TRP Financial Services Report

This past week may be remembered as the sunset of two well-worn political clichés.  First, the old adage about how “if you like laws and sausages, you should never watch either one being made,” might no longer be possible in the modern media age as factions from both the left and the right continue to expand their use of social media to rally their respective bases against “extraneous” provisions that had been added to the CRominbus, even if those provisions were incorporated in the traditional way that appropriation bills are put together.  While the bill survived and is now on its way to the President’s desk, the intensity, and more importantly the rhetoric used by the opposition may portend for a similar strategy on future legislative battles. 

Of course, the idea that sunlight is the best disinfectant for bad policy is nothing new.  So while complicating deals, the increased public scrutiny is probably a good thing.  However, it also seems that some members of Congress may also moving away from another platitude of deal making, namely the belief that a good deal leaves everybody a little bit dissatisfied, along with its corollary that you can’t let the perfect be the enemy of the good.   
 
Regardless of how this all plays out in the next Congress it is clear that despite some significant victories including the tweaks to Sections 171 and 716 of Dodd Frank, as well as the end user provision included as part of the TRIA deal that should go through later this week, Wall Street can still ignite a bipartisan firestorm.  With two outspoken critics of “big banks” taking over the Chair and Ranking slots on the Senate Banking Committee, Wall Street (in all of its forms) will continue to be a target for progressives and conservatives alike.
 

 
Near Term 

• The House has concluded its business for the year and stands in recess pending Senate approval of its Sine Die adjournment motion.
• The Senate will take up a series of nominations this week before voting on TRIA and the Tax extenders measure. 
• Federal Stability Oversight Council (FSOC) to meet on Thursday and will discuss non-bank SIFI designations as well as Council’s work on asset management industry.

 
Further Out 

• New Congress returns on January 6^th and almost immediately need to figure out how to deal with the following deadlines:
  • Debt Limit Runs out March 15, 2015
  • SGR (“Doc Fix”) runs out April 1, 2015
  • Federal Transportation Funding runs out May 30, 2015
  • Export-Import Bank Charter expires June 30, 2015

 
House
Despite Heartburn over Swaps and Political Contributions House Passes CRomnibus
Thursday evening, after hours of arm-twisting and politicking, by a vote of 219-203 the House passed the CRominbus funding bill.  In the end nearly 70 Republicans voted “no” while nearly 60 Democrats votes affirmatively for the measure.  Although significant attention was focused on two provisions, the so-called “swaps push out” fix to Section 716 of the Dodd Frank Act and a provision to increase the amount of funds that individuals can give to the political parties other sections of the bill of interest to the financial services industry include: Requiring the CFPB to notify Congress every time it requests a transfer of funds from the Fed; the Travel Promotion Act; increases funding for the SEC by $150 million from FY14 but rescinds $25 million from the SEC’s reserve fund and increases CFTC funding by $35 million over FY14.  The latter two were apparently part of the deal for including the swaps push out language.
 
House Overwhelmingly Passes TRIA
On Wednesday, by a vote of 417-7, the House passed a bill to extend the Terrorism Risk Insurance Act (TRIA) for another six years.  Despite the substantial majority, there was some grumbling about the inclusion of a provision that clarified that derivatives collateral requirements in Dodd-Frank do not apply to manufacturers and agricultural firms (i.e., “end users) who use the contracts to hedge price swings, but in the end, the broad bipartisan support for this so-called “end user exemption” outweighed any frustration about how it made it into TRIA.  The measure is now before the Senate where it is expected to be approved later this week.
 
House Clears “Collins Fix”
On Wednesday, following passage of TRIA, by unanimous consent the House cleared S. 2270, the Insurance Capital Standards Clarification Act of 2014.  The bill, which would amend section 171 of the Dodd Frank Act in order to give the Federal Reserve flexibility to set capital standards for insurance companies, is expected to be signed by the President.
 
House Oversight Committee Slams FDIC on Operation Chokepoint
On Monday, the House Oversight and Government Reform Committee released a report that was highly critical of how high level FDIC officials appeared to allow their personal beliefs about payday lending lead to their pressuring banks and other components of the payments ecosystem to cut off funding via Operation Chokepoint.  Following the release of the report, Congressman Blaine Luetkemeyer called on the FDIC  to conduct a “full review” and implied that officials should be fired for their role in Operation Chokepoint. 
 
Effort to make Charitable Deductions Permanent Fails
On Thursday, by a vote of 275-149, the House failed to approve a measure that would have made the tax break for charitable deductions permanent.  Although a majority of the House approved the bill, because the legislation was on the suspension calendar it required the consent of two-thirds of the house (around 290 votes).  Many members while approving of the principle of the bill were concerned that its $11.1 billion price tag was not offset.
 
Senate
Senate Comity Breaks Down – But Manages to Pass Cromnibus
Late Saturday night, by a vote of 56-40 the Senate passed the so-called Cromnibus spending bill.  However the vote came after the Senate nearly ground to a stand-still as Senators Cruz and Mike Lee attempted to derail the vote over the immigration issue, and Senators Warren and Vitter tried to kill it over the swaps provision.   Ultimately both were unsuccessful, but the collateral damage from their efforts may be felt well into next year.
 
