Financial Services Report (2/4)

February 4, 2019

Our Take

For those working off their Big Game spiderwebs this morning, please appreciate that this is a relatively slow week.   The apex will likely come on Tuesday when the President delivers the State of the Union.   Beyond that there are a few hearings of note, including two on retirement security.   While infrastructure often is cited as "the" issue where bipartisan support for legislation exits, a similar sentiment is out there to address the looming retirement crisis.  


Looking Ahead

Near Term

  • The President will deliver his State of the Union on Tuesday.
  • Negotiations continue to find a resolution for funding the government and addressing the President’s demands for wall funding before February 15th.
  • The House Ways and Means Committee and the Senate Aging Committee will each hold a hearing on Retirement Security on Wednesday

Further Out

  • The Financial Services Committee is expected to hold a hearing on Credit Reporting Agencies on February 26th.  Other future hearings that have been rumored include one with the CEOs of the largest banks, one with CFPB Director Kranniger, and regardless of rumors to the contrary, the Humphrey-Hawkins hearing with Fed Chair Powell.
  • The current suspension of the Debt Limit will expire on March 2nd, 2019 – though the use of extraordinary measures could extend the need to actually pass something into the summer months.


The Past Week

Legislative Branch
Trio of Financial Services Bills Pass out of House on the Suspension Calendar
On Monday, the House passed three bills under the suspension of the rules calendar reserved for non-controversial measures. They were: HR 624 sponsored by HFSC Chairwoman Maxine Waters (D-CA) and Ranking Member Patrick McHenry (R-NC) instructing the Securities and Exchange Commission (SEC) to examine ways to amend Rule 10b5-1 in order to prevent indirect insider trading; (2) The Financial Technology Protection Act (HR 56)—sponsored by Reps. Ted Budd (R-NC) and Stephen Lynch (D-MA)—that would create a Financial Technology Task Force researching illicit uses of fintech, a reward program for information leading to the convictions of individuals using digital currencies to finance terrorism, and programs to support the development of tools to detect the use illicit use of digital currencies; and (3) and the FIND Trafficking Act, sponsored by Rep. Juan Vargas (D-CA) to deal with the financing of sex trafficking. 
House Urges Institutions to Assist Shutdown-Impact Consumers
On Tuesday, by a vote of 240 – 176, the House passed a resolution (H.Res.77) urging financial institutions and credit reporting agencies to ease the difficulties faced by individuals affected by the recent government shutdown. The resolution also called for firms to, among other things, provide flexibility on rents and loans for individuals impacted by the shutdown and to not impair the creditworthiness of customers who were unable to meet commitments due to not being paid.  Fifteen Republicans, including Leader McCarthy, joined every Democratic member of the House in voting for the non-binding measure. 
Financial Services Committee Organizing Meeting Gets Contentious Quickly
On Wednesday, the House Financial Services Committee held its organizational meeting, which is generally a staid affair that concludes within an hour.  The purpose of this mark-up is to formally appoint members to subcommittees, as well as approve the Committee’s rules for the 116th Congress. The Committee’s complete subcommittee roster can be found here.  During the mark-up of the Committee’s rules a series of Republican amendments were defeated on party-line votes, though an amendment involving advance notice of subpoenas to the Minority Ranking Member, which was already the practice of the Committee, was adopted by a voice vote. 

