy to take it.
    Mrs. Axne. We will absolutely talk with you about that. I 
think that is a great idea. So are you telling me then the 
number is much lower that is being audited?
    Secretary Mnuchin. No, it is higher, as a matter of fact, 
thank you. So, again, this is the problem in the data you guys 
just gave me. The way we report the data is on closed audits, 
and these audits take obviously a long period of time. I am 
happy to come back, and I am going to get the IRS to release it 
publicly. The way I think we should be looking at the data is 
for each tax year, what percentage of an income group are we 
auditing, not what percentage has closed in that year.
    Mrs. Axne. Okay. That would be great. If you could get that 
over to this committee, or to my office, I would really 
appreciate that, as well as if you could make sure that it 
tells us what percent is currently being audited.
    Secretary Mnuchin. What people should want to understand is 
not what percentage of the audits were closed in the year. What 
people should want to understand is in a tax year, what 
percentage of those people will be audited, whether it was 
closed in 2018, 2019, 2020--
    Mrs. Axne. Sure.
    Secretary Mnuchin. We will get you the data.
    Mrs. Axne. No, that--
    Secretary Mnuchin. I can assure you I had the same view 
when I saw it.
    Mrs. Axne. Listen, I am glad to hear that. My concern is I 
just want to make sure that those who are the wealthiest among 
us in this country are being audited at the same rate that 
other folks are, and from what we can see right now, which is 
the data that we are able to have access to, it shows that they 
are being audited at a much lower rate. So if you can provide 
us with information that differs from that, I would love to see 
that. So, I appreciate that.
    The next thing I want to talk about is back to the 2017 tax 
law. It included two provisions intended to limit the use of 
tax havens for multinational corporations, of course, Global 
Intangible Low-Taxed Income (GILTI) and Base Erosion and Anti-
abuse (BEAT). The IRS's own data shows that in 2016, U.S. 
corporations booked more than $33 billion of profits in 
Bermuda, despite having only 384 employees there. So for anyone 
trying to do that math, this is high productivity. That is more 
than $85 million per employee. My goodness. Now, I know that 
data is from 2016. That is before the tax cuts were passed, but 
I am using it because it is the last information that we have. 
So, Mr. Secretary, my question is, has there been a significant 
reduction in profits booked in Bermuda in 2017 or 2018 data?
    Secretary Mnuchin. I don't have that data. We are happy to 
look into it and get back to you.
    But I will tell you, part of the reason we moved from a 
global tax system to a territorial system with the GILTI tax 
was to basically prevent people from moving to tax havens, and 
to make sure that the U.S. taxed companies fairly.
    Mrs. Axne. Okay. Great. I am so glad to hear that because 
from what we are seeing right now, and what we have seen in the 
past, that is not happening. I would love to see if we are 
making some improvement on that. Obviously, I want to make sure 
that we limit corporations' use of tax havens. We need all that 
money here in the United States so we can address things like 
infrastructure and things that people in this country need. I 
guess I would ask you, what suggestions do you have for 
continuing to work on curbing the use of tax havens?
    Secretary Mnuchin. Again, there were many regulations we 
put out through the last 2 years on the Tax Act that limit 
these types of things. And, again, we are happy to follow up 
with you specifically on some of them.
    Mrs. Axne. Okay. And then lastly, the European Union has 
actually had success in reducing tax havens simply by requiring 
public disclosure of country-by-country income. Is that 
something you think might help?
    Secretary Mnuchin. Not necessarily, although I will say, a 
lot of the information exchange with the Europeans is helpful 
in looking at tax havens.
    Mrs. Axne. Thank you.
    Mr. Perlmutter. The gentlewoman yields back. The 
gentlewoman from New York, Ms. Ocasio-Cortez, is recognized for 
5 minutes.
    Ms. Ocasio-Cortez. Thank you, Mr. Chairman, and thank you, 
Mr. Secretary, for coming in today. I looked through the 
minutes of the FSOC meetings this year, and I didn't see any 
mention of student loans. The total outstanding student loan 
debt burden is now at over $1.5 trillion. Young people are 
waiting until their 30s and 40s to have children, buy a home, 
and make other major purchases. Do you believe that student 
loan debt currently poses a major risk to our financial 
stability?