Senate Banking Hearing on Cybersecurity
On Wednesday the Senate Banking Committee held a hearing on Cybersecurity.  During the hearing Senator Warren questioned the OCC witness as to whether they take into account an institution’s cybersecurity preparedness as part of their analysis of the “safety and soundness” of that institution.  While the Office of the Comptroller of the Currency Senior Critical Infrastructure Officer Valerie Abend indicated that it was something the OCC looked at but she was unsure whether it was included as part of the OCC’s ranking of its regulated financial institutions, Senator Warren made it clear that that the OCC should be incorporating this element into its safety and soundness rankings. 
 
Senate Passes Legislation for Community Banks & Credit Unions
On Thursday the Senate passed, H.R. 3329 and H.R. 3468, legislation that respectively would assist community banks and credit unions.  H.R. 3329, would give the Fed the power to allow more small banks to take on higher levels of debt than would normally be permitted in order to finance acquisitions, while H.R. 3468, would allow IOLTA funds to have federal deposit insurance against losses if a credit union fails.
 
Schumer Passes on Becoming Top Democrat on Senate Banking Committee
Ending weeks of speculation, on Friday Senator Charles Schumer (D-NY) announced that his leadership responsibilities, including “formulating strategy for Senate Democrats,” would preclude him from also taking on the role as the Ranking Member of the Senate Banking Committee.  The decision cleared the way for Senator Sherrod Brown (D-OH) to assume the top slot.  In addition, Senator Joe Donnelly (D-IN) will join the committee, taking the spot of Senator Manchin (D-WV) who left to join the Energy and Commerce Committee, where he will be joined by fellow newcomers Gary Peters (D-MI),  and Tom Udall (D-NM).  Senator Tim Scott (R-SC) will also join the Banking Committee as well as joining Senators Schumer, Menendez, Warner, Crapo and Toomey on both the Banking and Finance committees.     
 

 
Federal Reserve Board
Fed Increases Capital Requirements for SIFIs
On Tuesday, the Fed announced that, in accordance with Basel III standards,  it was proposing to require Banks with more than $50 billion dollars in assets to be subject to risk based surcharges of between 1 to 4.5% in order to ensure that those institutions have set aside enough capital to withstand any issues with their use of short term whole sale funding.   The frame work, which is currently open for comment, is expected to be phased into effect beginning in January 2016 and going through January 2019.  In his prepared statement explaining the proposal, Fed Governor Daniel Tarullo noted that the proposal differs from the Basel proposal in two ways: First, the calibration of surcharges would generally be higher than those applicable to the eight covered U.S. banks under the international agreement, and second, it would directly take into account a firm's reliance on short-term wholesale funding.   The Fed is accepting comments on this proposal until February 28, 2015.
 
Securities and Exchange Commission (SEC)
SEC Setting its Sights on Asset Managers
On Thursday, while speaking at the New York Times Deal Book Conference, SEC Chair White offered the most detail to date about the SEC’s intentions as it attempts to address concerns the Commission hasn't focused enough attention on the asset management industry.  According to her remarks, among the rules being developed is a plan to limit funds’ investments in harder-to-sell assets and derivatives.  Additionally, the SEC is also working on a rule to require mutual funds to make broader and more frequent reports of holdings to investors, as well as additional disclosures about their use of derivatives and practice of lending out securities to earn a profit.  White also noted how the SEC will also require money managers to have plans in place to transfer fund assets to a new manager in the event that they fail. 
 
The SEC’s actions come as the FSOC continues to focus on the potential systemic risks of large asset managers, and White noted that “[t]he staff is also reviewing options for specific requirements, such as updated liquidity standards, disclosures of liquidity risks, or measures to appropriately limit the leverage created by a fund's use of derivatives.” Although White did not specify when these proposals would be formally released she did indicate that “2015 will be a very active year for those rules.” 
 
Consumer Financial Protection Bureau (CFPB)
CFPB Urges Rating Agencies to Review Medical Debt Reports
On Thursday, the CFPB released a report highlighting its concerns with how medical debts were being collected and placed on consumer credit reports by the reporting bureaus.  The report also outlined how the CFPB would start requiring the major credit bureaus it oversees to provide regular accuracy reports which will now include metrics on the furnishers with the most dispute, the industries with the most disputes, and furnishers with especially high number of disputes relative to their industry peers. 
 
Federal Housing Finance Agency (FHFA)
FHFA to fill Housing Trust Funds
On Thursday, FHFA Director Watt announced that he was directing Fannie Mae and Freddie Mark to direct 4.2 basis points of every dollar in home loans they buy from lenders into the Housing Trust Fund and the Capital Magnet Fund.  These funds, which were established under the 2008 law authorizing the government takeover of the two companies, had yet to be filled by either GSE and were long seen as an objective of liberal lawmakers and housing advocates.    Not surprisingly, almost immediately following the announcement Financial Services Committee Chairman Hensarling announced that he would hold hearings on the issue, with Director Watt as a witness, to examine what he called "a grave mistake."  The hearing is expected to take place as early as January. 
 

 
The House is in Recess and the Senate Has not noticed any Hearings of Note