Treasury Department News
Mar 17
TREASURY DEPARTMENT COMMENDS $3.4 BILLION DEBT RELIEF INITIATIVE FOR
LATIN AMERICA’S POOREST COUNTRIES
Washington, D.C. –
Treasury Assistant Secretary for International Affairs Clay Lowery
today commended the Inter-American Development Bank's final approval
of a debt relief package that will provide $3.4 billion in debt
reduction for five of the region's poorest countries: Bolivia,
Guyana,
Haiti, Honduras, and Nicaragua. The Bank's initiative to cancel 100
percent of loans outstanding as of December 31, 2004 will free up
money for needed health care, education and infrastructure
development
in the region.
"This landmark agreement follows President Bush's call to address
the
debt sustainability of the poorest countries in the region,
including
through grants and debt relief. The Treasury Department worked
closely
with the IDB for more than a year to develop this proposal to
provide
debt relief for the poorest countries in the Western Hemisphere – a
critical step to reducing poverty and stimulating economic growth to
help countries create the opportunities for upward mobility," said
Assistant Secretary Lowery.
The initiative was approved in a vote that was finalized this week
demonstrating overwhelming support within the region, and throughout
the Bank's membership, for the agreement. The agreement also extends
the benefits of concessional loans to five low-income countries
(Ecuador, El Salvador, Guatemala, Paraguay, and Suriname) that will
gain access to an additional $1.7 billion of subsidized financing
when
a current lending program is extended to at least 2015.
In addition to receiving $423 million of debt relief, the IDB
approved
Heavily Indebted Poor Countries (HIPC) status for Haiti. In
recognition of its special needs, Haiti will also receive $50
million
in grants per year from 2007 through 2009. After 2009, Haiti may be
eligible to receive a mix of grants and concessional loans, of which
the grant component may be up to $40 million through 2015.
Mar 15
Testimony of Treasury Under Secretary Robert K. Steel Before the U.S. House Financial Services Committee on Government Sponsored Enterprise Reform
Washington, DC- Thank you Chairman Frank, Ranking Member Bachus, and Members of the Committee for inviting me to appear before you today.
The United States has one of the most successful housing finance systems in the world. Our nation's housing finance system provides consumers with a wide range of mortgage finance options that open the door for home ownership. In today's mortgage market, consumers can choose from mortgage products designed to match their desired payment characteristics. Consumers also have greater flexibility regarding down payment options, and reductions from the once standard 20 percent down payment have played a critical role in expanding home ownership opportunities. In addition, consumers have increasingly used the mortgage market to tap illiquid housing wealth that has accumulated over time with cash out refinancing or through the use of home equity lending products.
The underlying structure of our nation's housing finance system is supported by various types of financial institutions: federally insured depository institutions and mortgage banks that both originate, service, and invest in mortgages; private mortgage insurers that provide insurance on low down payment mortgage loans; mortgage brokers that assist consumers in obtaining mortgages; investment banking firms that arrange securitization transactions and invest in mortgages; and, of course, the housing government sponsored enterprises (GSEs) – Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBanks).
Fannie Mae and Freddie Mac operate in the secondary mortgage market by providing credit guarantees on mortgage-backed securities (MBS) or by directly investing in mortgages and mortgage-related securities through their retained mortgage portfolios. In the credit guarantee business, Fannie Mae and Freddie Mac generally enter into swap agreements with mortgage lenders under which individual mortgages are transformed into MBS guaranteed by the GSEs. Fannie Mae and Freddie Mac also have the ability to purchase mortgages and package them into MBS. Treasury continues to believe that the credit guarantee function provides a useful mechanism in the operation of an effective secondary market for mortgages. In the mortgage investment business, Fannie Mae and Freddie Mac issue debt securities to fund an investment portfolio of mortgage-related securities. In comparison to the credit guarantee business where credit risk is the main exposure, the mortgage investment business involves both credit and interest rate risk. Treasury continues to believe that the mortgage investment businesses of Fannie Mae and Freddie Mac present the greatest potential risks, while at the same time having a much more tenuous connection to their housing mission than the credit guarantee business.
Recent accounting/corporate governance problems and regulatory restrictions have limited the growth of Fannie Mae and Freddie Mac over the last few years. Nonetheless, they are still a significant presence in our nation's housing finance system. As of year-end 2006, the retained mortgage portfolios of Fannie Mae and Freddie Mac totaled $1.4 trillion, which is off slightly from the $1.6 trillion outstanding as of year-end 2003. In addition, as of year-end 2006, Fannie Mae and Freddie Mac provided credit guarantees on $2.9 trillion of MBS. Together, Fannie Mae and Freddie Mac have about $4.3 trillion of mortgage credit exposure as of year-end 2006, which was about 40 percent of total outstanding mortgage debt. And while it is difficult to calculate precisely, given that fixed-rate mortgages make up the significant portion of the credit guarantees and mortgage assets of Fannie Mae and Freddie Mac, their share of the fixed-rate mortgage market would be even higher.
The FHLBanks also are significant participants in our nation's housing finance system, but they operate under a different business model than Fannie Mae and Freddie Mac. The FHLBanks' primary business is making advances – or secured loans – to member institutions that are involved in housing finance to various degrees. As of year-end 2006, FHLBank advances were $641 billion. The FHLBanks are also active mortgage investors. As of year-end 2006, they directly held $225 billion in mortgage assets – $98 billion as individual mortgages and $127 billion as MBS. At year-end, the FHLBanks also held $144 billion in fed funds and other investments, and total assets were $1 trillion.
Core Objectives of Housing GSE Regulatory Reform
It is Treasury's view, and it appears to be generally recognized, that the regulatory system for housing GSEs neither has the tools, nor the stature, to deal effectively with the current size, complexity, and importance of these enterprises. While some of these issues have been raised for years, it was the accounting/corporate governance problems that emerged first at Freddie Mac in 2003 then later at Fannie Mae in 2004 that brought these issues to the forefront. In addition, the FHLBanks were not immune to these problems as the regulatory actions associated with problems at the FHLBank of Chicago and the FHLBank of Seattle illustrated.
Treasury has been an active participant in the housing GSE regulatory reform debate. We have continually stated that we have two core objectives: the need for a sound and resilient financial system, and increased homeownership opportunities for less advantaged Americans. In line with our core objectives, our reform proposals have been designed to minimize risks that the housing GSEs pose to the broader financial system and clearly focus the housing GSEs on their mission. More specifically, our reform proposals have included provisions to improve regulatory oversight, enhance market discipline, and allow for the establishment of appropriate capital requirements for the housing GSEs. If the housing GSEs are going to continue to accomplish their mission, it is paramount that the risks undertaken by the housing GSEs are properly managed and supervised; otherwise there may be a threat to their solvency, and importantly to the stability of other financial institutions and the strength of our economy.
It is widely recognized that there is a deficiency in the oversight of the housing GSEs and Congress has worked to improve the regulation of the housing GSEs. We at Treasury appreciate this effort and pledge to continue to work with you to establish a new regulator that has all the authorities necessary to oversee these complex and sophisticated institutions.
Key Elements of Housing GSE Regulatory Reform
Throughout the debate on housing GSE regulatory reform, Treasury's focus has been on ensuring the new regulator has all of the powers, authority, and stature needed to do its job. In this regard, a core tenet of our position is that the new regulator's powers should be comparable in scope and force to those of our nation's other financial institution regulators. As I have mentioned, the housing GSEs have grown into large and complex financial institutions that require strong and effective oversight. In addition, later in my testimony, I will describe what makes the housing GSEs different than a typical financial institution. It is just as important that the new regulator have the appropriate authority to consider the unique characteristics of the GSEs and their housing missions.
In terms of comparable powers, we must ensure that the new housing GSE regulatory agency is not encumbered by the current restrictions that are placed on the Office of Federal Housing Enterprise Oversight (OFHEO). Some key elements of housing GSE regulatory reform that have been debated in recent years include the following:
- Capital Requirements – Under current law, the minimum capital requirements for the housing GSEs are fixed in statute, and the risk-based capital requirement for Fannie Mae and Freddie Mac is based on a highly prescribed stress test that is set forth in statute. These limitations are inconsistent with the ability of other financial regulators to broadly set both minimum and risk-based capital requirements. The new housing GSE regulatory agency must have enhanced flexibility to set both minimum and risk-based capital requirements. Sections 111 and 112 of H.R. 1427 largely accomplish this goal. We would be strongly opposed to changes that weaken the new regulatory agency's ability to effectively implement the capital provisions.
- Receivership/Conservatorship – Under current law, OFHEO has the authority to place Fannie Mae or Freddie Mac into conservatorship, but not into receivership. Should such circumstances arise, the new housing GSE regulatory agency must have more than the powers associated with conservatorship. In particular, the new regulatory agency must have all the receivership authority that is necessary to direct the liquidation of assets and otherwise to direct an orderly wind down of an enterprise. The new regulatory agency must also be required to take mandatory receivership actions under certain circumstances. Such receivership authority can be established in full recognition that Congress has retained to itself, in the case of Fannie Mae and Freddie Mac, the power to revoke a charter. Providing the new regulatory agency the ability to complete an orderly wind down of a troubled regulated entity also encourages greater market discipline by clarifying that investors may suffer losses. Enhanced market discipline is essential to promoting safe and sound operations, which is consistent with maintaining the GSEs' role in our housing finance system and protecting our broader financial system from problems at a GSE. Section 144 of H.R. 1427 largely accomplishes this goal.
- New Activity Approval and Mission Oversight – Under current law, the Department of Housing and Urban Development (HUD) is responsible for approving new programs, setting housing goals, and overall mission oversight. The authority for approving new activities of Fannie Mae and Freddie Mac and ensuring compliance with their mission must be transferred from HUD and combined with the other supervisory/enforcement powers of the new housing GSE regulatory agency. This authority is consistent with availability of one of the central tools that every effective financial regulator has--the ability to say "no" to new activities that are inconsistent with the charter of the regulated institutions, with their prudential operation, or with the public interest. Section 122 and other provisions of H.R. 1427 largely accomplish this goal.
Other important aspects of housing GSE regulatory reform that represent a significant improvement over current law and further provide comparability to other U.S. financial institution regulators include ensuring that the new housing GSE regulatory agency has: independent funding outside of the appropriations process; independent litigating authority and other related powers; and the full set of regulatory and enforcement tools. H.R. 1427 largely accomplishes these goals.
In addition to ensuring that the new housing GSE regulatory agency has powers and authority consistent with that of other U.S. financial institution regulators, the housing GSEs also have unique characteristics that must be addressed in regulatory reform legislation. The housing GSEs were created to accomplish a mission, and they were provided a certain set of statutory benefits to help in the accomplishment of that mission. For example, in terms of specific benefits the housing GSEs are not subject to state or local taxation and they have access to a line of credit with the Treasury Department ($2.25 billion each for Fannie Mae and Freddie Mac and $4 billion for the FHLBank System, which pales in comparison to the size of their debt obligations). The GSEs also greatly benefit from the market's perception that the U.S. government guarantees or stands behind GSE obligations, which results in preferential funding rates being provided to the GSEs. On behalf of Treasury, I want to reiterate that the GSEs' debt and other financial obligations are not backed by the federal government. There are differing views on the precise amount of this benefit, but general agreement that the benefit exists. It is this benefit and a lack of effective market discipline that largely drove the rapid expansion of the retained mortgage portfolios of Fannie Mae and Freddie Mac throughout the 1990s.