    Secretary Mnuchin. I share your concern on student loans, 
although I don't think it is a major risk to financial 
stability. But I can assure you on an interagency basis, we are 
working with the Department of Education and the NEC, because I 
think in many cases, people have taken out student loans that 
have created certain issues for them. So, student loans are a 
large part of the debt, and that is something we are carefully 
studying.
    Ms. Ocasio-Cortez. So it is a problem, but not a major risk 
to financial stability? I just wanted to kind of run through a 
few different topics here. Turning back to the minutes from the 
FSOC meetings, I also didn't see any mention of climate change. 
Do you believe climate change poses a risk to our economy?
    Secretary Mnuchin. You may have missed my comments before 
on this--
    Ms. Ocasio-Cortez. Oh, my apologies.
    Secretary Mnuchin. I acknowledge that climate change should 
be discussed in certain areas. But FSOC is not an area where I 
believe it should be discussed. But based on previous 
discussions, I said I would raise that with the committee.
    Ms. Ocasio-Cortez. Okay. Let's talk about leveraged 
lending. I know there was some discussion of it earlier, but it 
is up 20 percent this year with a total outstanding balance of 
over $1 trillion for the first time. I heard earlier you don't 
think it poses a threat to our financial system either, is that 
correct?
    Secretary Mnuchin. Not at this time, and, specifically, it 
doesn't pose a threat to the banking system or the insurance 
system. But this is an area that FSOC will continue to monitor 
on a quarterly basis because it is an area, particularly if the 
economy slows down, that we want to carefully monitor.
    Ms. Ocasio-Cortez. Do you see similarities between 
collateralized loan obligations and mortgage-backed securities 
that helped trigger the 2008 financial crisis?
    Secretary Mnuchin. Not at all.
    Ms. Ocasio-Cortez. No. We have talked about student debt. 
What about medical debt? We spent about $3.3 trillion on 
healthcare last year. That is more than $10,000 per person. 
That is up almost 20 percent over the last 5 years. Do you 
believe that medical debt poses significant risks to our 
financial system?
    Secretary Mnuchin. Again, I would say this is not an FSOC 
issue, but putting on my Treasury hat, we are concerned about 
the rate of growth of medical expenses. And that is something 
where we are trying to look at many different things, because 
that does pose economic issues, although not financial 
stability issues.
    Ms. Ocasio-Cortez. Okay. What about housing? I see some 
mention in recent FSOC minutes about mortgage origination from 
non-bank lenders. So I am assuming you at least agree that 
there are some problems in the housing market that can pose 
threats to the stability of the financial system in that 
respect?
    Secretary Mnuchin. Yes, I commented earlier that we are 
monitoring the amount of the mortgage market that has moved out 
of the banking system. Particularly, we are focused on non-bank 
servicers that don't have liquidity, and we hope to work with 
this committee and others on housing reform. It is an important 
issue.
    Ms. Ocasio-Cortez. What percentage of mortgages were 
originated by non-banks this year?
    Secretary Mnuchin. I think it is roughly 50 percent.
    Ms. Ocasio Cortez. Fifty percent. So half of mortgages in 
America are being originated by non-banks. That puts them 
outside of the usual scope of regulation. Is that correct?
    Secretary Mnuchin. No, not outside the usual scope of 
regulation at all. It is outside of the banks, so it is 
something that we are looking at carefully. And, again, a lot 
of those loans are sold to Fannie Mae and Freddie Mac or 
insured by FHA, so we are also looking at it through all those 
different regulators.
    Ms. Ocasio-Cortez. And what about the overall shortage in 
the housing stock? The number of homes for sale is about 6 
percent nationwide, and it is down more than 15 percent in 
several large metropolitan areas. Does the fact that this 
market seems to be slowing down pose a risk to the financial 
system?
    Secretary Mnuchin. Again, not risk to the financial system, 
but affordable housing is something we are concerned about and 
making sure that there is greater access to affordable housing. 
It's not an FSOC issue, but a Treasury issue.