Blue Dogs Announce that Three More Freshman Have Joined the Caucus
On Tuesday, the Blue Dog Coalition—House Democrats’ most conservative caucus—inducted three additional freshman members: Reps. Ed Case (D-HI) (a Member of the Coalition during his previous stint in Congress), Joe Cunningham (D-SC), and Kendra Horn (D-OK). The three new inductees brings the Blue Dog’s total membership for the 116th Congress to 27, a 50 percent increase from last Congress, and of the 10 freshman in the group, nine represent districts carried by President Trump in 2016.
Fintech and Payments Caucus Returning
On Thursday, Congressional sources indicated that the Fintech and Payments Caucus is in the process of reorganizing for the 116th Caucus and that David Scott (D-GA) and Barry Loudermilk (R-GA) are expected to serve as two of the group’s four bipartisan co-chairs.  There was some question that whether the creation of the still be announced FinTech Task Force would make the caucus less necessary, but with all of the interest in FinTech it is clear that there is a need for a forum to examine the multitude of policy issues for those Representatives not on the Financial Services or Banking Committees.  
New Dems Announce Policy Task Forces
On Friday, the New Democrats, the 101-member strong, centrist caucus of the House Democrats announced the creation and co-chairs of eight different policy task forces.  They are: The Climate Change Task Force (Co-Chairs: Reps. Don Beyer, Sean Casten, Susan Wild, and Elaine Luria); The Future of Work Task Force (Co-Chairs: Reps. Bill Foster, Chris Pappas, Haley Stevens, and Lisa Blunt Rochester); The Healthcare Task Force (Co-Chairs: Reps. Angie Craig, Kurt Schrader, Kim Schrier, and Greg Stanton); The Housing Task Force (Co-Chairs: Reps. Denny Heck, Katie Hill, and Ben McAdams); The Infrastructure Task Force (Co-ChairsReps. Stacey Plaskett, Jason Crow, Elissa Slotkin, and Salud Carbajal); The National Security Task Force (Co-ChairsReps. Anthony Brown, Brendan Boyle, Brad Schneider, and Abigail Spanberger); The Technology Task Force (Co-Chairs: Reps. Sharice Davids, Kendra Horn, Harley Rouda, and Darren Soto) and the Trade Task Force  (Co-Chairs: Reps. Ron Kind, Rick Larsen, Greg Meeks, and Lizzie Fletcher).  
Crapo Outlines Broad Contours of the Banking Committee’s Agenda and More Specifics on Housing
On Tuesday, Chairman Mike Crapo (R-ID) released his outline the Senate Banking Committee’s agenda for the 116th Congress. Highlights include:

  • Developing “legislative solutions to give consumers more control over and enhanced protection of consumer financial data, and to ensure consumers are notified of breaches in a timely and consistent manner”
  • Identifying bipartisan bills to be contained in a capital formation package following the Committee’s failure to advance the House-passed JOBS 3.0 package last Congress
  • Exploring “targeted reforms” intended to make it easier for consumer to interface with credit bureaus
  • Examining improvements to ensure that the fintech regulatory landscape encourages innovation
  • Reauthorizing and reassessing the roles of the Terrorism Risk Insurance Act (TRIA), National Flood Insurance Program (NFIP), Export-Import Bank, and Fixing America’s Surface Transportation (FAST) Act
  • Tailoring financial regulations to ensure that financial institutions can provide credit in different types of communities
  • Conducting oversight to prevent financial institutions from using their market power to influence “social policy”

