Financial Services Report

 

Looking Ahead

Near Term

The House and Senate are out this week.

Further Out

The Senate Banking Committee is expected to vote on a series of nominations in August.   The vote had been scheduled for last Thursday but was scrapped when the Senate finished up its floor schedule earlier than anticipated triggering an earlier departure for the abbreviated recess.   While a new date has yet to be announced, it is expected to take place during this August work period.

The Senate returns on Wednesday August 15^th and will return to the slog of nominations, with two more Judges teed up for consideration. 

The Senate is also expected to take up another minibus spending bill (Defense / Labor HHS). 

Other items that the Senate could take up in August (though not likely) are the FAA bill and the Water Infrastructure (WRDA) bill.

The Past Week

Legislative Branch

House

Republicans Ask Fed to Loosen Capital Requirements
Last Monday, 29 House Republicans, including nearly every member of the Financial Services Committee sent a letter to Federal Reserve Vice Chairman for Supervision Randal Quarles last week calling on the Fed to recalibrate the Globally Systemic Investment Bank (G-SIB) capital surcharge. Currently, the G-SIB surcharge requires the eight largest U.S. banks to apply an additional 1%-4.5% on top of their minimum capital requirements, depending on their size, risk exposure, and complexity. The letter argued that the current U.S. surcharge is more stringent than recommend by the Basel Committee for Banking Supervision and puts U.S. banks at a disadvantage relative to foreign competitors. 

Senate

Senate Passes Four-Bill Appropriations Minibus

The Senate on Wednesday passed by a 92-6 vote its $154.2 billion appropriations minibus (H.R. 6147) including the Transportation-Housing and Urban Development, Interior-Environment, Financial Services, and Agriculture appropriations bills. During debate stretching over a week, the Senate accepted 45 amendments but by and large rejected controversial policy riders, including an amendment by Sen. Ted Cruz (R-TX) to defund the District of Columbia’s health insurance mandate. There are several controversial policy riders present in the House bill, and reconciling those differences will be resolved in conference.  

Senate Sends Short Term Flood Insurance Authorization to White House

On Tuesday, President Trump signed a four-month extension of the National Flood Insurance Program (NFIP) (S. 1182), keeping the program alive through November 30.  The The President’s signature came hours after the Senate voted in favor of the short term, and clean, extension passed by the House the previous week, and came as the NFIP was set to expire at midnight Tuesday.  Similar to the House debate, some Senators opposed short term reauthorization without reform, as 12 Republicans ultimately voting against the bill.

CFIUS Reform Passes in NDAA

The Senate on Wednesday passed the conference report for the FY19 National Defense Authorization Act (NDAA) (HR 5515), which contains the Foreign Investment Risk Review Modernization Act (FIRRMA) to reform the Committee on Foreign Investment in the United States (CFIUS). FIRRMA, which constitutes CFIUS’ most significant reforms in the Committee’s existence, would substantially expand the scope of CFIUS review to include investments in “critical technologies,” critical infrastructure businesses, and real estate transactions. Notably, the final version of the bill omits a controversial provision tasking CFIUS with review of joint ventures that was present in previous versions. CFIUS has attracted attention in recent months amid the Administration’s attempts to crack down on Chinese forced technology transfers.

Senators Introduce Bipartisan Bill to Curb President’s Tariff Authority

Sens. Rob Portman (R-OH), Doug Jones (D-AL), and Joni Ernst (R-IA) introduced the Trade Security Act (text) on Wednesday, which would limit the application of Section 232 national security tariffs. While the Trump Administration imposed the Section 232 steel and aluminum tariffs working primarily through the Department of Commerce, the bill would give the Department of Defense sole authority to decide if a national security concern justifies tariffs, with the Commerce Department then setting specific tariff rates. The bill, which would only apply to future tariffs, would also allow Congress to pass by two-thirds majority a “disapproval resolution” nullifying any tariff action. Although the bill’s path forward is unclear, it is a more moderate response to the 232 tariffs than legislation (S. 3013) sponsored by Sens. Jeff Flake (R-AZ), Pat Toomey (R-PA), and Bob Corker (R-TN) which would require any national security-related tariff to be approved by Congress.