    Ms. Ocasio Cortez. Okay. So we have here student loan debt 
does not pose a risk to financial stability. Climate change, 
potentially. Leveraged lending does not. Medical debt does not. 
Mortgage origination does not. What are some of the largest 
risks to our economy right now?
    Secretary Mnuchin. Again, there is a larger--
    Ms. Ocasio-Cortez. And the financial system.
    Secretary Mnuchin. The financial system. I don't know if 
you had a chance to read the report. But, again, if you just 
look at, and we highlight cybersecurity, structural issues, 
alternative reference rates, risk to the credit expansion. We 
specifically talk about non-bank mortgage origination, 
financial innovation, housing finance.
    Ms. Ocasio-Cortez. And do you see that there is kind of a 
decoupling here with the quality of life from what we are 
seeing in terms of measurements of financial stability?
    Secretary Mnuchin. No, I am not making that connection, but 
I am happy to explore that.
    Ms. Ocasio-Cortez. Okay. Thank you very much.
    Chairwoman Waters. The gentleman from Kentucky, Mr. Barr, 
is recognized for 5 minutes.
    Mr. Barr. Thank you, Madam Chairwoman, and, Mr. Secretary, 
you are almost at the end of the line here. I was compelled to 
come back and take my 5 minutes. I wasn't originally, but I had 
to ask you to elaborate a little bit more on your dialogue with 
my friend, Mr. Heck from Washington, on capital expenditures 
and tax cuts. My views on this, having spoken to many 
manufacturers and agricultural businesses in Central and 
Eastern Kentucky, is that there is no doubt that the expensing 
provisions and bonus depreciation accelerated business 
investment, and improved productivity. In fact, most of the 
CEOs and small business owners said that tax cuts were huge in 
terms of pulling forward investment that they needed to enhance 
the productivity of their businesses. Large and small 
businesses told me that, and it has made their employees more 
productive.
    And so my theory is, when you look at Mr. Heck's chart of 
declining capital expenditure (CAPEX), it certainly wasn't 
caused by tax cuts. Tax cuts may have pulled forward a lot of 
capital expenditures and business investment, but what most 
private sector people tell me is that the decline in capital 
expenditures is not attributable to anything other than trade 
uncertainty. And also they note, many of them would continue to 
invest in capital, and equipment purchases, and other items 
that would make their businesses more efficient and more 
productive if the Democrats would stop opposing making those 
provisions permanent in the Tax Code. The uncertainty of not 
having permanency with the bonus depreciation and expensing 
provisions is maybe an impediment for continued CAPEX.
    I want your thoughts on that feedback that I am getting 
from actors in the private sector on CAPEX. I also want your 
opinion about how trade uncertainty is contributing to a pause 
in additional business investment.
    Secretary Mnuchin. First of all, thank you for coming back. 
There is no question from the companies that we are visiting 
all over the country that there have been major capital 
expenditures as a result of the Tax Cut Act. And as you said, 
this incentivized companies because they get automatic 
expensing, which I would just comment on, when people ask 
about, will the tax cuts pay for themselves, I remind them this 
has to be calculated over a 10-year period of time because this 
was designed to stimulate investment and lead to expensing in 
year 1, which will recoup in year 5, 6, 7, 8, 9, and 10. As it 
relates to trade, I would say there are a lot of people who are 
waiting on the sidelines because of USMCA.
    Mr. Barr. Right.
    Secretary Mnuchin. I am hopeful that Congress will pass 
USMCA between now and the end of the year. It is the single 
most important economic trading relationship we have. And there 
is no question that passing it will add something like 50 basis 
points to GDP, and it will increase capital expenditures.
    Mr. Barr. I agree, and reclaiming my time, USMCA is why we 
don't have that line continuing to go up in terms of capital 
expenditures, so the best thing we can do in a bipartisan way 
in this Congress is to pass the USMCA. And I would argue that 
that is going to give you and Ambassador Lighthizer momentum 
with China and the EU if we can lock in USMCA. So I encourage 
my colleagues on the other side of the aisle to join us in 
supporting this renegotiated North American trade deal for all 
those reasons.