As Treasury has noted previously, the combination of three key features of Fannie Mae's and Freddie Mac's retained mortgage portfolios warrant the attention of policymakers: (1) the size of the retained mortgage portfolios of Fannie Mae and Freddie Mac – $1.4 trillion as of year-end 2006; (2) the lack of effective market discipline; and (3) the interconnectivity between the GSEs' mortgage investment activities and the other key players in our nation's financial system (both insured depository institutions and derivative counterparties). The combination of these three factors causes the GSEs to present the potential for systemic risk to our financial system and the global economy. This view has not changed.
In addition, given that Fannie Mae and Freddie Mac have a specified housing mission, and that the potential for broader risks to our financial system is associated with their retained mortgage portfolios, a sensible approach is to ensure that the mortgage investment activities of these GSEs are necessary to accomplish their housing mission. To address these issues, the new housing GSE regulatory agency must be provided specific review authority over the retained mortgage portfolios of Fannie Mae and Freddie Mac. Such authority should establish a clear and transparent process based on direction from Congress on how the new regulatory agency will evaluate the retained mortgage portfolios in terms of risk and consistency with mission. Section 113 of H.R. 1427 largely accomplishes this goal for Fannie Mae and Freddie Mac. While the broader risk issues related to the FHLBanks are less than those that are present with Fannie Mae and Freddie Mac, a review of the investment portfolios of the FHLBanks for mission consistency would also be appropriate.
In terms of the new regulator's authority or other changes related to the unique characteristics of the housing GSEs, other appropriate elements of housing GSE regulatory reform should include:
- Government-Appointed Directors – Treasury supports clarification that the government should not be involved in the appointment of directors to the Boards of Fannie Mae, Freddie Mac, and the FHLBanks. Consistent with long-standing principles of corporate governance, directors of the housing GSEs have a fiduciary responsibility to shareholders. The government appointment of directors does not change this fiduciary responsibility, but does give the impression that government may have a say or influence in the operation of the housing GSEs. That is not the case, and this should be corrected to improve corporate governance and to further clarify that the housing GSEs are not backed by the Federal government.
- Combining the Regulatory Authority of the Housing GSEs – Treasury continues to believe that the FHLBanks should be placed under the same regulator with Fannie Mae and Freddie Mac, and that this new regulatory regime should be structured to take into account certain special differences between the Federal Home Loan Banks and the other GSEs. This would enhance the critical mass of financial expertise needed to oversee the GSEs. At the same time there are many common synergies, such as the FHLBanks' investments in mortgages and MBS, and the mortgage investments of the other housing GSEs. In addition, combining regulatory authority over all of the housing GSEs under one regulator has the potential to increase the stature of the new agency and better enable it to deal with these large and influential companies. In other words, the potential for regulatory capture should be reduced. Title II of H.R. 1427 largely accomplishes this goal.
Conclusion
In conclusion, we at Treasury appreciate the efforts of the Chairman and Members of the Committee in working toward achieving resolution of the housing GSE regulatory reform issue. H.R. 1427 will establish a new regulator with powers that are comparable to other financial institution regulators, which will greatly improve the oversight of the housing GSEs. We still have strong concerns with certain aspects of H.R. 1427. In particular, if an Affordable Housing Fund is going to part of this legislation, the Fund must be: controlled by the Federal government not by Fannie Mae and Freddie Mac; temporary; and capped. In addition, the provision increasing the conforming loan limit in high cost areas is inappropriate because there do not appear to be problems in the provision of mortgage credit in these areas, and it could detract from the affordable housing efforts of Fannie Mae and Freddie Mac. Nonetheless, Treasury is supportive of the regulatory enhancements contained in this legislation as they are a significant improvement over current law. Any efforts to limit these powers or weaken the new regulator will not be viewed favorably.
We look forward to continuing to work with you on this important issue. Thank you.
TREASURY INTERNATIONAL CAPITAL (TIC) DATA FOR JANUARY
Washington, DC - Treasury International Capital (TIC) data for
January
are released today and posted on the U.S. Treasury web site
(www.treas.gov/tic).
The next release, which will report on data for February, is
scheduled
for April 16, 2007.
Net foreign purchases of long-term securities were $97.4 billion.
* Net foreign purchases of long-term U.S. securities were $115.0
billion. Of this, net purchases by foreign official institutions
were $12.3 billion, and net purchases by private foreign
investors
were $102.7 billion.
* U.S. residents purchased a net $17.6 billion in long-term
foreign
securities.
Net foreign acquisition of long-term securities, taking into account
adjustments, is estimated to have been $84.0 billion.
Foreign holdings of dollar-denominated short-term U.S. securities,
including Treasury bills, and other custody liabilities increased
$23.4 billion. Foreign holdings of Treasury bills increased $1.2
billion.
Banks' own net dollar-denominated liabilities to foreign residents
decreased $32.8 billion.
Monthly net TIC flows were $74.6 billion. Of this, net foreign
private
flows were $47.4 billion and net foreign official flows were $27.2
billion.
Mar 9
PREPARED REMARKS BY TREASURY SECRETARY HENRY M. PAULSON, JR. ON THE
GROWTH AND FUTURE OF CHINA'S FINANCIAL MARKETS
Shanghai, China – Thank you very much. I am very happy to be here in
Shanghai, and I appreciate your warm welcome. In December, I was in
Beijing for the first meeting of the U.S.-China Strategic Economic
Dialogue. After that meeting, I decided that I should return to
Shanghai to speak about the growth and the future of China's
financial
markets.
In my travels here over the last 15 years, I have seen this city
grow
to be a cosmopolitan center of finance and culture. Shanghai has in
many ways come to symbolize the economic dynamism of China. It is
an
example of China's emergence as an important participant in the
global
economy. So it is only fitting that I am making this visit against
the
backdrop of a global economy, which over the last several years has
been as strong as any I have seen during my business lifetime – an
economy that has been characterized by strong growth, low inflation,
and high levels of liquidity.
As China has grown, the relationship between the United States and
China has become more important than ever before. We welcome China's
growth and integration into the world economy – it benefits the
Chinese people, and the people of the world. Today, China is
transitioning from a planned economy to a market-driven economy and
there is no doubt that this process will continue for a number of
years. But because of its size and its role in world markets, China
is
already a global economic leader and deserves to be recognized as a
leader. And with leadership comes responsibility. Decisions about
the
pace and shape of your economic reforms, as well as policies
relating
to energy and the environment, affect nations around the world.
Since the economic relationship between our two countries is an
important part of the overall relationship, I have focused intensely
on China from the day I became Treasury Secretary. To manage the
economic relationship between our two nations on a long-term basis,
President Bush and President Hu established the Strategic Economic
Dialogue. We were very pleased with our first meeting in Beijing in
December, and will meet again in Washington in May. Because the U.S.
and China share many strategic economic interests, I am confident
the
SED will help us make progress on fundamental long-term structural
economic issues, as well as on very pressing short-term issues.
The economic relations between our two nations are vital to the
future
of the global economy. And I believe we share many of the same goals
–
the policies of openness and market principles that the United
States
advocates are similar to those that China's leaders have embraced to
bring balanced, harmonious growth to your nation. As I have said
many
times, our policy disagreements are not about the direction of
change,
but about the pace of change. It is worth noting that over the last
five years, the U.S. and China accounted for over 50 percent of
global
growth. Make no mistake about it, China's continued economic success
is not only vitally important to the people of China, but also to
the
rest of the world.
I want to take the time today to lay out why I believe increasing
the
pace of reform in your financial services markets is in the best
interest of China's future – to spread prosperity to all the people
of
your nation, to promote greater stability here and abroad, and to
demonstrate leadership in accordance with your global economic
presence.
I. Overarching Importance of Financial Markets
I am a strong believer in the power of financial markets to support
growth and development, and help a society fulfill its aspirations
and
needs. Through more than 30 years of work in the global financial
sector – including many visits to China – I have witnessed the
extraordinary global growth in financial services. And I have seen
how
deep, liquid, and efficient capital markets pave the way for
prosperity, opportunity, and economic dynamism, while minimizing and
diversifying risks.
Many years of hands-on experience working in my own country and in
nations and markets around the world has convinced me that open,
competitive, world-class financial markets are the backbone of
stable
and balanced growth.
Efficient and competitive financial sectors help allocate scarce
resources to their most productive uses and generate significant
multiplier effects for economic growth. Markets connect money with
ideas and ambition – which are the lifeblood of innovation and
dynamism. They offer a diverse array of financing channels,
providing
for more innovation and a lower cost of finance. They allow new
financial products to enter the markets and help people, young and
old, acquire consumer goods and make the investments they need to
meet
their financial goals, provide retirement security, and insure their
families against risk. Deep and liquid capital markets also increase
stability and reduce volatility.
The building blocks for strong capital markets buttress the broader
development of a prosperous economy. Strong capital markets require
strong property rights; a robust supervisory regime with clear,
transparent rules which strike the appropriate balance to ensure
market integrity while promoting the entrepreneurial spirit and
innovation; sound accounting standards; strong corporate governance;
strong financial institutions; objective, independent financial
information, analysis, and research; a meaningful disclosure regime;
and independent credit rating agencies – each of which strengthens
development in other sectors of the economy.
Efficient financial sectors are, in a sense, the central nervous
system of modern economies, making countless decisions all the time
to
keep the body in good working order.
II. Role of Capital Markets for China
Well-developed financial markets are a necessary precondition for
China's development as well – moving this nation toward its goals of
more balanced, harmonious, innovation-based, and environmentally
sustainable growth. Efficient, developed capital markets will
allocate
resources more effectively and efficiently, allowing China to
continue
growing at a healthy pace, while spreading prosperity throughout the
economy and giving Chinese citizens a better return on their savings
and investments.
China's growth is increasingly imbalanced – among regions,
households,
and sectors. These imbalances in economic structure and income
inequalities differentiate China's current development challenges
from
those of past decades. Today, China's economy depends heavily on
low-cost manufacturing goods, mainly for export. This has produced
tremendous growth. But over-reliance on a single part of your
economy
has the potential to cause problems in the future. Your long-term
economic strength requires a diverse economy, with high-value-added
manufacturing and world-class services, including financial
services.
China's most recent five-year plan acknowledges the need to achieve
better balance in the economy, by increasing the role of the
services
sector, increasing the quality of inputs – not just their quantity –
and developing a more innovative and technologically sophisticated
economy. With a population aging as rapidly as that of any advanced
economy, the five-year plan also recognizes the need to provide
health
care and retirement security for China's population. The Chinese
people seek continued growth, with more innovation and harmony, so
that the benefits of growth reach out from the cities into the
country, from the coasts into the heartland, and to all the Chinese
people.
Financial sector development is the key to China's transition into
an
economy that is less reliant on industrial activity, produces more
high value-added products, and reduces the intensity of natural
resources consumption. Your leaders recognize the power of financial
markets to speed your transition to harmonious growth. Speaking at
the
National Financial Working Group meeting in January, Premier Wen
said:
"We must push financial reform and development into a new phase, and
promote the complete development of a sustainable, healthy, and
secure
finance industry."
With an underdeveloped financial sector, investment in China doesn't
reach its potential in generating returns, personal saving is not
adequately rewarded, and risk is not appropriately priced, managed,
and diversified.
Inefficient allocation of investment means fewer jobs are created
for
any given level of investment, inefficient companies fail to reform,
new companies with higher-value added production are stifled, and
growth remains less balanced.