Senate Committee Advances Treasury, IRS Nominees; Kraninger Vote Pushed Back

The Senate Finance Committee on Wednesday voted to advance the nominations of Justin Muzinich to be Deputy Secretary of the Treasury and of Michael Desmond to be Chief Counsel of the Internal Revenue Service (IRS). While Desmond’s nomination advanced with bipartisan support, Committee Democrats voted unanimously against advancing Muzinich, and immediately following the vote, Ranking Member Ron Wyden (D-OR) announced that he had placed a hold on Muzinich’s nomination until the Treasury Department has complied with his requests for information relating to the Russia investigation.   A vote in the Banking Committee on a number of high profile nominees, including Kathy Kraninger to be Director of the Consumer Financial Protection Bureau, was supposed to take place on Thursday but was rescheduled to a time TBD after the Senate finished its outstanding legislative business ahead of schedule on Wednesday.

Democrats Press Fed on Volcker Rule Reforms

On Thursday, a group of 31 Senate Democrats, lead by Senators Merkley (D-OR) and Shaheen (D-NH) sent a letter to the Federal Reserve criticizing the central bank’s proposed changes to the Volcker Rule. The letter was a rebuttal to a proposal the Fed announced in May that would modify some of the Volcker Rule’s definitions and limitations.   However, the Senators letter argued that the proposed revisions “[are] not a minor change or attempt to cut red tape for community banks and credit unions” and “[create] potentially major loopholes for Wall Street banks to avoid complying with core protection put in place by Congress to protect taxpayers and investors.” It followed an earlier in the week, Sens. Merkley, Elizabeth Warren (D-MA), and Sherrod Brown (D-OH) sent a separate letter to the Fed requesting data on current Volcker rule enforcement and compliance in the context of the proposed reforms.

Heller and Donnelly Introduce Anti-Fraud Bill for Seniors

Sens. Dean Heller (R-NV) and Joe Donnelly (D-IN) introduced the National Senior Investor Initiative Act in the Senate on Thursday. The bill would create a Securities and Exchange Commission (SEC) task force aimed at strengthening anti-fraud protections for seniors and instructs the Government Accountability Office (GAO) to publish a study on the economic consequences of financial exploitation of seniors. Introducing the bill, Sen. Heller said that the legislation “aims to prevent seniors from becoming victims of financial crimes and help them keep more of their hard-earned money through strengthened protection and transparency measures.” The bill is identical to legislation that has already been introduced in the House by Rep. Josh Gottheimer (D-NJ).

Select Highlights from the Administration

Treasury Department

Treasury Releases Fintech Report

The Treasury Department on Tuesday released its Report on Nonbank Financials, Fintech, and Innovation. The report includes over 80 legislative and regulatory recommendations to improve the financial regulatory environment. Key proposals include 1) the creation of regulatory sandboxes for firms to develop innovative tools while maintaining close contact with regulators; 2) the repeal of the Consumer Financial Protection Bureau’s (CFPB) payday lending rule; 3) codifying through legislation the “valid when made” doctrine; 4) national standards for data privacy and breach protection; and 5) a recommendation that the OCC should move forward with the issuance of special purpose national bank charters to fintech companies. The report is Treasury’s fourth in a series on identifying regulations inconsistent with the Administration’s Core Principals for financial regulation. In a statement, CBFPB Acting Director Mick Mulvaney, who recently announced the creation of a CFPB regulatory sandbox, praised the report as “an important step taken by our fellow agencies to promote innovation.” 

Treasury Department to Explore Easing Capital Gains Tax

The New York Times reported last Monday that the Treasury Department is exploring ways to use its regulatory authority to incorporate inflation into the capital gains tax calculation. Currently, capital gains are calculated by subtracting the original price of an asset from the value at which it is sold— adjusting an asset’s original price for inflation would significantly decrease the value of the gain and thus the tax paid by investors. While Treasury officials emphasized that the Department is only in the early stages of determining whether it can enact the changes under existent regulatory authority, the White House confirmed on Wednesday that President Trump was encouraging  the move. Critics of the proposal, including Congressional Democrats, have argued that capital gains tax cuts would primarily benefit high-income taxpayers.