Chairman Crapo’s agenda additionally lists housing finance reform, an item discussed in more detail in a separate outline released on Friday. Among an assortment of policy changes suggested there include privatizing Fannie Mae and Freddie Mac, endeavoring to preserve the 30-year fixed rate mortgage, limiting the percent of all mortgages that could be guaranteed by a single guarantor, and replacing current affordable housing goals with a new Market Access Fund.
Grassley Cautions Against NAFTA Pull Out AS USTR Lists Legislative Changes for USMCA
On Wednesday, Senate Finance Committee Chairman Chuck Grassley (R-IA) said that the Trump Administration should lift Section 232 steel and aluminum imports on Canada and Mexico before Congress considers the United States-Mexico-Canada Agreement (USMCA).    Grassely’s comments came as the USTR released a list of legislative changes needed to bring the United States into conformity with USMCA—a process stipulated to occur within 60 days of signing an agreement under TPA. While timing of the vote on the agreement remains in flux, last week the International Trade Commission (ITC) announced that the government shutdown could delay its report on USMCA’s economic impact—originally due March 15—until April 19, which would likely cause a correlative delay in consideration of the legislation as well.
Grassley, Wyden Announce Finance Subcommittee Roster
On Thursday, Finance Committee Chairman Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) announced expected subcommittee membership for the tax, trade, and health panel. The assignments will be made official during the Committee’s next executive business meeting. While a complete subcommittee roster can be found here, subcommittee chairmanships are highlighted by Majority Whip John Thune chairing the Tax Subcommittee, former Whip John Cornyn (R-TX) chairing the International Trade Subcommittee, Sen. Pat Toomey (R-PA) chairing the Healthcare Subcommittee, Sen. Rob Portman (R-OH) chairing the Social Security Subcommittee, Sen. Tim Scott (R-SC) chairing the Energy Subcommittee, and Sen. Bill Cassidy (R-LA) chairing the Fiscal Responsibility Subcommittee.
Senate Dems Flag Climate Change Financial Risk
On Monday, 20 Senators sent letters to Federal Reserve Chairman Jerome Powell, Federal Deposit Insurance Corporation (FDIC) Chair Jelena McWilliams, and Comptroller of the Currency Joseph Otting encouraging them to take steps to mitigate climate change-related risks to the financial system. Citing increased incidence of extreme weather, the 19 Democrats and Sen. Bernie Sanders (I-VT) asked regulators to identify and analyze the risks to the financial system associated with climate change and “join…international peers in ensuring the financial system is resilient to climate-related risks.” The letter requests that the agency heads provide “detailed information on the steps each of [their] organizations have taken to identify an manage climate-related risks in the U.S. financial system,” including if the agencies have taken any actions to address climate-related risk, by February 15.
Senate Democrats Urge Rating Agencies to Remove Shutdown-Related Credit Items
On Wednesday, Sen. Brian Schatz (D-HI) and seven Senate Democrats sent a letter to the CEOs of the nation’s three major credit rating agencies urging them remove negative credit reports relating to employees who were not paid during the 35-day partial government shutdown. Noting that the Fair Credit Reporting Act requires reporting agencies to “assure maximum possible accuracy” of credit information, the letter argues that negative credit items resulting from a government shutdown “may not be an accurate indicator of an individual’s creditworthiness” and that “workers’ credit reports and scores should not be ruined for reasons entirely outside of their control.” To this end, the letter calls on reporting agencies to remove negative information furnished during or within one billing cycle of the shutdown upon request by affected federal employees.
Brown Urges Federal Reserve to Strengthen Financial System
On Wednesday, Senate Banking Committee Ranking Member Sherrod Brown (D-OH) sent a letter to the Federal Reserve Board of Governors urging the Fed “use all of its authorities,” including the Counter-Cyclical Capital Buffer (CCyB) to strengthen the resiliency of the financial system.  In his letter, the Ranking Member of the Banking Committee notes that the timing is right for such an action as the largest banks are reporting record profits at the same time that some analysts are seeing elevated valuations in the real estate market and increased leverage lending – potential precursors to a financial downturn.   When activated, the CCyB—which has set at zero since being implemented as Part of the Basel III capital standards—imposes additional capital requirements to increase the resiliency of financial institutions during times of elevated risk.  Given that Vice Chair Quarles has indicated to Congress that he does not believe such measures are necessary it is unlikely that the Fed will act on Ranking Member Brown’s suggestion.
Select Highlights from the Administration
The White House
January Jobs Numbers Strong, Despite Market Anxiety and Shutdown
On Friday, the Bureau of Labor Statistics released its January job numbers, highlighted by the economy’s addition of 304,000 jobs in January. These numbers significantly surpassed estimates, which had anticipated in increase of only around 165,000 jobs.  Friday’s news also showed that the unemployment rate ticked up from 3.9 to four percent, though numerous observers attributed that to the prolonged partial government shutdown.  Other positive employment news included that the labor force participation rate rose to 63.2 percent and non-manager hourly earnings rose 3.4 percent—the fastest wage growth in nearly a decade.
White House Warms to Congressional Involvement in Housing Finance Reform
On Wednesday, White House Spokeswoman Lindsay Walters told reporters that the White House would work with Congress as it pursues a forthcoming plan to overhaul the country’s housing finance system. Ms. Walters statement walks back comments made earlier this month by acting Federal House Finance Agency (FHFA) Acting Director Joseph Otting, in which he indicated that the Administration would pursue housing finance reform through existing regulatory channels rather than legislation. A letter sent by Director Ottting to House Financial Services Committee Chairwoman Maxine Waters (D-CA) the same day echoed the change in tone, welcoming Congressional input as the Administration crafts a housing finance proposal.
The White House is expected to release a proposal to resolve the decade-long conservatorship of Fannie Mae and Freddie Mac in the coming weeks. Administration sources have indicated that the plan may consist of broad goals such as protecting taxpayers and instruct the Departments of Treasury and Housing and Urban Development to formulate more robust proposals.
Lighthizer and Mnuchin Headed to China After Upbeat Trade Talks