Inadequate reward to savings hurts the Chinese people. While China's
people work every bit as hard – if not harder – than people in other
economies, they are not yet as well off. Today, Chinese citizens
have
$2 trillion – or 16 trillion RMB at today's exchange rate –
deposited
in banks, earning on average a 2.5 percent return. After inflation
and
taxes, the real return on bank deposits is probably negative. People
in many other parts of the world have more choices of where and how
to
save, and routinely earn a much better return – often in the high
single digits even in economies that are not growing nearly as fast
as
China.
If China's financial sector were developed and offered a variety of
savings and investment securities and vehicles, the potential rate
of
return on a well-managed pension portfolio of financial assets in a
rapidly growing economy like China's could be much higher, even if
China's growth rate moderates over time Let us assume for
illustrative
purposes that rather than earning 2.5 percent, Chinese savers were
to
earn 8 percent over 30 years. The difference in the return on this
16
trillion RMB in savings would be truly significant due to the power
of
compounding. Instead of having 34 trillion RMB ($4 trillion) at the
end of 30 years, Chinese households would have 160 trillion RMB ($20
trillion), which amounts to an estimated 124,000 RMB ($16,000) per
capita. This is money that can be dedicated to meeting the Chinese
people's needs, funding education and health care and securing
retirement.
III. China's Reform of its Financial Markets
You have recognized that a deeper, more sophisticated, and more
competitive financial sector will help you to achieve your
aspirations
of harmonious growth. And already you have made significant strides.
I
have seen your progress on a first-hand basis. China's banking,
securities, and insurance sectors have all made substantial progress
over the last 10 years.
Banking
You have recapitalized four of your top five state-owned banks and,
even more importantly, invited in strategic investors and completed
IPOs, which bring with them the added discipline of enhanced
corporate
governance, external audits, and new public shareholders. As someone
who in my former job participated in and hopefully positively
contributed to this process, I was highly impressed by the speed
with
which you move to execute a plan once your leaders have made a
decision. The IPOs of your banks, like some of your earlier IPOs of
state owned enterprises in other industries, were executed much more
quickly than I have witnessed in any other country.
Corporate governance of large banks has improved considerably, with
more qualified senior management and – in many cases – foreign
directors. Non-performing loans are being reduced. And WTO
commitments
mean that foreign banks can now open 100 percent-owned subsidiaries
without geographical restrictions.
Of particular note is the separation of responsibilities for
monetary
policy and financial stability, on the one hand, and the regulation
and supervision of banks on the other. Regulatory transparency is
also
improving. Last fall, CBRC consulted extensively with foreign
companies, the U.S. Treasury, and other regulators before issuing
final regulations on the operations of foreign banks.
Securities Markets
China has also made significant improvements in its securities
markets, including new accounting standards that were adopted at the
beginning of this year. The proportion of non-tradable shares of
listed companies has been reduced. The IPO market was reopened in
mid-2006 to allow domestic investors to participate in the landmark
bank share sales, as well as a number of others. Financially weak
securities companies are being merged with stronger ones. Foreign
participation in the equities market has increased, while Chinese
investors have been given the right to invest in overseas stock and
bond markets through approved funds. The People's Bank of China has
created a vibrant short-term bond market. And the number of mutual
funds and asset management firms has increased significantly,
including through joint ventures with foreign companies.
Insurance
The quality of China's insurance companies is also improving, as
foreign and domestic institutions expand into new regions and offer
new products to better serve Chinese individuals and companies
seeking
to manage their risks.
The Benefits of Continued Reform
This nation is clearly on the right track, and further reforms lie
ahead. As you develop deeper, more liquid, broad-based, and
transparent markets with greater participation of sophisticated
institutional investors – markets which are more representative and
reflective of your strong underlying economic fundamentals – you
will
benefit from less volatility, better dispersion of risk, and greater
stability. To achieve your goals of balanced and harmonious growth,
there is much still to do in the development of open, competitive
capital markets. And the experiences of nations around the world
offer
helpful advice in charting your own course.
IV. Structural Challenges Facing China
China's financial markets face four important structural challenges:
* Your capital markets remain underdeveloped;
* For all practical purposes, China has no institutional market;
* The banking system is also underdeveloped;
* And China lacks a predictable, transparent regulatory structure
that fosters innovation.
Addressing these challenges is vital to China's long-term economic
growth.
Capital Markets
As I said earlier, strong capital markets require strong property
rights; robust supervision; sound accounting standards and corporate
governance; strong financial institutions; objective financial
analysis; a meaningful disclosure regime; and independent credit
rating agencies.
The extent to which China's capital markets still need to develop
becomes clear in comparison with other countries. A McKinsey study
found that in 2005, equity market capitalization, excluding
non-tradable, state-owned shares, was 17 percent of GDP. This is the
smallest market cap ratio in emerging Asia, where the ratio averages
70 percent. Corporate bond issues by non-financial companies
amounted
to between 2 and 3 percent of GDP, compared with a typical 50
percent
in other emerging Asian markets. Access to your markets is limited,
restricting potential buyers, and bid-offer spreads are wide,
indicating a lack of competition and liquidity. China's capital
markets lack a diversity of products. And the quality of market
participants varies widely.
Moreover, the Chinese private sector currently produces over half of
the country's GDP and in some regions 75 percent of new jobs, yet
state owned enterprises get three-quarters of the bank financing and
account for most of the corporate issuances in the stock and bond
markets. Few of your best companies are issuing securities in China.
And for the most part, state-owned enterprises, with rising profits,
don't pay dividends. As a result, most corporate investment is
financed through retained earnings or the informal sector. This
leads
to less efficient investment because there is not a rigorous
arms-length vetting process of a project's viability, and it leads
to
a more volatile investment cycle as companies tend to over-invest
during good times when they are flush with cash.
To develop stronger capital markets, China needs a larger and more
accessible government bond market, a more liquid and transparent
corporate bond market, and a legal construct in which private equity
can flourish.
Experience around the world shows that government bond markets are
the
first part of the bond market to develop. China's government bond
market offers a very narrow range of products with only limited
secondary market trading. By establishing a deeper government bond
market with open access and competition, as well as more issues
throughout the maturity structure, China can create a longer, more
representative yield curve. And this will facilitate development of
the corporate bond market by providing a reliable benchmark for
pricing.
In addition to the difficulties caused by the immature government
bond
market, China's corporate bond market is underdeveloped in large
part
because of excessive regulation. Trading is segmented between an
over-the-counter market and the listed bonds that trade on stock
exchanges. These barriers should be removed.
China would also benefit by moving to a "disclosure-based" system in
which regulators focus on ensuring that listed corporations provide
the market with adequate information and investors decide who should
get financing and on what terms. In this regard, we applaud recent
announcements from the National Financial Working Conference that
bond
market development will be a high priority. A "disclosure-based"
system also relies on good credit rating agencies, which need to be
independent from the government and evaluate risk in an objective
and
systematic fashion.
Eliminating interest rate controls and requirements that long-term
bonds receive guarantees from state-owned banks will facilitate the
proper pricing of risk.
And a legal construct that allows for limited liability companies
will
help cultivate private equity and venture capital. Private equity
and
venture capital investors will channel resources to start-up
companies, including those in the high-tech area, who might not yet
be
ready for market listing or for whom bank loans may be too
expensive.
This will move China toward its goal of becoming an innovative and
knowledge-based economy. As President Hu said in January of last
year,
"The basic role of the market will be given a full play in the
allocation of scientific and technological resources." Private
equity
and venture capital have a demonstrated record of directing
resources
to new, promising technologies.
Institutional Market and Asset Management
The cornerstone of developed capital markets throughout the world is
the institutional market, and the mutual fund and asset managers who
populate it. Institutional investors are the most rigorous in their
analysis, and innovative in developing new securities and investment
strategies. Yet China's markets lack these important elements.
Without a meaningful institutional investor base, the market relies
too much on retail investors. The result can be a more speculative
environment and a more volatile equity market. Private pension
funds,
mutual funds, and insurance companies are critical in providing
long-term finance and improving corporate governance. A broader base
of institutional investors and asset managers will lead to a wider
array of market strategies, reducing volatility and the risk of
"herd
mentalities".
The development of a broad-based institutional investing market is
being inhibited by a number of policies, including the fact that
some
important institutional investors, such as insurance companies, are
highly restricted in the types of investments they can own. Big
investors, such as insurance companies and pension plans, with large
pools of capital, should drive the development of an institutional
market when an appropriate tax and regulatory regime is in place.
Permitting professionals to enter the asset management business
would
strengthen the fiduciary role, protect investors, and develop trust
in
the industry. A switch to risk-based capitalization requirements in
the asset management industry from a fixed minimum capital
requirement
would also be beneficial.
Banking
China's third challenge is a banking system which, while making
progress, is still transitioning to a modern, efficient,
market-driven
system with proper controls, management, and professional staff.
Some
risk-averse credit officers may still believe it is safer to lend to
state-owned enterprises backed by what they see as implicit
government
guarantees, rather than to dynamic small, medium-sized, and private
businesses. In addition, corporate control of a massive and
geographically dispersed branch network remains a challenge, and
branch lending decisions are still often influenced by local
pressures. And the lack of consolidated data reporting in Chinese
banks means that the true extent of China's non-performing loans is
unclear and provisioning is insufficient.
There is widespread recognition of what needs to be done to reform
China's banking sector – better risk management; a more developed
and
accessible credit bureau; more consumer finance products; greater
scope to set interest rates to reward depositors and price risk;
consolidated supervision and reporting; greater competition,
including
of electronic payment systems; and opportunities for new banks to
expand branch networks far more quickly. The insurance sector would
also benefit from greater opportunities to expand branches in China.
Regulatory Regime
The final challenge China faces is a regulatory regime that may be
inhibiting innovation and development of a modern financial market.
As
China transitions from a centrally administered economy to a
market-based economy, its regulatory regime must adapt. Today,
central
authorities continue to be too involved in investment decisions that
are more efficiently made by the market. For example, to get
approval
to issue bonds, no fewer than three government bodies must approve
the
details of a company's fundraising and investment plan – a construct
unlikely to ensure that funds are directed to their most efficient
use. The result is that it can take more than a year to issue a bond
in China, compared to one or two months in Pakistan or the
Philippines
and less than a month in other Southeast Asian countries. Markets
would better channel funds to the most dynamic sectors and
businesses
in the economy. The appropriate role for government is to set the
rules for the market as a whole and enforce them – rather than to
make
individual investment decisions.
Government has a responsibility to set corporate governance rules
and
enforce them. But today, these rules are unclear and adherence to
them
is weak. In addition, Chinese accounting standards – although moving
toward international standards – are in continuous flux, creating
more
uncertainty and weakening financial disclosure.
The continued large role of non-market factors that influence both
state-owned enterprises and private enterprises – including
financial
services companies – stifles the dynamism of economic
decision-making
and the strength of regulatory integrity. Increasing the pace of
privatization of state-owned enterprises would be beneficial. And
state-owned enterprises should pay meaningful dividends if the cost
of
capital is to become a more meaningful concept in the Chinese
economy.
It is clearly the government's responsibility to maintain a
macroeconomic environment that supports harmonious growth. Right
now,
the combination of a rigid RMB exchange rate regime and large
external
surpluses means that there is a flood of liquidity into the banking
system. The authorities mop up as much liquidity as possible. Twelve
percent of assets in the big four banks are now sterilization bonds.