    In my remaining time, I want to talk to you about leveraged 
lending. There has been lots of hand-wringing on the other 
side, in particular, about the growth in corporate debt. And I 
wanted to ask you your views on collateralized loan obligations 
(CLOs), in particular, as non-bank investor vehicles, taking 
some of this leverage out of banks, federally-insured 
depository institutions, into these CLO vehicles, and the 
extent to which CLOs non-market long-term vehicles provide 
liquidity, and could provide liquidity precisely in the time 
where we need it, in an economic downturn, and to that extent, 
offer the financial system a tool, a financial stability tool; 
and that if we overreacted to leveraged lending, particularly 
if we overreacted to CLOs, that could actually have a 
destabilizing effect and limit liquidity right when we need it.
    Secretary Mnuchin. I would agree with you, and I would even 
go one step further, which is that a significant problem of the 
financial crisis was that there were too many high-risk 
mortgages in the banking system. So, the good news is the 
higher-risk leveraged lending has moved out of the banking 
system into permanent capital vehicles.
    Mr. Barr. Thank you. I yield back.
    Chairwoman Waters. The gentleman from Texas, Mr. Green, who 
is also the Chair of our Subcommittee on Oversight and 
Investigations, is recognized for 5 minutes.
    Mr. Green. Thank you, Madam Chairwoman, and thank you for 
your appearance, Mr. Secretary. Mr. Secretary, I am on a 
mission of mercy. Here is why: In 2008, we had 215 minority 
banks; and in 2018, we had 149. Of the 149, 23 are said to be 
African-American banks, meaning more than 50 percent African-
American ownership. And it seems, according to the Independent 
Community Bankers of America (ICBA)--this is dated October 22, 
2019--these 23 African-American-owned banks have assets of $5 
billion. Total assets, $5 billion.
    I am on a mission of mercy because usually these banks are 
in neighborhoods wherein the people are not high-income 
earners. They are underserved neighborhoods. They are 
economically distressed neighborhoods. And they are 
neighborhoods in need of banks, but these banks need additional 
capital. So when you mentioned your Small Bank Mentorship 
Program, it really made my heart warm. I really would like to 
know how this program will help me with my mission of mercy to 
help capitalize these small banks that I no longer call 
community banks; I call them neighborhood banks. Community 
banks, $10 billion. These neighborhood banks, if they can get 
to $1 billion, there will be a great celebration. Can you 
please share some intelligence on the topic?
    Secretary Mnuchin. I share your concern. It is really 
terrible that these numbers have dropped as much as they have. 
And these are, as you said, some communities that really, 
really need these banks. The Protege Program is a step in the 
right direction of helping these banks, but we need to work 
with the regulators. We need to work with private capital in 
making sure that these banks have access to capital and can 
grow, and we turn these numbers around in the other direction.
    Mr. Green. How far along are you with the program? My 
understanding is that you have a departure date that is certain 
in your mind. I am not sure it has been published. But will 
this become viable before you leave?
    Secretary Mnuchin. I wasn't planning on going anywhere 
anytime quickly, so, yes.
    Mr. Green. Okay. I have heard rumors--I'm sorry--that you 
might be leaving.
    Secretary Mnuchin. Leaving when? I have said I would stay 
through the second term, so I don't--
    Mr. Green. Through the second term? My apologies.
    Secretary Mnuchin. I don't know what rumors you have heard 
of me leaving.
    Mr. Green. Listen, you are talking to a guy who is proud to 
apologize. I apologize. I am glad to know you will be here. So 
the question becomes, how can we collaborate and work together 
in a positive way to affect positively these African-American 
banks? And I am saying, ``African-American,'' because they are 
at the lower end of the totem pole. No other community, no 
other banks, when you take the aggregate, are in this kind of 
dire circumstance. So I really want to work to get some help.
    Secretary Mnuchin. I will ask my staff to schedule a 
meeting with you. Maybe we can try do it in the beginning of 
January and figure out how we can work together.