On Thursday, Chinese Vice Premier Liu He met with President Trump and US trade officials for what both Chinese and American sources have described as positive meetings as the two nations attempt to resolve their ongoing trade tensions prior to the March 1 escalation of US tariffs. While the talks focused primarily on forced technology transfers and other IP issues, Vice Premier He also announced that China would purchase an additional 5 million tons of US soybeans. For his part, President Trump hailed the talks as “tremendous” progress and said that United States Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin would travel to Beijing this month. Officials are also discussing an in-person meeting between President Trump and Chinese President Xi Jinping towards the end of the month.
The largely positive developments for the trade talks come amid continued tensions on other fronts. The Department of Justice on Monday indicted Chinese telecommunications giant Huawei for attempting to steal trade secrets from T-Mobile and on Tuesday the United States formally requested the extradition of Huawei CFO Meng Wanzhou from Canada for breaking US trade sanctions.
Former Pizza CEO, Ex-GOP Candidate Reportedly Under Consideration for Fed Seat
On Thursday, National Economic Council Director Larry Kudlow confirmed reports that the White House is considering former Godfather Pizza CEO and Kansas City Fed Bank Chairman Herman Cain to fill a seat on the Federal Reserve Board of Governors. Reports of the 2012 Republican Presidential Candidate’s consideration for the position receiving widespread attention. However, his history of support for hawkish monetary policy clashes with President Trump’s vocal criticism of Fed interest rate hikes and the allegations of sexual misconduct that ended his Presidential campaign would complicate his chances of confirmation.
The White House has yet to select nominees for either vacancy on the Federal Reserve Board after former Fed official Nellie Liang withdrew and economist Marvin Goodfriend has not been renominated. In the same conversation with reporters, Mr. Kudlow said that the White House is considering a “fairly large list” of candidates, including Mr. Cain and Dr. Goodfriend.
Trump Signs Second “Buy American” EO
On Friday, President Trump signed an Executive Order strengthening “Buy-American” preferences for US infrastructure projects. While falling short of imposing new requirements on firms doing business with the government, the order instructs agencies to “encourage” recipients of federal financial assistance to use American-made construction materials. The action is a follow up to the President’s April 2017 executive order instructing agencies to ramp up their “buy American” and “hire American” efforts, including through scrutiny of buy American waivers and H1-B visa applications.
Federal Reserve
Fed Taps Breaks on Interest Rate Hikes – Development of Real Time Payments
On Wednesday, the Federal Open Market Committee (FOMC) voted to hold the interest rate benchmark steady at 2.25-2.5%. At a press conference following the vote, Federal Reserve Chairman Jerome Powell additionally seemed to walk back previous indications that the Fed would continue raising rates this year, commenting that “the case for raising rates has weekend somewhat” and that he “would want to see a need for further rate increase.”
Also at his press conference, Chairman Powell told reporters that the Federal Reserve isn’t close to a decision on developing a real-time payment system after requesting input last year on whether it should build such a system. In his comments, Chairman Powell emphasized that the Fed would likely be a “convener” between various industry and public interest groups on the matter and cautioned that the central bank lacks “the plenary authority to just do things, for the most part, in the payments space.”
Regulators Targeting Custody Bank Capital Rule Early this Year
On Thursday, reports emerged that bank regulators intend to release a proposal early this year to ease capital requirements for custody banks pursuant to Section 402 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. Intended to ensure that custody banks—banks primarily engaged in safeguarding assets rather than other banking activities such as loan origination—are not forced to turn away deposits during times of economic stress, the rule would exclude deposits at the Fed from the calculation of custody banks’ supplementary leverage ratio requirements. The proposal will apply specifically to large custodial banks BNY Mellon, State Street, and Northern Trust and not to larger banks with smaller custodial lines of business.
Commodity Futures Trading Commission
CFTC Nominee Talbert Discloses Legal Work for Major Derivatives Users
On Wednesday, Politico reported that Heath Tarbert, President Trump’s nominee to chair the Commodity Futures Trading Commission (CFTC), disclosed compensation for legal work for several derivatives market participants he would be regulating at CFTC chair.  If confirmed, Mr. Tarbert would be required to recuse himself from any issue which specifically involves former clients for two years after joining the Administration—the White House can however waive this restriction. Mr. Tarbert currently serves as Assistant Treasury Secretary for International Markets and Development.
Securities and Exchange Commission (SEC)
FINRA To Take Over Consolidated Audit Trail Development
On Thursday, the Wall Street Journal reported that the committee of nine stock exchange operators overseeing the development of the Consolidated Audit Trail (CAT) intends to fire Thesys technologies, the start-up that won a bid to develop the tool in 2017. Thesys’ management of CAT has been the subject of significant consternation over the past year, highlighted by the November launch of CAT’s first phase—one year late and without the promised functionality. A Thesys spokesperson confirmed the separation, calling the decision mutual saying that the parties have “irreconcilable differences” with regards to their vision for the system. The Financial Industry Regulatory Authority (FINRA)—the securities industry’s self-regulator—is expected to take over the project after losing out on the initial bid in 2017.
FASB Holds CECL Roundtable
On Monday, the Financial Accounting Standards Board (FASB) held a roundtable discussion to gain industry input on the current expected credit losses (CECL) model. The roundtable — which included representatives from numerous banks of various sizes as well as other stakeholders — reviewed FASB staff research on the credit losses agenda requests, as well as a proposal submitted by a group of banks that would allow an alternative to the income statement impact of the current expected CECL model. The group also discussed FASB’s consideration of charge-offs and recoveries as a component of the vintage disclosures. FASB noted that the input received would be carried through to the next FASB board meeting at the end of Q1, where both proposed amendments will be further discussed.
First issued in 2016, CECL requires institutions to estimate losses over the remaining life  of the loan rather than focusing on the incurred losses used by current standards. Numerous stakeholders from various corners of the financial services industry have raised concerns about the standard and asked for delays or revisions.