Sterilized intervention hurts banks' income through higher reserve
requirements or by forcing banks to buy PBOC bonds at low rates,
which
barely cover the banks' cost of funds.
Liquidity which cannot be absorbed is available to the banks for
lending, running the risk of excess lending and future
non-performing
loans. Administrative controls to clamp down on lending are less
effective in the larger, more market-oriented and globally
integrated
economy China has become. A more effective monetary policy – one
less
absorbed by managing the exchange rate – could assist efforts to
reform the banking system, making it more market driven as well as
help assure more stable growth.
V. Fostering Openness to Competition
China can make progress toward financial sector reform simply by
making these domestic changes. But allowing much more foreign
participation in China's financial markets would speed reform, as
well
as the stability and prosperity it will bring. I don't know of a
single country in the world with a successful and sustainable
well-balanced economy that doesn't have a strong capital market in
place. And I cannot think of any such country that isn't open to
competition – both domestically and from abroad.
In his National Financial Working Group speech, Premier Wen
established a goal of – quote – "Opening up the financial sector
wider
to foreign financial help, and introducing advanced foreign
management
experience, technology, and personnel to accelerate the pace of
innovation in China's financial system to improve efficiency and
competitiveness."
Opening your capital markets to global competition and participation
would bring many benefits: World-class financial institutions can
introduce new technology and products to China, enhance training and
the transfer of skills, improve market practices and infrastructure,
and enhance financial stability.
Allowing Chinese banks to sell controlling stakes to foreign
investors
– currently capped at 25 percent – can promote China's efforts to
strengthen risk management and internal controls in small and medium
sized banks. Chinese banks would benefit from stronger credit
analysis
skills that enhance their ability to make sound loan decisions. And
the banking sector as a whole would become more competitive as the
capital markets develop and alternate sources of financing become
available.
Opening to international competition does not mean compromising your
own rules or identity. If China opens its markets to foreign
participants, those participants will be subject to Chinese
regulation
and supervision. While undoubtedly international companies will have
some foreign managers, the bulk of the people employed in China's
financial services industry will be Chinese and the benefits
generated
will largely stay in China. Consider the large foreign investment
banks in Japan, which are overwhelmingly comprised of and managed by
Japanese professionals. As a matter of fact, they are almost as
Japanese as some of the historically Japanese institutions. The
wealth
that is generated in Japan stays in Japan.
Foreign headquartered financial enterprises operating in China would
provide tremendous resources for domestic skill development, and for
training those who will become the leaders of China's financial
industry, as well as future Chinese entrepreneurs.
China currently maintains tight caps on foreign participation in its
capital market. Foreign securities companies can only own up to 33
percent of a joint venture and foreign asset management firms up to
49
percent of a joint venture. These limitations are among the most
restrictive in large emerging markets.
Experience demonstrates that the joint venture model doesn't work in
the securities sector, because investment banks are difficult to
manage and control. The model of minority foreign stakes has not
produced world-class investment banking institutions. China would
benefit by eliminating its ownership caps in the securities
industry,
as have almost all major developing countries, including Brazil,
India, and Russia. This might not happen overnight, but the sooner
the
better.
To understand why this is true, let me briefly discuss an area I
know
something about – managing an investment bank. An important role of
an
investment bank is to serve as an intermediary between users and
providers of capital. To do this well, these institutions must
combine
advisory, sales, risk management, market-making, and investing
skills.
Premier world-class institutions must combine the full range of
these
functions globally with capabilities in various domestic markets
delivered by locals staffs trained and executing to international
standards.
This business model is difficult to execute and it comes down to
people – hiring and training the right people, and instilling in
them
proper values. Much of the training needs to be done on the job in
both the commercial and the control side of the business. The
management and control of these enterprises is very difficult even
when there is 100 percent ownership by organizations with strong
cultures and long institutional memory.
China also maintains tight controls over how much funding foreign
companies can bring into the "A" share market through the Qualified
Foreign Institutional Investor scheme. Despite the sharp rise in
stock
market capitalization and foreign exchange reserves, the quotas for
QFIIs have barely budged. This slows development of the equities
market, giving foreign investors access to less than two percent of
the market capitalization of local exchanges, which deprives Chinese
markets of buyers and expertise. Increasing QFII quotas will speed
China's financial market development. Foreign securities companies
are
leaders in derivatives, yet only banks are allowed to trade them in
China. Since all markets have periods of volatility, well-developed,
sophisticated financial markets give investors the tools to manage
volatility through a variety of financial instruments and
techniques,
including futures, and the ability to offset positions by borrowing
and selling securities. The availability of these instruments also
increases market liquidity and reduces volatility.
The Qualified Domestic Institutional Investor scheme is a good start
in allowing Chinese institutions to invest overseas. Granting more
QDII licenses to asset management firms to invest in overseas
equities
would open up new avenues for Chinese investors to diversify their
financial assets and earn higher risk-adjusted returns.
Most nations recognize that large, well-managed securities and asset
management firms which bring with them international best practices
are critical to strong domestic capital markets. Nations that want
robust, sustainable, harmonious growth do not impose caps. China is
a
large and powerful country, and you should not limit your own
potential by restricting your access to world-class financial
expertise that can enhance your capital markets.
VI. Conclusion
Time is of the essence. China's underdeveloped financial markets
place
the nation in a challenging position, trying to balance between a
centrally administered and a market-driven economy. One lesson I
have
learned over the years is that although perhaps not as easy
politically, it is better to implement reforms during periods of
economic strength. The risks for China are greater in moving too
slowly than in moving too quickly toward transparent, liquid, stable
capital markets. The longer China waits, the more difficult it will
be
to create robust capital markets and reach your goal of more
balanced,
harmonious, and innovation-based growth. Some industries that may
seek
protection from competition will grow more politically powerful as
they grow more economically powerful. That will make it more
difficult
to withdraw protection, to the detriment of a nation and its
citizens
who are deprived of world-class performance.
It's been said that everyone is in favor of competition, unless it
is
competition for themselves. Historically speaking, existing
financial
services companies tend to oppose liberalization and reform that
brings new competition, even if it brings new opportunities and
produces benefits for society overall. This has certainly been true
of
major financial sector reform in the United States and the United
Kingdom, where market participants have almost always resisted
change
which increased competition in their sectors – change which
ultimately
proved to be beneficial to society as a whole and to the financial
sector, which continued to grow and flourish with greater
competition,
efficiencies, and increases in employment.
To be sure, financial markets need to strike the right balance
between
supervision and regulation, and dynamism and efficiency. This is not
an easy challenge to master. Yet the reality of the situation is
that
an open, competitive, and liberalized financial market can
effectively
allocate scarce resources in a manner that promotes stability and
prosperity far better than governmental intervention.
Rebalancing your economy and welcoming international competition in
the financial services sector is a win-win proposition. China and
its
major trading partners will benefit from increased prosperity that
will strengthen other parts of your economy.
China's emergence as a global economic leader presents an important
responsibility. All world leaders, including China and the United
States, must maintain a transparent system of regulation and rule of
law that gives international and domestic investors confidence in
our
markets.
I look forward to continued cooperation with Chinese leaders,
particularly in the context of our Strategic Economic Dialogue,
which
is an important forum for discussing and managing our economic
relationship. We received a very warm welcome in Beijing in December
for our inaugural discussions, and I look forward to welcoming
Madame
Wu Yi and the Chinese delegation to Washington in May.
China has come a long way in developing its capital markets, but the
journey is not complete. At the end of this road lie benefits for
all
the Chinese people. With visionary leadership and steady progress,
these benefits are within reach. We wish you continued success as
you
work to attain them. Thank you very much.
Mar 7
PREPARED REMARKS OF STUART LEVEY UNDER SECRETARY FOR TERRORISM AND
FINANCIAL INTELLIGENCE BEFORE THE 5TH ANNUAL CONFERENCE ON TRADE, TREASURY
AND CASH MANAGEMENT IN THE MIDDLE EAST
Dubai, UNITED ARAB EMIRATES – I have been traveling across the
Middle
East this week discussing a wide range of issues. In Jordan I met
with
the Finance Minister and the Central Bank Governor, in Israel I met
with the Prime Minister and Foreign Minister, and here in the UAE I
met with the Minister of Foreign Affairs and the Central Bank
Governor, and hope to meet with the Prime Minster today. Tonight I
head to Riyadh for additional meetings with my counterparts in the
Kingdom. One thing that has emerged from my discussions is that
there
is unanimity on one particular issue across the region: Iran's
nuclear program and support for terrorism poses a great threat to
our
safety and security.
Throughout these discussion on global risk with governments and the
private sector, I have stressed that although there are times when
we
caution companies about the risks of investing in a given country,
the
United States believes in encouraging the free flow of goods and
capital, and we believe that free trade is a mechanism for enhancing
economic and social ties between the United States and the Middle
East.
That said, Iran under its current regime is an example of a country
where there are heightened risks to investing. The regime's dogged
pursuit of a nuclear program in defiance of UN Security Resolutions
and its insistence on arming and supporting terrorist groups like
Hizballah are threatening the stability of the region and the
international community. These policies have implications for your
businesses – especially when that business deals with government
enterprises. I am sure you would agree that your companies want to
take every precaution to avoid being involved with terrorism or
other
dangerous activities. Today, I would like the opportunity to
discuss
some of the risks that private business should consider with respect
to Iran. I will also explain a bit about steps governments are
taking
– including targeted financial measures – to combat the threat.
I understand that a session was planned yesterday to examine the
case
for doing business in Iran, but that it was cancelled. This is a
good
indication of the prevailing view in the business community. It is
clear that many businesses are taking it upon themselves to scale
back. At first glance, this may appear to present a tempting
business
opportunity for other corporations to step in. However, there is a
reason that these other companies are pulling back: they have
decided
that the risks of business with Iran outweigh any potential gain.
The world is well aware of Iran's defiance of the international
community in pursuing its nuclear program and its sponsorship of
terrorist organizations that maim and murder innocent civilians.
Iran
disguises its activities through an array of deceptive techniques
specifically designed to evade the controls of responsible financial
institutions and avoid suspicion. For example, we have seen Iranian
banks request that other financial institutions take their names off
of transactions when processing them in the international financial
system.
Iran also works to make its procurement efforts for its nuclear
program appear to be unrelated and innocent commercial activities.
Iranian entities form front companies in other countries for the
sole
purpose of exporting dual-use items to Iran that can be used in
illicit nuclear and missile programs. These front companies enable
the
regime to obtain materials that the country of origin would
typically
prohibit from being exported to Iran.
In addition, I want to tell you about another area of concern about
how Iran does business. Iran's Revolutionary Guard Corps, or IRGC,
is
used by the regime to provide a `train and equip program' for
terrorist organizations like Hizballah, as well as to pursue other
military objectives of the regime. The IRGC's control and influence
in
the Iranian economy is growing exponentially under the regime of
Ahmadinejad. More and more IRGC-associated companies are being
awarded
important government contracts. An IRGC company, for example, took
over management of the airport and runways in Tehran, while another
company won the contract to build the Tehran metro. When
corporations
do business with IRGC companies, they are doing business with
organizations that are providing direct support to terrorism.
As the evidence of Iran's deceptive practices has mounted, financial
institutions and other companies worldwide have begun to reevaluate
their business relationships with Iran. Many leading financial
institutions have either scaled back dramatically or even terminated
their Iran-related business entirely. They have done so of their own
accord, many concluding that they did not wish to be the banker for
a
regime that deliberately conceals the nature of its business – too
often the business of funding terrorism, and defying the UN Security
Council in pursuing a nuclear program.