    Mr. Green. I absolutely assure you that I will look forward 
to this meeting. And I would just add one additional thing 
about these banks. I have many of them in my district, and they 
take pride in what they do. They have good personnel, but they 
don't have all of the technology that other institutions are 
blessed to have, and they don't have obviously the clientele, 
but there is a willingness to grow and to work with larger 
banks. This Protege Program, pairing smaller banks with larger 
banks, can reap some good benefits if it is done appropriately 
and properly. So I am eager to hear more about how we can do 
this pairing and to work with some of these banks, these small 
African-American banks. Thank you, and I yield back.
    Chairwoman Waters. Thank you. The gentleman from Missouri, 
Mr. Cleaver, who is also the Chair of our Subcommittee on 
National Security, International Development and Monetary 
Policy, is recognized for 5 minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman. Mr. Secretary, 
thank you for being here, and I appreciate your response to my 
letter in which I discussed the whole issue surrounding the 
rise of white supremacy and the El Paso attack specifically, 
and I don't think there is much question that that that attack 
was motivated by white nationalism. And in my letter, I talked 
about the Treasury Department's ability or the tools you had 
available to challenge and hopefully even curb the rise of 
these style of acts of white terrorists, white nationalist 
terrorists.
    In your letter, you talked about the fact that you shared 
my concern over the racially- and ethnically-motivated violent 
extremism, and then said you would use all the tools available. 
But you also said that you did not want to comment on any 
investigation, which I understand and appreciate. What I would 
like to know, however, is based on what the FBI Director said, 
which is, ``A majority of the domestic terrorism cases 
investigated are motivated by some version of what you might 
call white supremacist violence, and 40 percent of the 850 
domestic attacks were racially motivated.''
    I am one of the victims myself, as my congressional office 
was firebombed. But the guilty one was caught, and so I don't 
need any help there. But I do want to see where you are in 
terms of trying to help curtail financing of these criminal 
networks. I am not asking you about what happened in El Paso. I 
am asking you about in general the criminal networks that I 
think all of our intelligence, counterintelligence units are 
saying is out there. And is there something going on in 
Treasury where those networks are being targeted?
    Secretary Mnuchin. Let me just say I didn't realize your 
office had been attacked. That is just a horrible situation. 
Any of these attacks are just despicable. As it relates to 
Treasury's role, FinCEN plays a significant role in working 
with all of law enforcement. When I was a banker and I used to 
send in all those SARs, I always wondered if they went just 
into nowhere land, and I can tell you that these activities, 
and us being able to follow the money, is very important in us 
being able to fight all these different activities.
    Mr. Cleaver. Is there a unit in Treasury that is actually 
following the money?
    Secretary Mnuchin. There is. There are two units. There is 
both FinCEN--
    Mr. Cleaver. Yes, I am familiar with FinCEN.
    Secretary Mnuchin. --and they are the ones who take in all 
the data, and they have huge analytic programs that work with 
all of law enforcement. And the other area is obviously the 
RTFI area, which is less domestically and more internationally. 
But to the extent there are domestic issues, we work with law 
enforcement as well.
    Mr. Cleaver. Okay. Madam Chairwoman, thank you. I yield 
back.
    Chairwoman Waters. Thank you very much. I would like to 
thank the Secretary for his time today.
    I am going to interrupt the closing. We have a hard stop at 
1:00. If you will take your seat, I think we can get you out in 
5 minutes. Excuse me, Mr. Secretary, for the inconvenience.
    Secretary Mnuchin. Not a problem. Not at all.
    Chairwoman Waters. But we are going to try and get this 
done so that we can honor your hard stop. The gentlelady from 
California, Ms. Porter, is recognized for 5 minutes.
    Ms. Porter. Thank you, Mr. Secretary. I really appreciate 
your willingness to stay, and I will be sure to be done in 4 
minutes and 56 seconds. In June 2017, Treasury issued a report 
on banking deregulation. It suggested that if Congress raised 
the $50 billion threshold above which U.S. banks are subject to 
stricter oversight, that Congress ought to do the same for 
foreign mega banks. Earlier this year, the Fed followed that 
Treasury recommendation and massively deregulated foreign mega 
banks, and that was an item on a wish list that you published 
in 2017.
