Congress may need to step in on Libor switch, Mnuchin warns

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WASHINGTON — The Treasury Department may need congressional help to ease the transition to a new interest rate benchmark, Secretary Steven Mnuchin told lawmakers Thursday.

Mnuchin suggested a role for the legislative branch at a House Financial Services Committee hearing, where lawmakers echoed regulators' concerns about the likely demise of the London interbank offered rate in 2021.

The Financial Stability Oversight Council warned in its annual report that the end or waning use of Libor does have the potential to “significantly disrupt trading in many important types of financial contracts.”

While the Alternative Reference Rates Committee has developed fallback language for loan documents as banks prepare for the transition to the recommended secured overnight financing rate, Mnuchin said legislation mandating such language may be necessary.

“I can assure you that this is something we are very, very focused on,” he said. “We may need to come back to Congress at some point and suggest some regulatory language and law to deal with this.”

When Rep. Brad Sherman, D-Calif., asked Mnuchin if Treasury has the authority to issue regulation requiring this fallback language, Mnuchin didn’t answer, and reiterated the possibility that his department might ask Congress to pass legislation.

“This is not on your 2021 calendar. This should be on your December calendar or January,” said Sherman. “I need to know whether you need legislation and I need to know what you need.”

Mnuchin also provided some insight into his thinking on whether the Federal Reserve should develop a digital currency, saying that he has met with Federal Reserve Chair Jerome Powell multiple times on the topic.

“I think we both agree for the near future, in the next five years, we see no need for the Fed to issue a digital currency,” he said.

He also mentioned that Treasury has had about a dozen meetings with Facebook on its proposed Libra cryptocurrency, and that it was also discussed at the G-7 and the G-20 meetings.

Several lawmakers also asked about the recent turmoil in the overnight repurchase agreement market. In the aftermath of a price spike for overnight repos, Fed officials attributed the spike to several factors, but disagreement persists about the root cause.

“There’s speculation that there are 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 it and needs liquidity the most,” said Rep. Patrick McHenry, R-N.C., the committee’s ranking member.

While some have theorized that liquidity regulations may have forced banks to load up on too many liquid assets, rendering them unwilling to inject their own liquidity into the repo markets, Powell has said that he doesn’t think the liquidity coverage should be re-calibrated. The LCR requires large banks to hold enough liquid assets to help fund operations in a crisis.

“It’s not impossible that we would come to a view that the LCR is calibrated too high, but that’s not something that we think right now,” Powell said at a press conference in September.

But Mnuchin said Thursday that “certain regulatory issues” may actually have contributed to the repo market spike, which could include liquidity rules.

“This has to do with an issue of bank liquidity,” he said. “The banks had plenty of liquidity, so 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."

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LIBOR SOFR Monetary policy Liquidity requirements Digital currencies Libra Steven Mnuchin Patrick McHenry Treasury Department FSOC
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