The bank UBS, last year, announced that it was cutting off all
dealings with Iran. HSBC, Standard Chartered, Commerzbank, and many
other global financial institutions have also indicated that they
have
limited their exposure to Iranian business. According to the banks,
these were business decisions, pure and simple – handling Iran's
accounts was no longer good for business. As further evidence of the
change in tide, a number of foreign banks are refusing to issue new
letters of credit to Iranian businesses. And in early 2006, the OECD
raised the risk rating of Iran, reflecting this shift in perceptions
and sending a message to those institutions that have not yet
reconsidered their stance.
Additionally, many non-financial institutions have scaled back on
their investments or projects in Iran, concluding that the risks of
expanding operations in the country are too great. Multinational
corporations have held back investing in Iran, including limiting
investment in Iran's oil field development. These companies have
done
their risk analyses – they do not know what lies ahead in terms of
Iran's economic stability. They do not want to risk coming under
regulatory actions that impact their ability to do business. They
are
responsible corporate citizens, and, quite frankly, they do not want
to risk the reputation of their corporations.
Let me briefly expand on these last two points. Iran sends hundreds
of
millions of dollars each year to terrorist groups like Hizballah and
other organizations. When a country has a nine-digit line item in
its
budget for support to terrorist organizations and is actively
seeking
a WMD program, there is no way to know how the regime will use its
revenues. Corporations are in the process of reconsidering their
investments in Iran because they do not want revenue generated from
their projects diverted towards threatening and destabilizing
policies
such as illicit weapons proliferation and terrorism.
Since most multinational institutions want to protect their
corporate
reputations by avoiding risky relationships, the United States and
other nations are reaching out to better inform the private sector
about the nature of some of those risks – particularly as they
relate
to Iran. We believe that by being equipped with information about
Iran's deceptive practices, businesses such as yours will be better
poised to evaluate the risk of given ventures.
When people think of sanctions, what often comes to mind is a
modern-day blockade: an attempt to stop trade or investment
altogether
in order to weaken the economy of an entire nation. This kind of
program is sometimes required. Perhaps one of the best contemporary
examples is South Africa under apartheid, a situation where broad,
international sanctions made a decisive impact on the course of that
nation's history.
Governments are working to hamper the efforts of the Iranian regime
by
imposing targeted financial measures directed specifically at
individuals, key regime members, front companies, and financial
institutions. Targeted financial measures are aimed at "conduct" not
a
"country." Some of these targeted measures require financial
institutions to freeze funds and close the accounts of designated
actors – effectively denying these actors access to the traditional
financial system. At times, the action includes bans on travel or
arms
transfers, which further confine and isolate the target. To maximize
the effect, we try to apply these measures in concert with others.
For
example, whenever possible, we act with a partner or a group of
countries, and in some cases we can designate a target at the United
Nations.
These kinds of measures have several advantages over broad-based
sanctions programs. First, by singling out those responsible for
engaging in the illicit activity – rather than targeting an entire
country – they are more apt to be accepted by a wider number of
international actors and governments. Second, targeted financial
measures warn innocent people not to deal with the designated
target.
And third, these measures serve as a deterrent. Those who are
tempted
to deal with targeted high risk actors are put on notice: if they
continue this relationship, they may be next.
The United States has taken some recent targeted measures to combat
Iran's pursuit of a nuclear weapons program and to confront its
support for terrorism. In September 2006, we cut off one of the
largest Iranian state-owned banks, Bank Saderat, from any access to
the U.S. financial system. We did this because Bank Saderat, which
has
over 3400 branch offices, is used by the Government of Iran to
transfer money to terrorist organizations. Iran uses Saderat to
transfer money to Hizballah as well as to terrorist groups
designated
by the European Union such as Hamas, PFLP-GC, and the Palestinian
Islamic Jihad. For example, since 2001, a Hizballah-controlled
organization received $50 million directly from Iran through
Saderat.
Recognizing the need for additional tools to combat the
proliferation
of weapons of mass destruction, President Bush signed Executive
Order
13382 in June of 2005. This executive order authorizes the
imposition
of strong financial sanctions against not only WMD proliferators,
but
also against entities and individuals that provide support or
services
to them. A designation under this E.O. cuts the target off from
access
to the U.S. financial and commercial systems, and puts the
international community on notice about a particular threat. Since
2005, we have used this authority against a total of 36 entities and
individuals, 19 of which are connected to Iran's WMD proliferation
efforts.
One recent and very significant designation under E.O. 13382 was the
January 9, 2007 designation of Bank Sepah, the fifth largest Iranian
state-owned bank and a supporter of WMD proliferation. In
particular,
Sepah provides direct and extensive financial services to Iranian
entities responsible for developing missiles capable of carrying
weapons of mass destruction. Like other Iranian banks and entities,
Bank Sepah engages in a range of deceptive practices in an effort to
avoid detection, including requesting that other financial
institutions take its name off of transactions going to other banks.
The United Nations has also taken a strong stand against Iran's
continued defiance of the international community. On December 23,
2006, the Security Council unanimously passed United Nations
Security
Council Resolution 1737, which imposes targeted sanctions against
the
regime under Chapter VII of the United Nations Charter for Iran's
continued "threat to international peace and security." This set of
sanctions requires countries to take a number of actions to deny
Iran
access to the materials and services that support its nuclear and
ballistic missile capabilities. They target equipment, training, and
technology – including dual-use equipment – as well as specific
individuals, like General Safavi, commander of the IRGC and listed
in
the resolution for his involvement in Iran's nuclear and ballistic
missile programs.
Among other things, the resolution requires all states to deny Iran
any financial assistance, or the transfer of any financial resources
or services, related to the supply, sale, transfer, manufacture, or
use of prohibited items associated with Iran's nuclear and missile
programs. It also contains an annex – available for all to see –
listing entities and individuals responsible for these programs. The
resolution requires states to freeze their assets and those of
entities owned or controlled by them.
The United Nations Security Council is also considering additional
measures against Iran. Just two weeks ago, the International Atomic
Energy Agency confirmed that not only had Iran had ignored the UNSCR
1737 requirement to suspend uranium enrichment within 60 days of the
resolution, but also that it had actually expanded its program. As a
result, the Security Council is considering adopting a second
resolution.
In the Iranian regime led by President Ahmadinejad, the world faces
the threatening combination of a country dedicated to developing
nuclear weapons and to materially supporting terrorists. The regime
not only has an ideologically extreme vision of the future, but also
is intent on developing the weapons it believes will help obtain
this
vision. It is clear why the world should not tolerate a
nuclear-armed
Iran. The United States, the European Union, and the United Nations
have embarked upon an effort to convince the Iranian leadership to
change its course.
It is our goal to convince Iran that it can no longer afford to head
down its destabilizing path. The imposition of government-imposed
financial measures, coupled with the private sector's own initiative
to reevaluate business with Iran, has already sparked a debate
inside
Iran about the wisdom of Ahmadinejad's policies. It is our hope that
Iran will realize that the only way to return to the international
fold – and protect its economy – is to reverse its self-isolating
behavior.
The Iranian people deserve better than a government willing to
sacrifice their economic well-being to pursue weapons they don't
need
and policies that result in the deaths of innocent civilians. They
deserve better than a regime that allows unemployment and poverty to
rise and their basic rights to be tossed aside. And this region
deserves to be free from the pressure of an increasingly hostile and
antagonistic Iran that is promoting sectarian violence and
heightening
Sunni and Shia tensions.
As you make your business decisions, I urge you to consider whether
it
is wise for your company to focus its efforts on doing business with
Iran. I recognize that it may be tempting to step into the void that
is being created by other companies pulling back their business in
Iran, but they are pulling back for a reason. The world's top
financial institutions and corporations are re-evaluating their
business with Iran because they are worried about the risk and their
reputations. You should worry too and be especially cautious when it
comes to doing business with Iran.
This is a situation where governments and the private sector share
the
same goal. Caution by the private sector is putting pressure on
Iran. By having governments partner with the private sector,
including by sharing information and concerns with the private
sector,
we are seeing more of an impact on our collective efforts, and it is
this impact that, I believe, can help bring about a change in course
for Iran.
Mar 5
US TREASURY TO AWARD NYC ORGANIZATION FOR EXCELLENCE IN FINANCIAL
EDUCATION
U.S. Treasury Deputy Assistant Secretary for Financial Education
Dan
Iannicola, Jr. will recognize New York City non-profit Working in
Support of Education (W!SE) as a leader in financial education
tomorrow at the High School of Economics and Finance. Iannicola
will
join New York City Department of Consumer Affairs Commissioner
Jonathan Mintz to present the John Sherman Award.
The Treasury's Office of Financial Education presents Sherman Awards
to raise awareness of the urgent need for financial education and
the
effective practices to help meet that need. The Office of Financial
Education has presented such awards to 15 organizations since its
creation in 2003.
W!SE is a non-profit organization that provides innovative programs
focused on financial education and literacy, business and social
entrepreneurship and preparation for college and the workplace.
Treasury chose this program because it partners with schools that
agree to teach 12th grade students a 6-8 week unit on personal
finance
as part of an Economics course required by the state of New York.
W!SE's Financial Literacy Certification Program encourages teachers
to
teach personal finance and measures the students' performance after
the unit is taught. Through this program, W!SE has reached thousands
of high school students throughout New York City.
Who U.S. Treasury Deputy Assistant Secretary for Financial
Education
Dan Iannicola, Jr.
What Sherman Award Presentation
When Tuesday, March 6, 12:00 p.m. (EST)
Where High School of Economics and Finance
10th Floor/Library
100 Trinity Place
New York, NY
SECRETARY PAULSON NAMES JAMES H. FREIS, JR. AS THE NEW DIRECTOR OF
FINCEN
U.S. Treasury Secretary Henry M. Paulson, Jr. today named James H.
Freis, Jr. as the new Director of the Financial Crimes Enforcement
Network (FinCEN), a bureau of the U.S. Treasury Department. Freis
currently serves as Deputy Assistant General Counsel for Enforcement
& Intelligence.
"Jim brings leadership, financial expertise and international
experience that will serve our nation well as Director of FinCEN. I
am pleased that he will take over and lead FinCEN's critical efforts to
safeguard the financial sector from illicit activity. Over the past
two years at Treasury, Jim has contributed greatly to Treasury's
efforts to protect the country against terrorist financiers, money
launderers, and other criminals who abuse the financial system,"
said Paulson.
As Deputy Assistant General Counsel, Freis provides legal support to
Treasury's Office of Terrorism and Financial Intelligence, including
supervising the legal counsel to FinCEN, the Office of Foreign
Assets Control, and the Treasury Executive Office for Asset Forfeiture. He
is also responsible for developing international financial measures
against rogue states.
Before coming to Treasury, Freis served as Senior Counsel in the
Legal Service of the Bank for International Settlements in Basel,
Switzerland, where he supported the banking and risk control
departments in providing financial services to central banks and
international organizations for management of monetary reserves. He
also had regular interaction with the Basel-based committees of
experts setting international financial standards. He previously
served in the Federal Reserve Bank of New York's legal department,
where he advised on payment and settlement systems issues at
wholesale and retail levels, administration of foreign government and central
bank accounts, and legislative and regulatory reform. He was part of
the successful defense of the Bank before the Iran-U.S. Claims
Tribunal in The Hague with respect to the management of Iranian
funds during the hostage crisis. Freis also spent one year working in the
financial sector in Germany.
