Financial Services Report

Our Take

Starting last Wednesday afternoon and stretching all the way through the next 25 hours, the House of Representatives ground to a halt, as House Democrats staged a sit-in to express their frustrations with the lack of a vote on their proposal to prevent individuals on the “no fly list” from being able to purchase handguns.   While the event was characterized as an insurrection or a publicity stunt depending on one’s political views, it was certainly a historic event.   Regardless of whether you agree with the motives or the methods of the Democrats efforts, it was clear that the chaos of the sit-in, and the visible frustration of House Democrats, dovetailed perfectly with the thesis of a recent article from The Atlantic entitled, How American Politics Went Crazy, which outlines how structural and social changes have resulted in a Congress, and in fact an entire political system, that is disintegrating before our eyes. 

Despite the bleakness of Rauch’s analysis, there are glimmers of hope – both in the current Congress and for the future as well.   First, there are members on both sides of the aisle who realize that they don’t have a monopoly on good ideas and that America was built on compromises.   Second, it is important to note that politicians are not representative of their constituents but of their voters.  Implementing common-sense redistricting reforms, such as non-partisan districting commissions and jungle primaries where the top two finishers advance to the general election would go a long way toward recreating a political center again.  As the article notes, according to the Pew Research center, for the first 12 contests of the 2016 Presidential cycle, only 17 percent of eligible voters participated in the Republican primaries and only 12 percent in the Democratic primaries – it is unlikely that that this hyper-partisan minority is truly reflective of our country yet at the end of the day, it is these voters that politicians must court. 
 
While many pundits are attempting to use the recent Brexit results to show that there is a parallel in the states between the anger towards the status quo in England and a rising populism in the United States, it is important to note that over 70% of eligible voters cast a ballot on the Brexit decision, while the 2012 Presidential only had around 53% of eligible voters casting a ballot.
 

Looking Ahead

Near Term

• House is Recess until July 5^th
• The Senate will aim to complete work on the fiscal 2017 Commerce-Justice-Science appropriations bill (H.R. 2578) and could move to consider two House-passed items: a conference report that would fund Zika containment, and legislation to address Puerto Rico’s ongoing debt crisis

The Past Week

Legislative Branch
House
In House Hearing, Yellen Commits to Easier Community Bank Regs, Rejects Financial CHOICE
On Wednesday, Federal Reserve Chair Janet Yellen gave the Fed’s Semiannual Report to Congress on the nation’s economic outlook and monetary policy to the House Financial Services Committee. As opposed to the Senate session a day earlier, House lawmakers focused on the alleged overregulation of the financial industry, the availability of credit for small businesses, and seemingly slow wage growth in the U.S. economic recovery.
 
Hensarling Aims for September Markup of Dodd-Frank Replacement
On Thursday, House Financial Services Committee Chairman Jeb Hensarling (R-TX) announced plans to hold a markup of his Dodd-Frank replacement proposal – known as the Financial CHOICE Act – during the House’s September session. Hensarling would not commit to a specific timeline for consideration, but released his initial draft of the legislation last week.  Democrats have already derided the proposal, which would alter the Consumer Financial Protection Bureau’s funding and administrative structure, remove the Financial Stability Oversight Council’s ability to designate firms as systemically important, and exempt banks from certain regulations if they meet a 10 percent leverage ratio requirement.
 
Terrorism Task Force Holds Final Hearing
On Thursday the Financial Services Committee Task Force on Terrorist Financing held its final hearing of the year.   Offering a summary of its activities over the past two years, the Chairman of the Committee noted that he intends to propose a series of bills that will focus on improving communication and coordination amongst various government agencies, increasing information sharing, and ensuring that “Treasury is properly supported and recognized for its role in our nation’s national security strategy.”  There was no indication though when this legislation would be introduced.
 
Veto Override on Fiduciary Rule Disapproval Fails
On Wednesday, House lawmakers held a vote to override President Obama’s veto of a resolution that would block the Labor Department’s recently finalized rule regarding the fiduciary duties of investment advisers. The 239-180 vote – which was conducted during House Democrats’ sit-in on the chamber floor – largely broke along partisan lines and was well short of the two-thirds support necessary to overcome a presidential veto.
 