    There is a lot that concerns me about this, but the most 
glaring for me is about Deutsche Bank. I am sure the chairwoman 
is very familiar with Deutsche Bank. They would now only need 
to submit their living will once every 6 years. This is the 
same Deutsche Bank that within the last 6 years had a surprise 
$3 billion quarterly loss--I don't know how you lose $3 billion 
and not see that coming--has failed its stress test in 3 of the 
last 4 years; was fined for a mirror trading scandal involving 
laundering money for Russian oligarchs; admitted to 
participating in LIBOR interest rate market-rigging scandals; 
and violated U.S. sanctions laws against Iran, Libya, Syria, 
and the Sudan. Why did you advocate to deregulate one of the 
worst corporate recidivists operating in the U.S. banking 
system, particularly when it is not even a U.S. bank?
    Secretary Mnuchin. Let me just first say I share many of 
your concerns about Deutsche Bank. I obviously can't comment on 
any of the specifics because from a regulatory standpoint, it 
would be inappropriate for me to comment specifically on 
Deutsche Bank. But I share many of your concerns, and 
particularly sanctions evasion is something that we will not 
tolerate by anybody, domestic or internationally. So, I am 
going to answer this generically, not as it relates to Deutsche 
Bank. The question is, will the banks be regulated? The U.S. 
subsidiaries, and the way that we have changed the structure, 
there is intermediary holding companies so that the foreign 
subsidiaries that are effectively U.S. institutions, we can 
look at the risk at that level.
    Ms. Porter. I understand the subsidiary foreign 
relationship. I just don't understand why we would do something 
that is deregulating one of the worst actors in the 
marketplace, and particularly when it is a foreign bank 
operating on our soil and threatening the stability of our 
markets. I understand there is a balance between regulating the 
industry and stifling capitalism, but if you do share my 
concern about Deutsche Bank, this gives us one less tool. I 
want to ask you about something else. How many people currently 
work at FSOC, the Financial Stability Oversight Council?
    Secretary Mnuchin. Again, and there have been some comments 
on this earlier. You weren't here, so I will just clarify. The 
way FSOC works is there are people who directly work under 
FSOC, and there are people who work at all of the different 
agencies.
    Ms. Porter. I am asking about the direct number.
    Secretary Mnuchin. There are hundreds of people if you add 
up all the different agencies and how many people--
    Ms. Porter. No, I mean people whose sole job is to work at 
FSOC.
    Secretary Mnuchin. There is a small group within Treasury.
    Ms. Porter. How many?
    Secretary Mnuchin. And then, there is the Office of 
Financial Research, which we have cut significantly because we 
thought those resources weren't being used appropriately.
    Ms. Porter. Because financial research isn't valuable?
    Secretary Mnuchin. Again, we didn't think that was the best 
use of taxpayer money, so it was really a function of, we felt 
that the resources within the different agencies are quite 
ample and quite significant that are dedicated to this.
    Ms. Porter. I just want to be clear, how many people work 
at FSOC and only at FSOC? Is it a secret?
    Secretary Mnuchin. Again, when you say, ``at FSOC,'' are 
you referring to within the Treasury Department, who are solely 
dedicated--
    Ms. Porter. Let's start there. Since you are the Secretary 
of the Treasury, let's start there.
    Secretary Mnuchin. Again, we probably have about 10 people 
who are directly in the Treasury who work on that, but we 
probably have 50 people within Treasury--
    Ms. Porter. Does anyone work just for FSOC?
    Secretary Mnuchin. Yes, there is a small number--
    Ms. Porter. How many, sir?
    Secretary Mnuchin. Again, it is slightly less than a dozen 
people.
    Ms. Porter. Less than a dozen.
    Secretary Mnuchin. Yes.
    Ms. Porter. Do you know what the maximum number was at its 
height?
    Secretary Mnuchin. Again, comparing this to the middle of 
TARP, in the middle of the financial area when, by the way, 
there weren't resources--
    Ms. Porter. Thank you very much.
    Chairwoman Waters. Let me start over again. I would like to 
thank the Secretary for his time today.
    The Chair notes that some Members may have additional 
questions for this witness, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to this witnesses and to place his responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
Thank you very much. This hearing is adjourned. Secretary
MNUCHIN. Thank you very much.
[Whereupon, at 12:58 p.m., the hearing was adjourned.]

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