Freis earned his Juris Doctorate from Harvard Law School and his
bachelors degree from Georgetown University, graduating with honors
from each institution. He is an attorney-at-law and a Chartered
Financial Analyst (CFA) charterholder. Freis currently resides in
Washington, DC with his wife and two children.
The Financial Crimes Enforcement Network is a bureau within the
Treasury Department charged with safeguarding the financial system
from money laundering and other illicit financial activity through
the administration of the Bank Secrecy Act. FinCEN supports the law
enforcement and intelligence communities, as well as the regulatory
agencies, through the sharing and analysis of financial
intelligence.
Freis replaces Robert Werner, who departed FinCEN in December 2006
to pursue a career in the private sector.
Mar 1
Testimony of Kimberly A. Reed, Director
Community Development Financial Institutions Fund
U.S. Department of the Treasury
Before the House Appropriations Committee,
Subcommittee on Financial Services
Chairman Serrano, Ranking Member Regula, and distinguished Members of the Subcommittee, I appreciate the opportunity to testify before you today on behalf of the Community Development Financial Institutions Fund (CDFI Fund), which is within the U.S. Department of the Treasury, on the CDFI Fund's important work to expand the capacity of financial institutions to provide financial services to low-income and disadvantaged communities, as well as on the President's fiscal year 2008 budget proposal.
I am Kimberly Reed, the new Director of the CDFI Fund. Treasury Secretary Paulson announced my appointment on January 18, 2007, and I began as Director on February 1, exactly one month ago today. Joining me today are the CDFI Fund's Deputy Director for Policy and Programs, Linda Davenport, and Deputy Director for Management and Chief Information Officer, Terry Keyfauver.
Secretary Paulson's top priority is keeping America's economy strong for our workers, our families, and our businesses. The CDFI Fund helps fulfill this priority by encouraging more jobs and opportunity in America's neediest communities. The mission of the CDFI Fund is to expand the capacity of financial institutions to provide credit, capital, and financial services to underserved populations and communities in the United States. Through its various programs, the CDFI Fund makes investments that strengthen and sustain a network of financial institutions that we call Community Development Financial Institutions and Community Development Entities.
Growing up in rural West Virginia, I appreciate the importance of and impact that programs such as those of the CDFI Fund can make to improve the lives in and economic conditions of America's neediest communities.
CDFI FUND'S MISSION of expanding the capacity of financial institutions to provide financial services to disadvantaged communities
I am pleased to tell you that the CDFI Fund is devoted to supporting financial institutions working in low-income and disadvantaged communities. Given the focus of today's hearing on the need for unique financial services for those residing in disadvantaged communities, I want to highlight the activities of some of our Community Development Financial Institutions (CDFIs). Many CDFIs offer an alternative to what are considered "predatory lending practices".What is a CDFI?
Generally, CDFIs are community-based specialized financial institutions that serve low-income people or work in economically distressed communities, often working in market niches that may be underserved by traditional financial institutions.
CDFIs include regulated institutions such as community development banks and credit unions. These institutions, in particular, provide consumer financial services that are designed to bring underserved persons into the financial mainstream, building wealth on affordable terms. CDFIs also include loan funds, many of which offer home mortgage products to consumers not reached by conventional mortgage lenders or at terms not generally available to low-income communities.
CDFIs respond to gaps in local markets that traditional financial institutions are not able to adequately serve. They provide a wide range of financial products and services. While the types of products offered by CDFIs may be similar to those provided by larger mainstream financial institutions (such as checking and savings accounts, mortgage financing for low-income and first-time homebuyers, small business lending, and lending for community facilities), CDFIs generally lend to and make equity investments in markets not served by these traditional financial institutions. The size of transactions and the risk profiles of transactions or customers make it difficult for traditional financial institutions to focus on these customers. CDFIs often offer rates and terms that are more flexible than those provided by traditional financial institutions. CDFIs that are certified by the CDFI Fund also are required to provide services that will help ensure that credit is used effectively, such as technical assistance to small businesses and credit counseling to consumers.CDFIs are a segment of the financial services industry that is just beginning to grow. Data reported by more than 500 CDFIs to the CDFI Data Project indicate that their total assets doubled in just four years, from $9 billion in 2001 to more than $18 billion in 2004. While commendable, this growth results in institutions that are still a fraction of the size of most regional or national banks. The average CDFI bank has $152 million in assets as compared to $1.3 billion in assets for the average commercial banks. The average CDFI credit union has $17 million in assets as compared to the $78 million of the average federally-insured credit union. In 2006, national commercial banks and savings institutions held nearly $10 trillion in assets and federally insured credit unions held $679 billion. The CDFI Fund plays an important role in supporting the growth and increasing the capacity of CDFIs to reach markets those other financial institutions may not.
CDFI Fund's CDFI ProgramThe CDFI Fund, through its CDFI Program, uses federal resources to invest in and build the capacity of certified CDFIs to serve low-income people and communities lacking adequate access to affordable financial products and services. Specifically, the CDFI Program provides Financial Assistance awards to CDFIs and Technical Assistance grants to CDFIs and entities proposing to become CDFIs. The CDFI Fund selects Financial Assistance and Technical Assistance awardees annually through a competitive selection process.
CDFI Certification
Only financial institutions certified by the CDFI Fund can receive Financial Assistance awards through the CDFI Program. Certification requires a determination that the institution has a mission of serving low-income communities, is a financing entity, and commits 60 percent or more of its lending or investing resources to low-income communities together with the provision of technical assistance or counseling services to its customers, among other requirements.
CDFIs are located in both rural and urban communities, as well as on Tribal lands, as follows:
- 82% are located in urban areas, and
- 18% are located in rural areas.
The above statistics include 39 Native CDFIs, 6 of which are located in urban areas and 32 in rural areas.
As of January 31, 2007, the CDFI Fund has certified 778 CDFIs:- 517 (67%) are Loan Funds
- 152 (19%) are Credit Unions
- 62 (8%) are Banks and Thrifts
- 27 (3%) are Venture Capital Funds
- 20 (3%) are Depository Institution Holding Companies
The CDFI Fund provides Financial Assistance awards in the form of equity investments, loans, deposits, or grants, depending on applicant needs, and must be matched dollar-for-dollar by the applicant with funds of the same type from non-federal sources. There are two applicant categories for Financial Assistance awards: (1) Core, for larger CDFIs, and (2) SECA (Small and/or Emerging CDFI Assistance), which is available for applicants that are smaller and/or have a shorter operating history.
These awards enable CDFIs to leverage private capital to respond to demand for affordable financial products and services in economically distressed markets and by low-income families. CDFIs respond to this demand through the provision of loans, investments, training, technical assistance, and basic financial services, such as checking or savings accounts. Based on data supplied by CDFIs required to report to the CDFI Fund, it is estimated that, for the past two years, CDFIs leverage their Financial Assistance awards with nonfederal dollars by up to an average of 27:1.
During FY 2006, the CDFI Fund received 127 applications requesting $146.7 million in Financial Assistance awards, including 41 SECA applicants requesting $18.2 million. The CDFI Fund awarded a total of $24.47 million to 52 organizations, including 39 Core awards in 24 states and 13 SECA awards in 12 states.
CDFI Program Technical Assistance Awards
The CDFI Fund provides Technical Assistance grants to build the capacity of start-up and existing CDFIs by acquiring prescribed types of products or services including technology (usually efficiency enhancing technology, such as computers and loan management software), staff training, consulting services to acquire needed skills or services (such as a market analysis or lending policies and procedures), or staff support to conduct discrete, capacity-building activities (such as website development).
More established CDFIs also use Technical Assistance grants to build their capacity to provide new products, serve current markets in new ways, or enhance the efficiency of their operations; examples include upgrading computer hardware and software.
In FY 2006, the CDFI Fund received 53 applications requesting $3.4 million in Technical Assistance grants. The CDFI Fund awarded $1.91 million to 21 organizations, of which 27 percent were funded to increase the efficiency and capacity of their organizations through the addition or expansion of technology.
CDFI Program Impact
CDFI Program awardees are having significant impact in the communities they serve. As a steward of taxpayer dollars, making this impact is of the utmost importance to me. In FY 2005, the most recent year for which data is available, 186 CDFI Program awardees reported leveraging their awards with $1.4 billion in private and non-CDFI Fund dollars. These CDFIs reported that their financing helped to:
- create or maintain nearly 14,000 full-time equivalent (FTE) jobs, and
- develop or rehabilitate nearly 27,000 affordable housing units.
In addition, these CDFIs reported that they provided:
- home purchase mortgages to 2,000 individuals,
- checking or savings accounts to nearly 14,000 previously unbanked individuals,
- Individual Development Accounts to 2,500 low-income individuals, and
- financial literacy or other training to 148,000 individuals and organizations.
These new jobs, along with the increase in residential housing and commercial real estate, result in an increase in tax revenue (consisting of federal, state and local income taxes, and social security taxes), reduce the amount of state unemployment benefits paid out, and increase the amount of local property taxes.
CDFIs Provide Financial Services to Disadvantaged CommunitiesCDFIs provide many services to disadvantaged communities. According to CDFI Fund data from 2005, more than half (59%) of CDFIs receiving CDFI Program awards report that they are providing financial education services and 42 percent are providing homeownership counseling to first-time homebuyers. These education and counseling services increase consumer awareness and help individuals make informed decisions about available financing products. Among bank and credit union CDFIs, half offer alternatives to payday loans and nearly 40 percent provide check cashing services to people who don't have accounts with these institutions. CDFIs also help individuals build wealth, another factor that can help them avoid the need for an emergency payday loan to cover an unexpected illness or other expense. Twenty-nine CDFIs, including 22 unregulated CDFIs in partnership with regulated CDFIs, provide their eligible low-income clients the opportunity to open an Individual Development Accounts.The following are examples of how the CDFI Fund supports such CDFIs to provide financial services to disadvantaged communities:
1) The National Community Investment Fund, a certified CDFI in Chicago, Illinois, that invests equity and debt in banks, thrifts, and credit unions with a primary mission of community development, received a CDFI Program Financial Assistance award of $1,315,000 in 2003 to support its Retail Financial Services Initiative. This initiative is helping 12 institutions implement financial products that provide affordable retail financial services, and the four CDFIs mentioned below are among the participants.
- Bethex Federal Credit Union in Bronx, New York, and scheduled to appear on the next panel at this hearing, has built a partnership with a check cashing outlet to educate and market strategies which help the check cashing customer move into the financial mainstream. This effort to encourage consumers to utilize financial services is conducive to long term wealth creation. Bethex has received six CDFI Program awards totaling $812,954.
- North Side Community Federal Credit Union in Chicago, Illinois, offers a Payday Alternative Loan (PAL) program. Founded in 1974, North Side is a non-profit federally chartered community development credit union and certified CDFI with more than $7.2 million in assets and is owned and controlled by its more than 3,100 members. In 2002, North Side began a short-term PAL program to offer low-cost alternatives to payday lenders, as well as banking services to individuals who had been turned down by traditional lenders. This very successful lending program has resulted in over 4,200 loans, as of December 2006, to people facing emergency cash needs. The program has more favorable terms than payday lenders offer and requires borrowers to participate in financial education courses. North Side has received two CDFI Program awards totaling $239,500.