Treasury Releases Guidance on One-Time Repatriation Tax

The Treasury Department on Wednesday released its first guidance on the process for calculating the repatriation tax on foreign earnings. Under the Tax Cuts and Job Act, U.S. companies are required to pay a one-time tax on foreign earnings saved abroad, at a 15.5% rate on cash and an 8% rate on non-cash assets. In general, the 249 page guidance document attempts to preempt potential strategies to minimize repatriation taxes. For instance, it denies companies credit for foreign taxes incurred moving money to the United States and warns that the IRS will ignore strategic investments made after the bill’s introduction that lowered a corporate entity’s foreign earnings. Additionally, its regulations on “notional pooling” would cause a significant amount of foreign income managed under the strategy to be treated as liquid and subjected to the higher rate.

Office of the Comptroller of the Currency (OCC)

OCC to Accept Fintech Applications for Bank Charters

Hours after the release of the Treasury Department’s fintech report, the Office of the Comptroller of the Currency (OCC) announcedthat it would begin accepting national bank charter applications from fintech companies. The national charters will offer qualifying fintech firms the benefit of reporting to a single primary federal regulator as opposed to complying with a state-by-state patchwork. In its announcement, OCC said that fintech companies receiving national bank charters “will be supervised like similarly situated national banks,” including complying with capital, liquidity, and inclusion standards as relevant. Responding to the announcement, the Electronic Transactions Association praised OCC for ensuring “that industry, customers and regulators are operating from the same rules and expectations,” although the special purpose charters have faced pushback from state banking regulators and some members of Congress.  However, at the same time John Ryan, President and CEO of the Conference of State Bank Supervisors called the charter a “is a regulatory train wreck in the making,” and intonated that they would like sue whoever gets the first charter from the OCC.  

Federal Reserve

Fed Holds Rates Steady

In an expected move, the Federal Reserve’s Federal Open Market Committee (FOMC) voted to keep interest rates unchanged at its meeting Wednesday. While the FOMC is expected to approve further increases later in the year, the federal funds rate target until then will remain at 1.75 to 2 percent. The Fed also upgraded its assessment of the economy, which it described as “strong.” Earlier in the week, Treasury Secretary Steven Mnuchin said that President Trump “absolutely respects the independence of the Fed,” in response to concerns relating to Trump’s criticism of the central bank’s raising of rates earlier in July.

United States Trade Representative

U.S., Mexico Hold NAFTA Round

The United States and Mexico held ministerial-level NAFTA talks in Washington last week amid reports that the two countries were close to a deal on automotive rules of origin, one of the renegotiation’s most contentious issues. Notably, Canada did not participate in this week’s meeting—the Trump Administration has indicated interest in coming to an agreement with Mexico in order to pressure Canada to compromise on key areas. Canada, however, has pushed backed on insinuations that they were excluded from the talks, with sources saying that Canada agreed to sit out the negotiations given that the topics of contention are primarily between the United States and Mexico. With negotiators set to meet again this week, Mexican Economy Minister Ildefonso Guajardo said that a breakthrough is possible in the near future, while Jesus Seade, representing the incoming Mexican Administration, said that another controversial issue, the inclusion of a sunset clause, could be discussed next week. The Trump Administration has expressed hopes of reaching an agreement in principal prior to August 25.

Labor Department

Economy Adds 157,000 Jobs, Unemployment Declines to 3.9%

The Department of Labor on Friday released its monthly jobs report, in which it reported that the U.S. economy added 157,000 jobs during the month of July. Although the figure falls short of the 193,000 new jobs forecasted by economists, the Department also revised May and June labor figures substantially upward, pushing the unemployment rate down from 4.0% to 3.9%. Additionally, the Labor Department reported that nominal wages had grown by 2.7% over the previous 12 months, a number that Labor Secretary Alex Acosta said “must increase.” Responding to the report, leaders from both parties framed the jobs numbers around the tax reform debate, with House Ways and Means Chairman Kevin Brady (R-TX) saying that “today’s report marks over 1.5 million jobs that have been created since Republican tax reform.” On the Democratic side, House Minority Whip Steny Hoyer (D-MD) argued that “every week brings new reports of companies using their tax breaks to buy back stock and benefit shareholders, while wages for workers have stagnated.”