Next Week’s Schedule

Mon. (2/4)

  • No events schedule.

Tues. (2/5)

  • State of the Union Address – 9:00 PM

Wed. (2/6)

  • Hearing: Senate Aging Committee on Retirement – 9:30 AM – The Senate Special Committee on Aging will hold a hearing entitled "Financial Security in Retirement: Innovations and Best Practices to Promote Savings." Details here.
  • Hearing: Senate Commerce Committee on 5G – 10:00 AM – The Senate Committee on Commerce, Science, and Transportation will hold a hearing entitled "Winning the Race to 5G and the Next Era of Technology Innovation in the United States." Details here.
  • Hearing: House Energy and Commerce Committee on Climate Change – 10:00 AM – The House Energy and Commerce Committee will hold a hearing entitled "Time for Action: Addressing the Environmental and Economic Effects of Climate Change." Details here.
  • Hearing: House Oversight Committee on H.R. 1 – 10:00 AM – The House Committee on Oversight and Reform will hold a hearing entitled "H.R. 1: Strengthening Ethics Rules for the Executive Branch." Details here.
  • Hearing: House House Ways and Means on Retirement – 10:00 AM – The House Ways and Means Committee will hold a hearing entitled "Improving Retirement Security for America's Workers." Details not yet posted.
  • Hearing: House Small Business Committee on the Shutdown – 11:00 AM – The House Small Business Committee will hold a hearing that examines the partial government shutdown's impact on small businesses. Details here.

Thurs. (2/7)

  • Hearing: House Transportation and Infrastructure Committee – 9:30 AM – The House Transportation and Infrastructure Committee will hold a hearing entitled "The Cost of Doing Nothing: Why Investing in Our Nation's Infrastructure Cannot Wait." Details here.
  • BPC Event on Corporate Governance – 9:30 AM – The Bipartisan Policy Center will host an event entitled "Corporate Governance's Increasing Role in Public Policy: Opportunities and Limitations." Details here.
  • Business Meeting: Senate Judiciary Committee – 10:00 AM – The Senate Judiciary Committee will hold an executive business meeting to vote on pending nominations, including the nomination of William Barr to be U.S. Attorney General. Details here.
  • Hearing: House Budget Committee on Economic and National Security – 10:00 AM – The House Budget Committee will hold a hearing entitled "Investing in America's Economic and National Security." Details here.
  • Hearing: House Small Business Committee on Underserved Businesses – 10:00 AM – The House Small Business Committee will hold a hearing entitled "Exploring Challenges and Opportunities of Underserved Businesses in the 21st Century." Details here.
  • Hearing: House Education and Labor Committee on the Minimum Wage – 10:15 AM – The House Education and Labor Committee will host a hearing entitled "Gradually Raising the Minimum Wage to $15: Good for Workers, Good for Businesses, and Good for the Economy." Details here.
  • Hearing: Energy and Commerce Subc. on the Internet – 11:00 AM – The House Energy and Commerce Subcommittee on Communications and Technology will hold a hearing entitled "Preserving an Open Internet for Consumers, Small Businesses, and Free Internet." Details here.
  • Hearing: Ways and Means Committee on Presidential Tax Returns – 2:00 PM – The House Ways and Means Committee will hold a hearing entitled "Legislative Proposals and Tax Law Related to Presidential and Vice Presidential Tax Returns. Details here.
  • Chamber Event on the International IP Index – 5:00 PM – The U.S. Chamber of Commerce will host its 2019 U.S. Chamber International IP Index Reception. Details here.

Fri. (2/8)

  • No events scheduled.