Senate
Current and Former Dems Challenge Judge Over Dodd-Frank Ruling
On Thursday, a group of current and former Democratic members of Congress – including both former Sen. Chris Dodd (D-CT) and former Rep. Barney Frank (D-MA) – filed an amicus brief arguing that a federal judge incorrectly ruled against regulators in a case testing the financial reform law’s powers in designating nonbanks as systemically important financial institutions (SIFIs). The lawmakers argue that the judge’s ruling on the side of MetLife in a challenge of its designation as a SIFI would “fundamentally undermine” Congress’s vision for Dodd-Frank. The case is currently pending before a federal appeals court.
 
Yellen Challenged in Senate on Brexit, Insurance Rules, CCAR Changes
On Tuesday, Federal Reserve Chair Janet Yellen gave the Fed’s Semiannual Report to Congress on the nation’s economic outlook and monetary policy to the Senate Banking Committee. The Fed Chair assured lawmakers on the country’s economic path, but maintained that “considerable uncertainty” remained due to sluggish global growth and other factors. Other topics of the hearing included responses to questions on the Fed’s recently proposed insurance rules, the U.S. response to the British exit from the European Union (EU), alterations to the Comprehensive Capital Analysis and Review (CCAR) process for regional banks, and possible consequences for major banks if they fail the latest round of “living wills” this fall.
 
Warren, Donnelly Urge Fed Diligence on Living Wills
On Monday, Senate Banking Committee Democrats Elizabeth Warren (D-MA) and Joe Donnelly (D-IN) wrote a letter to Fed Chair Janet Yellen and Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg to use all tools available to examine the nation’s six biggest banks in their latest round of living wills. The wills are intended to provide a path to resolution through the bankruptcy code should one of the institutions encounter serious financial turmoil. Should the banks fail the latest round, the regulators have the authority to impose higher capital requirements and, if necessary, restructure the firms. Sen. Warren urged for the regulators to use those powers in her questioning of Yellen in a Senate Banking hearing on Tuesday.
 
Baldwin, Levin Call for Closing of Carried Interest ‘Loophole’
On Wednesday, Democrats Sen. Tammy Baldwin (D-WI) and Rep. Sander Levin (D-MI) issued a joint statement calling on Congress to close the carried interest tax “loophole.” The two lawmakers introduced a bill (H.R. 2889) last year that would charge investment fund managers at ordinary income tax rates and have the income be treated as wages subject to employment taxes.
 
Warren, Daines Introduce Retirement Savings Bill
On Tuesday, the bipartisan pair of Sens. Elizabeth Warren (D-MA) and Steve Daines (R-MT) introduced a bill intended to help consumers maintain retirement savings accounts when changing jobs. The bill (text) would use existing consumer data to create a database that would track employer-sponsored retirement accounts and make it easier for employers to invest abandoned accounts into target date funds.
 
Select Highlights from the Administration
Federal Reserve (Fed)
Banks Unanimously Pass Minimum Capital Ratios in Latest Fed Stress Test
On Thursday, select results of recent stress tests conducted by the Federal Reserve show that all 33 banks examined exceeded minimum projected capital and leverage ratios under severely adverse scenarios. The results signal an improved readiness among banks to handle a severe recession and come ahead of the Fed’s announcement of Comprehensive Capital Analysis and Review results this week.
 
Office of Comptroller of the Currency (OCC)
OCC Wades Further into Possible FinTech Regulation
On Thursday, the Office of the Comptroller of the Currency (OCC) held a forum on supporting responsible innovation in the federal banking system, specifically looking at financial technology, or FinTech, developments. The forum featured a number of regulators from the OCC, as well as representatives of academia, industry, and consumer advocacy groups. During a question and answer session, Comptroller of the Currency Thomas Curry indicated his belief that there is a need for a “regulatory sandbox” or a “a place for the regulated institutions and fintech firms to have a conversation about what the rules of the road are.”   He also noted that the OCC is carefully considering the potential implications of a limited purpose charter option for fintech firms, after increasing calls from technology companies across the industry. 
 
Treasury
FSOC Releases Annual Report – Flags FinTech, Cyber Attacks as Areas of Concern
On Tuesday, the Financial Stability Oversight Council (FSOC) released its annual report on its activities and its analysis of the United States financial system.   In this year’s report the FSOC noted a variety of new threats and potential concerns including Cyber-attacks, with FSOC recommending more information sharing and a “common, risk-based approach” for protections at regulated firms.  In addition, the FSOC flagged two FinTech industries – online lending and distributed ledger systems as potential risks that need to be better monitored by regulators.  Online lending for the potential “erosion in lending standards” and distributed ledger systems for “operational vulnerabilities associated with such systems [that] may not become apparent until they are deployed at scale.”
 

Next Week’s Schedule

There are no relevant hearings scheduled for this week