Four things to watch during Mnuchin’s first Banking Committee hearing

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WASHINGTON — Treasury Secretary Steven Mnuchin is expected to face tough questions from lawmakers when he makes his first appearance before the Senate Banking Committee on Thursday, including on restoring the Glass-Steagall Act and housing finance reform.

One area Democrats will likely focus on is Mnuchin’s appointment of Keith Noreika as acting comptroller of the currency two weeks ago. Democrats have fiercely criticized the move, and this is their first chance to raise those concerns directly.

“That is going to color the hearing and suck all of the oxygen out of the room,” said Brandon Barford, a partner at Beacon Policy Advisors.

But there are several other topics liable to come up. Following are a few things to look for during the hearing.

Mnuchin’s defense of OCC move

Democrats on the Senate Banking Committee were incensed by Mnuchin’s move to remove Comptroller Thomas Curry and replace with him an acting director, which avoided the Senate vetting process.

Seven of the 11 Democrats on the panel sent Mnuchin a letter on Thursday with a detailed set of questions about the move to make Noreika the new OCC chief. The letter asked for a response by May 18, the same day as the hearing.

“The interesting manner in which Mr. Noreika was appointed is going to definitely elicit questions,” Barford said.

Adding fuel to the fire were comments made by Noreika within his first few days in office in which he suggested he might unilaterally attempt to rollback parts of the Volcker Rule.

“Those kinds of process fouls are not a great way to start with the minority” of the committee Mnuchin will work most closely with on issues like housing finance reform, said Barford, who added that even some Republicans may be bothered by the move.

The return of Glass-Steagall

Democrats also will likely press Mnuchin on whether he is committed to restoring the Depression-era Glass-Steagall Act, which separated investment and commercial banking until its repeal in 1999. President Trump and Mnuchin have broadly endorsed the idea, but their commitment to it is unclear.

Sen. Elizabeth Warren, D-Mass., "is likely to ask about the push for a Glass-Steagall 2.0 package,” Isaac Boltansky, a policy analyst at Compass Point Research & Trading, wrote in a note to clients. “We remain skeptical regarding the effort to implement a new Glass-Steagall construct, but the headlines are likely to persist.”

The Republican platform during the July convention called for a modernized version of the law, which would likely break up the largest banks if enacted. Mnuchin has agreed he doesn’t want a literal return of Glass-Steagall.

“I don't support going back to Glass-Steagall as is … our view is we need a 21st-century Glass-Steagall,” Mnuchin said during his confirmation hearing earlier this year.

Moreover, National Economic Council Director Gary Cohn told Warren during a closed-door meeting in April that the administration still supports the return of Glass-Steagall.

Their comments come as Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig has outlined a plan that would allows commercial banks to keep their securities and investment arms but separately capitalize them, among other steps. It’s not clear how the Trump administration feels about that idea, but lawmakers may ask Mnuchin for his views.

Charting a future for Fannie and Freddie

The Senate Banking Panel appears eager to move forward with housing finance reform this year. Chairman Sen. Mike Crapo, R-Idaho, and Sen. Sherrod Brown, the panel’s lead Democrat, have both expressed optimism that they can reach a compromise on the issue and address one of the largest pieces of unfinished business since the financial crisis.

The issue is also of top-tier importance to Sens. Mark Warner, D-Va., and Bob Corker, R-Tenn., both of whom were involved during the panel’s previously unsuccessful attempt to chart a future for Fannie Mae and Freddie Mac.

The hearing also comes a week after Federal Housing Finance Agency Director Mel Watt said he was prepared to allow the government-sponsored enterprises to begin rebuilding capital if a legislative solution is not enacted soon.

Warner, Corker and Crapo will probably “devote at least a portion of their Q&A segments to the issue of mortgage finance reform,” Boltansky wrote. “These exchanges will carry extra significance” given Watt’s testimony.

During the May 11 Senate Banking hearing, Watt said there have been discussions with the Treasury about a new sweep agreement, appealing to lawmakers not to interfere with the talks. But Corker raised concerns about the GSEs rebuilding capital, suggesting that if they have to borrow from the Treasury, it would not cause a market panic.

Both Republicans and Democrats are looking for Mnuchin to clarify the administration’s position on the issue. Mnuchin initially suggested he was open to recapitalizing the GSEs, but
has subsequently softened that stance.

Several observers said Mnuchin is unlikely to spell out concrete details.

“We do not expect that [Mnuchin] will commit to a path forward for the government-sponsored enterprises,” said Brian Gardner, a policy analyst with Keefe, Bruyette & Woods.

Regulatory relief

The Treasury Department has been studying the regulatory system and plans to release a series of reports soon on how to revamp it. The first report could come as early as next month.

Lawmakers are likely to ask Mnuchin to update them on the report’s progress, but it is doubtful Mnuchin will give many details.

“We expect a series of questions regarding the regulatory regime, but we doubt that the conversation will delve past generalities and platitudes,” Boltansky said.

Senate Majority Leader Mitch McConnell signaled Tuesday that while Dodd-Frank reform is important, it will require support from Democrats, which is unlikely.

“So far, my impression is the Democrats on the banking committee believe that Dodd-Frank is something akin to the Ten Commandments,” McConnell told Bloomberg News.

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