- Alternatives Federal Credit Union in Ithaca, New York, offers financial services and financial education and economic development programs to its members, residents of Tompkins County (Central New York), since it was chartered in 1979. A full-service credit union with over 7,113 members, Alternatives FCU plays a key role in assisting its low-income members to build wealth and accumulate assets. Alternatives has received five CDFI Fund awards totaling $4,331,715 to help support its capacity and expansion of programs and financial services.
Since 2002, Alternatives FCU has been managing a free tax-preparation service by running an IRS Volunteer Income Tax Assistance (VITA) program as a "new-accounts strategy" to encourage individuals to come into the financial services mainstream. As an incentive to have individuals open accounts, Alternatives waives the $10 membership fee and suspends the $5 minimum balance until the tax refund is deposited.
- Legacy Bank in Milwaukee, Wisconsin, is a state-chartered commercial bank founded by three African American women. Legacy opened in 1999 and already is a $160 million asset financial institution. The bank focuses on financial education and affordable lending products that encourage the use of a bank rather than payday lenders. More than a third of its low-income customers have had some type of negative experience with payday lenders and rapid tax refund loans. Its primary product to combat this issue was the Financial Liberty First Accounts product that has now evolved into the Liberty Checking/Savings Account products.
To support the Liberty Checking/Savings Account products, financial education classes are taught offsite through partnerships with more than 30 organizations that serve low-income populations. The bank also holds monthly classes on site. Successful completion of the classes results in the participant being able to open an account even if they have had prior credit or checking account issues. The bank focuses on turning these account customers into loan customers who buy homes and start-up businesses. Many of them have learned how to save for their own or their children's education, emergency expenses (to avoid payday lenders), and other financial goals. Several thousand people have taken advantage of these programs and products – bringing them into the mainstream of banking rather than the downward cycle of payday lending. Legacy has received five CDFI Fund awards, totaling nearly $4.5 million.
2) ASI Federal Credit Union in New Orleans, Louisiana, is a low-income designated credit union that serves approximately 77,000 members in New Orleans and southeast Louisiana. ASI's mission is to serve the underserved, promote economic empowerment, and provide affordable financial products and services to those with little or no credit. Over 60 percent of ASI's members fall below the poverty level, and it is estimated that ten percent of its members were unbanked prior to joining the credit union. ASI's mission became more critical following the devastation of Hurricane Katrina. Most members served by ASI experienced substantial personal losses, including homes, automobiles, and employment opportunities.
In its history of serving the underserved, ASI has pioneered a number of products and services catered specifically to those of modest means. The five main products offered are the Stretch Plan, the Credit Enhancement Plan, the Asset Builder Loan, the Yours-to-Own Loan, and the Payday Lender ReBuilder Loan. All of these products provide a much-needed outlet for the credit union's low-income members who frequently fall victim to the debt trap. ASI received a CDFI Financial Assistance award in the amount of $585,000 in 2006.
Additional CDFI Fund Efforts to Assist with Financial Services in Distressed CommunitiesAs the new Director of the CDFI Fund, I plan to work with our CDFI Advisory Board on the important issues that we are discussing here today. The Community Development Advisory Board was established in the Community Development Banking and Financial Institutions Act of 1994 to advise the Director of the Fund on policies regarding the activities of the CDFI Fund. The Board is composed of public representatives from the Departments of Agriculture, Commerce, Housing and Urban Development, Interior, Treasury, and the Small Business Administration, as well as nine private citizens with a variety of backgrounds relevant to the CDFI Fund's mission. The current Chair is Bill Bynum, President and CEO of the Enterprise Corporation of the Delta. I hope to invite a number of CDFIs to attend a Community Development Advisory Board meeting for a discussion of ways in which the CDFI Fund can improve and expand its support of CDFIs doing this important work.
Additionally, the CDFI Fund will continue to cultivate its close working relationship with the Treasury Department's Office of Financial Education, the Internal Revenue Service, and other Treasury and federal agencies in important financial education work. For example, CDFI Fund staff will join other Treasury officials in its partnership with the American Bankers Association Education Foundation for the 11th annual "Teach Children to Save Day" initiative on April 24, 2007. This is Treasury's fourth year participating in this program, where thousands of bankers and Department officials connect with students in classrooms and after-school programs to share "real life" lessons about money. The CDFI Fund recognizes that such outreach is important to help the youth in disadvantaged communities better understand the advantages of or possible pitfalls associated with various financial services.
PRESIDENT'S FY 2008 BUDGET REQUEST
The President's budget for fiscal year 2008 requests a $28.6 million appropriation for the CDFI Fund. Specifically, the CDFI Fund's budget request includes $24.4 million for the CDFI Program and $4.1 million for the administration of the New Markets Tax Credit (NMTC) Program. This request is $21 million above the President's FY 2007 budget request, as funding was not requested in FY 2007 for the CDFI Fund's grant programs, other than for support of the management of the existing portfolios. Because the NMTC Program provides tax credit allocations instead of grants or loans, all costs are administrative in nature.
As in FY 2006 and 2007, the FY 2008 budget does not request funding for the Bank Enterprise Award (BEA) Program. Through the BEA Program, the CDFI Fund provides monetary awards to FDIC insured depository institutions as incentives to increase their lending and investments in economically distressed communities. The awards are made on the basis of past activity, which is, in our view, a fundamental program flaw and the reason, among others, funding is not requested for FY 2008.
Additionally, because no separate authorization exists for the CDFI Fund's Native Initiatives, no separate set-aside for this program is being requested in FY 2008. However, the CDFI Fund will continue to provide economic and community development to Native American, Alaskan Native, and Native Hawaiian communities through our existing CDFI Program.
Since it began its awards programs in 1996, the CDFI Fund has awarded more than $820 million through its programs. In addition, the CDFI Fund has allocated $12.1 billion in tax credit authority to CDEs through the NMTC Program.
By directing our efforts to increase the capacity of CDFIs, and administering the NMTC Program, the President's FY 2008 budget request allows us to focus our programs to promote economic revitalization and community development through investments in and assistance to CDFIs and CDEs through four key ways:Make Awards Through the CDFI Program
The CDFI Program provides financial assistance awards and technical assistance awards to carry out the Fund's mission of expanding the capacity of financial institutions to provide credit, capital and financial services to underserved populations and communities in the United States.
Issue Allocations of Tax Credits Through the NMTC Program
The NMTC Program attracts private sector capital into low-income communities through Community Development Entities (CDEs). CDEs raise funds by providing tax credits to private investors in exchange for equity investments, which are then invested in low-income communities. CDEs apply for allocations of NMTCs through annual, competitive allocation rounds.
Manage the Existing Portfolio of Awards
Certain activities pertaining to the existing portfolio of awards are required. These activities consist of finalizing the terms of assistance agreements with recent awardees, making disbursements of awards, and monitoring awardee compliance with the terms of their two and three-year award assistance agreements. This later step includes reviewing annual reports provided by awardees to ensure that their performance meets the goals as outlined in the assistance agreements.
Evaluate Program Design, Effectiveness, and Impact and Provide Training
It is of great importance to me not only to ensure that our awards create lasting impact on our nation's distressed communities, but also that the organizations that utilize our programs find that they are efficient and effective. The Fund's CDFI Program is now over ten years old. To ensure that they are meeting the needs of today's CDFIs, the CDFI Fund has retained an outside research and consulting firm to conduct an evaluation of this program, as well as of the Fund's CDFI certification process and past CDFI training efforts.
In addition, the CDFI Fund is reviewing proposals for independent research to be conducted on the role and impact of CDFIs in increasing the provision of needed financial services and products to low-income communities. The results of these evaluations will set the stage for improvements to existing programs and provide input to the re-engineering of processes that encourage more organizations to seek certification as a CDFI.
Similarly, the CDFI Fund has retained Urban Institute to analyze the effectiveness of the NMTC Program. Lastly, the CDFI Fund is supporting Native CDFIs through three current contracts supporting the creation of Native CDFIs, and financial education in Native communities.CDFI Fund's management and operations
Internal Financial and Management Controls
The CDFI Fund has implemented effective financial and management controls, as verified by its independent auditors (KPMG Peat Marwick, LLP). I am pleased to share that FY 2006 marks the ninth consecutive year in which the Fund received an unqualified opinion on its financial statements and in which no material weaknesses were identified. This serves as a confirmation that the CDFI Fund has good internal controls and that our accounting and administrative systems are operating effectively, something that is important to me and this Administration.
Compliance and Portfolio Monitoring
The CDFI Fund has implemented a variety of new initiatives to monitor and conduct compliance reviews of its growing portfolio of awardees and allocatees. The CDFI Fund's NMTC compliance system has been significantly upgraded and now provides us with a fully automatic system that reflects each allocatee's compliance status with the various terms and conditions found in its allocation agreement. The Internal Revenue Service has access to the CDFI Fund's system to assure compliance with the tax code by NMTC investors. Our increased effort in monitoring our awardees has also extended to exploring ways in which all compliance reporting can be fully automated. This would allow the Fund to pull information from various CDFI Fund systems, including the Community Investment Impact System, and would automatically determine an awardee's compliance status with the requirements set forth in each assistance agreement.
In addition to the above systems, our compliance office also conducts post-award site visits to verify the information submitted by awardees and allocatees and plans to substantially increase these visits in the near future. The CDFI Fund also participates in several outreach sessions at various industry conferences each year to better inform awardees and allocatees of the reporting requirements and to answer any individual compliance questions.
Measuring Community Development Investment Impact
The Community Investment Impact System (CIIS) developed by the CDFI Fund is the nation's first system to collect standardized institution and transaction level data from CDFI Program awardees and NMTC Program allocatees. The CIIS database currently contains data from several hundred organizations.
Fully implemented in FY 2004, CIIS collects data such as awardee and allocatee financial position, number of staff, and number of development services clients. It also collects transaction level data providing details on each loan or investment made, such as the purpose of the loan or investment, borrower socio-economic characteristics, loan and investment terms, repayment status, and community development impacts. These data allow the CDFI Fund to measure impact at the census tract level and to map CDFI and CDE activity in specific geographic locations. This innovative system has been recognized by both former Federal Reserve Board Chairman Alan Greenspan and current Chairman Ben Bernanke, who stated that these "results can help inform funding decisions, develop programs, establish performance benchmarks, and communicate societal benefits attributable to specific policy."
CDFI Fund's Customer Service
The CDFI Fund makes every effort to be citizen-centered and responsive to the communities that we serve. In an effort to reach out to organizations and areas that have not traditionally had access to our programs, the CDFI Fund traveled to 18 states in 2006 to conduct application workshops for the FY 2007 programs. This effort was an attempt to reach out to rural areas and areas that have not traditionally applied to our programs, including such states as Montana, Florida, Iowa, Maryland, South Carolina, and Alabama. The CDFI Fund also hosted three satellite broadcasts of its workshops using HUD's satellite television network, which were then down linked to every HUD Field Office across the country – over 80. This effort helps ensure that citizens across the country have access to this valuable training.
Plans for the Remainder of FY 2007
The CDFI Fund is in the process of administering its entire cycle of FY 2007 program activities. The CDFI Fund's goal is to conduct each award program in keeping with its planned schedule for FY 2007, while undertaking planning for those activities that will be required by implementation of the President's FY 2008 budget.The CDFI Fund continues to support investment in low-income communities through the CDFI Program and NMTC Program, and supports the Administration in its efforts to focus our programs in building the capacity of CDFIs and CDEs to serve low-income communities.
