Mnuchin’s written responses fail to address key financial reform issues

As part of the process of gaining confirmation as the next treasury secretary, Steve Mnuchin had to provide written answers to questions posed by members of the Senate Finance Committee. 

Because the Finance Committee, which holds the confirmation hearing on Treasury Secretary nominees, does not have jurisdiction over banking and financial services legislation, relatively few of the questions posed to Mnuchin touched on banking and financial reform issues. 

{mosads}His answers therefore provide little insight into administration positions on key financial reform issues. Nonetheless, some of the questions did elicit useful responses from Mnuchin.

Without defining it, Mnuchin expressed support for a “21^st Century Glass-Steagall” act without stating what that act would encompass yet he acknowledged that “a bright line between commercial and investment banking . . . may inhibit necessary lending and capital markets activities to support a robust economy.” 

Separating investment banking from commercial banking is likely to be a non-starter in the House of Representatives.

The Financial CHOICE Act that Rep. Hensarling (R-Texas), chairman of the House Financial Services Committee, will soon introduce almost certainly will not contain any provisions forcing the separation of commercial and investment banking. 

The absence of separation language could create a conflict with the Trump administration, if it actually supports that separation. 

Somewhat surprisingly, Mnuchin expressed support for the Volcker Rule, a Dodd-Frank provision which restricts proprietary trading of securities by FDIC-insured banks. 

Hensarling’s CHOICE Act will likely include an outright repeal of the Volcker Rule, a repeal the large banks strongly support. Despite Mnuchin’s support for it, I question whether the administration will oppose repeal of the Volcker Rule.

As have many others, Mnuchin did express support for a bank “regulatory framework that is determined by complexity, not simply size.” 

There certainly is broad support among Republicans and some Democrats for simplifying banking regulation for smaller banks that provide basic banking services and lend to consumers and small businesses.

How to accomplish that simplification, though, is the great legislative challenge, a challenge Mnuchin did not address. 

The CHOICE Act will likely include a provision that opens the door to reduced regulatory burden for banks that have much higher capital levels than today’s regulatory minimums. 

Mnuchin’s answers, though, provided no insight into the administration’s position on the tradeoff between higher capital levels and a reduced regulatory burden.

Mnuchin’s answers to questions about the Financial Stability Oversight Council (FSOC) represent another potential conflict between the administration and the House. 

Mnuchin stated, “I very much look forward to serving as Chair of the FSOC,” yet the House is likely to sharply curtail, if not eliminate, the FSOC. 

Where the Senate will come down on this issue is unknown. Given President Trump’s oft-stated desire to reduce regulatory burden, the likely House position on the FSOC probably will prevail. 

Several questions posed to Mnuchin dealt with Fannie Mae and Freddie Mac. He stated what many others have said in one way or another: “Important elements of my vision for housing finance reform include increasing private sector participation and protecting taxpayers.”  

However, he provided no details on how to achieve those objectives. 

Reforming Fannie and Freddie in a manner that reduces taxpayer risk and the Government Sponsored Enterprises’ distortion of the housing market is a far tougher challenge than financial regulatory reform, which is why Fannie and Freddie will continue to operate as they have for the indefinite future 

One issue not raised by Finance Committee questions is what to do about the Consumer Financial Protection Bureau (CFPB), yet, CFPB reform is one of the most contentious issues Congress will have to address when considering financial reform. 

Specifically, will the CFPB be restructured as a five-member commission, eliminating its management by a sole director, and will the CFPB be subject to the appropriations process? 

Unfortunately, Mnuchin’s written answers provided no insights into these tough questions.

The Trump administration’s position on many aspects of banking and financial services reform will evolve in the coming months as it staffs up the Treasury Department and as legislation begins to move on the Hill, especially in the House. 

Unfortunately, Mnuchin’s answers to the Senate Finance Committee’s questions provide little insight into the administration’s eventual position on specific legislative proposals.

Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking and thrift industries, monetary policy, the payments system, and the growing federalization of credit risk.

The views of contributors are their own and not the views of The Hill.