Lawmakers press Mnuchin over GSE reform, reg relief and cyber threats

WASHINGTON — The government must continue to provide support for the mortgage market in any new housing finance system, Treasury Secretary Steven Mnuchin said Tuesday.

During a Senate Banking Committee hearing, Mnuchin said reform of Fannie Mae and Freddie Mac is a top priority of the Trump administration. While he declined to spell out many details of the administration's views, he said keeping the 30-year fixed-rate mortgage is essential and that requires backing by a government guarantee.

“I don’t think the private markets on their own would support it,” Mnuchin said. “As we talk about GSE reform, we need to make sure we don’t do something that would put that at risk.”

Andrew Harrer/Bloomberg

Mnuchin was ostensibly there to discuss the Financial Stability Oversight Council's annual report, but spent much of his time discussing the government-sponsored enterprises, regulatory relief and cybersecurity.

Following are highlights of his testimony.

GSE reform is on the front burner

Mnuchin said in his opening statement that he viewed a resolution of the current conservatorship arrangement for Fannie and Freddie as “neither a sustainable nor lasting solution,” and called on Congress to arrive at a bipartisan agreement that could provide necessary support for the housing market without putting taxpayers at undue risk.

“The administration looks forward to working with Congress to reform America’s housing finance system in a manner that helps consumers obtain the housing best suited to their own personal and financial situations while, at the same time, protecting taxpayers," he said.

While saying the 30-year mortgage is a "critical" part of the U.S. economy, he also made clear that "substantial private capital" must be put in front of any government guarantee in order to ensure minimal potential losses to taxpayers.

Committee Chairman Mike Crapo, R-Idaho, said that GSE reform is his “highest priority on the committee,” suggesting that a reform package may be offered in the near term. The panel is working on a plan that would replace Fannie and Freddie with private guarantors which pay fees to the government for a guarantee that kicks in after catastrophic mortgage losses.

During the hearing, Crapo asked Mnuchin whether he thought that any private guarantors whose capital might precede a taxpayer backstop should be subject to the kinds of capital and liquidity requirements that global systemically important banks must follow. Mnuchin did not commit on that level of capital retention, but said that any such guarantors must be well-capitalized and that taxpayers should be compensated for their backstop.

"It is important that there is substantial capital, and that the taxpayers are protected,” Mnuchin said. “If there is any guarantee, that taxpayers are paid for putting that up, as opposed to explicit guarantees that weren’t compensated in the past.”

Progressive Democrats hit Mnuchin hard on raising SIFI threshold

Mnuchin praised a bipartisan Senate regulatory reform bill authored by Crapo, describing it as a “balanced and thoughtful approach” and calling on both chambers to “move legislation as quickly as possible.”

But progressive Democrats questioned him on a key provision of the bill which would raise the systemically important threshold for banks to $250 billion from $50 billion.

Mnuchin said that the “general consensus from the regulatory community is that threshold should be raised,” though he noted that the FSOC “could make exceptions” for institutions that fall below that threshold to be designated as SIFIs if the circumstances warrant that designation.

Sen. Elizabeth Warren, D-Mass., noted that the change would drop most of the SIFI banks from the designation list, including banks with more consolidated assets than Countrywide, which played a major role in the 2008 financial crisis.

“That’s about 30 of the 40 largest banks in this country,” Warren said. “Why are you so confident that wouldn’t pose a risk to the financial stability of the country? It’s clear to me that these banks do pose a risk to the economy, and that’s the reason Congress said they should be on a watch list.”

Mnuchin said that, while he shares Warren’s concerns about how Countrywide operated and originated loans, there was “lots of blame to go around” related to its operations and wrongdoing. With respect to the banks whose SIFI designations would be rescinded under the Crapo bill, he said, those institutions are generally regional banks that are still heavily regulated by their primary federal supervisors.

“We believe that these entities below this size can be regulated by their primary regulators,” Mnuchin said.

Republicans still wary of Basel, Financial Stability Board

Mnuchin fielded a handful of questions about the influence of foreign standard-setting bodies in U.S. banking regulation. Sen. Tom Cotton, R-Ark., said that he and a number of other lawmakers are worried the Financial Stability Board’s standards could usurp U.S. bank regulators’ prerogative in setting capital and liquidity rules.

“We’re concerned that it’s morphed into a kind of global regulatory body, using its peer-review mechanism as a quasi-enforcement tool to pressure U.S. companies into adopting global standards,” Cotton said. “I’m concerned about that kind of regulatory creep into U.S. jurisdiction.”

Mnuchin said that those standards are voluntary and do not necessarily amount to a binding constraint on U.S. businesses, though many of the Basel and FSB standards have been codified into U.S. regulations by domestic regulators. The value of the international standards, he said, is to ensure that U.S. banks are competing fairly against foreign banks across the globe.

“The U.S. banks are regulated by the U.S. regulators,” Mnuchin said. “I think the purpose for the international standards, from our standpoint, is to make sure there is a level playing field for our banks, and to the extent that foreign banks have a lot less capital, there are certain standards that they would adhere to. But that is not legally binding.”

Mnuchin sees no immediate cybersecurity threats

Crapo asked Mnuchin whether there were any immediate threats or information gaps related to cybersecurity — a major element of the 2017 FSOC report — that Congress should be aware of and move to shore up.

Mnuchin said that he doesn’t “see any specific gaps today” in cybersecurity, but said that improving information sharing and stopping threats as they become known is an ongoing and critical safeguard to the financial system.

“Whether it’s recent issues we’ve seen in chips or recent software situation … we need to be very, very careful,” Mnuchin said. “We need to be working in public-private partnerships. We need to have ways of sharing intelligence when it’s appropriate, and we need to make sure that, whatever the cost, the United States financial system is protected from cyberattacks.”

Possible room for bipartisan long-term debt ceiling deal

Mnuchin opened the door to some kind of long-term revision of the debt ceiling process, reiterating his criticism of the current process whereby Congress has to raise the country’s debt load as a separate legislative item from authorizing spending.

Sen. Brian Schatz, D-Hawaii, suggested that many members of Congress would favor abolishing the debt limit altogether to eliminate any possibility that the U.S. could default on its debt, and said that if the administration favored such an approach, it would receive broad bipartisan support.

“We especially, frankly, need a little political support on the Republican side,” Schatz said. “I know they want to get rid of this as badly as we do, but they need cover from the administration. We’ll need to work with you, if you’re open to it.”

Mnuchin was relatively noncommittal about repealing the debt ceiling, but did say the administration favors some kind of bipartisan solution.

“I have spoken to both the president and the vice president, and we are very open to bipartisan solutions to figure out something as an alternative to the current system that, I think, many of us would agree doesn’t work well,” Mnuchin said.