CLOSING
The CDFI Fund's vision is an America in which all people have access to affordable credit, capital, and financial services – a vision, I believe, that all interested in the topic of this hearing would support. I thank you for the opportunity to present my testimony on the CDFI Fund's mission of expanding the capacity of financial institutions to provide financial services to disadvantaged communities through the programs administered by the CDFI Fund, as well as in support of the President's FY 2008 budget request. I stand ready to answer any questions that you may have.
Feb 23
COMMON APPROACH TO PRIVATE POOLS OF CAPITAL GUIDANCE ON HEDGE FUND
ISSUES FOCUSES ON SYSTEMIC RISK, INVESTOR PROTECTION
Washington, DC- The President's Working Group on Financial Markets
(PWG) released a set of principles and guidelines today that will
guide U.S. financial regulators as they address public policy issues
associated with the rapid growth of private pools of capital,
including hedge funds. The agreement among the PWG and U.S. agency
principals, which will serve as a framework for evaluating market
developments, specifically concentrates on investor protection and
systemic risk concerns.
"The President's Working Group believes that public policy toward
private pools of capital should be governed by consistent principles
that set out a uniform approach to specific policy objectives," said
Secretary Henry M. Paulson, chair of the group. "These principles
demonstrate that U.S. regulators and policymakers have a unified
perspective and are committed to providing forward-leaning guidance
for the industry and its participants. These guidelines should serve
as a foundation to enhance vigilance and market discipline further,
which will strengthen investor protection and guard against systemic
risk. We will continue to monitor developments in this ever-evolving
market with these principles in mind."
The group has designed the principles to endure as financial markets
continue to evolve. They provide a clear but flexible
principles-based
approach to address the issues presented by the growth and dynamism
of
these investment vehicles.
The principles are intended to reinforce the significant progress
that
has been made since the PWG last issued a report on hedge funds in
1999 and to encourage continued efforts along those same lines:
* Private Pools of Capital: maintain and enhance information,
valuation, and risk management systems to provide market
participants with accurate, sufficient, and timely information.
* Investors: consider the suitability of investments in a private
pool in light of investment objectives, risk tolerances, and the
principle of portfolio diversification.
* Counterparties and Creditors: commit sufficient resources to
maintain and enhance risk management practices.
* Regulators and Supervisors: work together to communicate and use
authority to ensure that supervisory expectations regarding
counterparty risk management practices and market integrity are
met.
The PWG, chaired by the Treasury Secretary and composed of the
chairmen of the Federal Reserve Board, the Securities and Exchange
Commission, and the Commodity Futures Trading Commission, was formed
in 1988 to further the goals of enhancing the integrity, efficiency,
orderliness, and competitiveness of financial markets and
maintaining
investor confidence. The PWG worked with the Federal Reserve Bank of
New York and the Office of the Comptroller of the Currency in
developing the guidance.Feb 22
STATEMENT BY ADAM J. SZUBIN, OFAC DIRECTOR ON CHARGES AGAINST
INDIVIDUALS FOR FRAUDULENTLY VIOLATING CUBA SANCTIONS
Miami, FLORIDA – Adam J. Szubin, Director of the U.S. Treasury
Department's Office of Foreign Assets Control (OFAC), made the
following statement today in response to the unsealing of a criminal
complaint charging defendants Victor Vazquez and David Margolis with
conspiracy to violate restrictions on travel to Cuba. Defendant
Vazquez is additionally charged with the making materially false
statements in applications to obtain religious travel licenses to
Cuba.
The criminal complaint unsealed today marks an important step in
stopping fraud involved in facilitating violations of restrictions
on
travel to Cuba.
OFAC issues hundreds of licenses each year to individuals and groups
seeking to engage in legitimate religious activities and programs in
Cuba. Those who fraudulently obtain or traffic in such licenses not
only commit a crime, but also undermine the good works of legitimate
religious groups traveling to Cuba.
The Cuban Sanctions Enforcement Task Force, headed by the U.S.
Attorney for the Southern District of Florida, is moving
aggressively
to stop such violations, pursuing criminal investigations against
those involved in unlicensed dealings with Cuba, whether travel,
remittances, or other prohibited activities. I commend the Task
Force's efforts to halt this abuse and OFAC will continue to support
its activities.
OFAC investigators played a key role in uncovering the activity that
is being exposed today. OFAC has detected abuse among religious
license applicants and the travel providers who service them,
including fabricated religious organizations, ministers, and
programs
of religious activity.
As today's action demonstrates, OFAC takes the integrity of U.S.
sanctions programs very seriously and will continue to work to
safeguard these sanctions programs against abuse. Those who seek to
evade sanctions laws face serious penalties, both civil and
criminal.
For more information on today's action, please visit the website of
the United States Attorney's Office for the Southern District of
Florida: http://www.usdoj.gov/usao/fls.TREASURY DESIGNATES HIZBALLAH’S CONSTRUCTION ARM
The U.S. Department of the Treasury today designated Jihad al-Bina,
a
Lebanon-based construction company formed and operated by Hizballah.
Jihad al-Bina receives direct funding from Iran, is run by Hizballah
members, and is overseen by Hizballah's Shura Council, at the head
of
which sits Hizballah Secretary General Hassan Nasrallah.
"Hizballah operates Jihad al-Bina for its own construction needs as
well as to attract popular support through the provision of civilian
construction services," said Stuart Levey, Treasury's Under
Secretary
for Terrorism and Financial Intelligence (TFI). "We will take
action
against all facets of this deadly terror group."
Jihad al-Bina has used deceptive means to seek funding for projects
from international development organizations. In cases when
intended
solicitation targets were thought to object to the group's
relationship with Hizballah and the Iranian government, the
organization employed deceptive practices, applying in the name of
proxies not publicly linked to Hizballah. Following the summer 2006
conflict with Israel, Hizballah used Jihad al-Bina to raise funds
for
the terrorist organization and to bolster the group's standing by
providing construction services in Southern Lebanon.
"At the same time that we are targeting Hizballah's construction
company, the U.S. Government is also working to ensure that
legitimate
reconstruction efforts, led by the Lebanese Government, succeed,"
Levey continued.
In addition to the $230 million in humanitarian reconstruction and
security assistance pledged by President Bush in August 2006,
Secretary of State Condoleezza Rice announced an additional $770
million in aid to Lebanon at the January 25, 2007 Lebanon Donors'
Conference in Paris, France. The aim of this assistance is to help
all the Lebanese people rebuild their lives and country, while
strengthening Lebanon's sovereign, democratic government and helping
to ensure lasting peace.
Today's action prohibits transactions between U.S persons and the
designated entities and also freezes any assets those entities may
have under U.S. jurisdiction.
Identifying Information
Jihad al-Bina
AKAs: Jihad al-Binaa'
Jihadu-I-Binaa
Construction for the sake of the holy struggle
Construction Jihad
Struggle for Reconstruction
Jihad Construction Institution
Jihad Construction Foundation
Jihad al Binaa Association
Holy Construction Foundation
Jihad Construction
Location: Beirut, Lebanon
Bekaa Valley, Lebanon
Southern Lebanon
Background on Hizballah
Hizballah is a Lebanon-based terrorist group, which, until September
11, 2001, was responsible for more American deaths than any other
terrorist organization. Hizballah is closely allied with Iran and
often acts at its behest, but it also can and does act
independently.
Though Hizballah does not share the Syrian regime's secular
orientation, the group has been a strong ally in helping Syria
advance
its political objectives in the region.
Iran and Syria provide significant support to Hizballah, giving
money,
weapons and training to the terrorist organization. In turn,
Hizballah
is closely allied with and has an allegiance to these states. Iran
is
Hizballah's main source of weapons and uses its Islamic
Revolutionary
Guards Corps to train Hizballah operatives in Lebanon and Iran.
Iran
provides hundreds of millions of dollars per year to Hizballah.
The Majlis al-Shura, or Consultative Council, is the group's highest
governing body and has been led by Secretary General Hasan Nasrallah
since 1992. Hizballah is known or suspected to have been involved
in
numerous terrorist attacks throughout the world, including the
suicide
truck bombings of the U.S. Embassy and U.S. Marine Corps barracks in
Beirut in 1983 and the U.S. Embassy annex in Beirut in September
1984.
Hizballah also perpetrated the 1985 hijacking of TWA Flight 847 en
route from Athens to Rome, and has been implicated in the attacks on
the Israeli Embassy in Argentina in 1992 and a Jewish cultural
center
in Buenos Aires in 1994. The U.S. Government has indicted a member
of
Hizballah for his participation in the June 1996 truck bomb attack
of
the U.S. Air Force dormitory at Khobar Towers in Saudi Arabia. Most
recently, in July 2006 Hizballah terrorists kidnapped two Israeli
soldiers, triggering a violent conflict that resulted in hundreds of
civilian casualties in Lebanon and Israel.
On January 25, 1995, the Annex to the Executive Order 12947 listed
Hizballah as a Specially Designated Terrorist (SDT). The Department
of
State designated Hizballah as a Foreign Terrorist Organization (FTO)
in 1997. Additionally, on October 31, 2001, Hizballah was designated
as a Specially Designated Global Terrorist under Executive Order
13224.
Please visit the following links for more information on the
Treasury's efforts to stem the flow of support to Hizballah.
Treasury Targets Hizballah Fundraising Network in the Triple
Frontier
of Argentina, Brazil, and Paraguay (December 2006)
http://www.treasury.gov/press/releases/hp190.htm
Treasury Cuts Iran's Bank Saderat Off From U.S. Financial System
(September 2006)
http://www.treas.gov/press/releases/hp87.htm
Treasury Designation Targets Hizballah's Bank (September 2006)
http://www.treas.gov/press/releases/hp83.htm
Treasury Designates Key Hizballah Fundraising Organization (August
2006)
http://www.treas.gov/press/releases/hp73.htm
Feb 20
U.S., BULGARIA TO SIGN TAX TREATY, STRENGTHEN ECONOMIC RELATIONSHIP
Deputy Secretary of the Treasury Robert M. Kimmitt and Bulgarian
Finance Minister Plamen Orescharski will sign an income tax treaty
and
protocol. The treaty will strengthen economic relations between the
United States and Bulgaria by generally reducing the rates of
taxation
on cross-border dividend, interest and royalty payments, and
providing
for better exchange of information between the two countries,
including bank information.
The meeting is open to the media. Media without Treasury press
credentials should contact Frances Anderson in advance for entrance
to
the Treasury Department at (202) 622-2960, or
frances.anderson@do.treas.gov with the following information: name,
Social Security number and date of birth.
Who:
Treasury Deputy Secretary Robert M. Kimmitt
Plamen Orescharski, Minister of Finance of the Republic of Bulgaria
H.E. Elena Poptodorova, Bulgarian Ambassador to the United States
What:
Tax Treaty and Protocol Signing
Where:
U.S. Department of the Treasury
Diplomatic Reception Room (3311)
1500 Pennsylvania Ave.
Washington, D.C. 20220
When:
Friday, February 23, 2:00 p.m. - Alternatives Federal Credit Union in Ithaca, New York, offers financial services and financial education and economic development programs to its members, residents of Tompkins County (Central New York), since it was chartered in 1979. A full-service credit union with over 7,113 members, Alternatives FCU plays a key role in assisting its low-income members to build wealth and accumulate assets. Alternatives has received five CDFI Fund awards totaling $4,331,715 to help support its capacity and expansion of programs and financial services.
- checking or savings accounts to nearly 14,000 previously unbanked individuals,
- home purchase mortgages to 2,000 individuals,
