TRP Financial Services Report

December 8, 2014

Once again Friday’s jobs number came in significantly higher than expectations.  While the Bloomberg survey of economists predicted an increase of 230,000 the BLS reported that the American economy added 321,000 plus added upward revisions from the previous two months totaling another 44,000 jobs.  While the unemployment rate remained unchanged at 5.8 percent, this marked the 50th consecutive month of positive job growth.   The news, along with dropping oil prices, drove the stock market to near record highs
At the same time, Senator Landrieu’s loss on Saturday only served to reconfirm that Democrats were unable to convince the American public that their policies were responsible for the economic turnaround.  One reason could be the soft underbelly of this report, which despite the great headline number, showed a skewering towards part time rather than full time jobs.   

Looking Ahead

Near Term 

  • House and Senate expected to take up the nearly deliciously named “Crominbus” spending measure before funding for the government expires on Thursday (see Senate section below for more on possible riders). 
  • Senate is expected to pass the one year version of the tax extenders (though it may not).
  • The Federal Reserve plans to release a proposed rule on Tuesday that would establish risk-based capital surcharges for systemically important banks as required under the Basel III framework.
Further Out 
  • Hanukkah, Kwanzaa, Christmas, and New Years before the start of truly divided government.
 The Past Week
Legislative Branch
House Passes One Year Version of Tax Extenders
On Wednesday, by a vote of 378-46, the House on Wednesday cleared a one-year renewal of more than 50 tax breaks that expired at the end of 2013.   The vote came shortly after Treasury Secretary Lew indicated that the WH would be amenable to a shorter extension if a two year deal couldn’t be reached.  The Senate is expected to pass the measure this week. 
House Appears Set to Pass TRIA Extension
This week, the House is expected to take up legislation that would extend the Terrorism Risk Insurance Act (TRIA) for another six years.  The deal, a result of negotiations between House Financial Services Committee Chairman Jeb Hensarling (R-TX), Sen. Chuck Schumer (D-NY), and House Majority Leader Kevin McCarthy (R-CA), among others, came together late last week.  The preliminary outline of the deal includes the six year extension, and a “trigger” level for starting the backstop at $200 million dollars in losses.  In addition, it appears that this trigger will not be bifurcated for conventional vs. unconventional (i.e., nuclear, chemical etc.) attacks, though the bill will have a study on how to handle this distinction in the future.  The bill is also likely to include a provision recreating the provision re-creating the National Association of Registered Agents and Brokers (NARAB).  Other non-TRIA specific provisions rumored to be included in the deal include a handful of Dodd-Frank related tweaks, such as the so-called “Collins Fix” which would  clarifying that the Federal Reserve Board can apply insurance-based capital standards to the insurance portion of any insurance holding company it oversees, as well language to protect end users of swaps.    If the deal survives it is expected to be included in the omnibus appropriations bill.
House Passes Series of Capital Market Measures
Earlier this week, the House easily passed a series of bills aimed at improving a variety of policies impacting capital markets.  First, by voice vote they passed a Rep. Scott Garret (R-NJ) bill that would ease SEC reporting requirements for small companies.  Next was a bill by Rep. Gwen Moore (D-WI) dealing with how certain derivatives are treated by CFTC and SEC swaps requirements.  The House also passed by voice vote a bill by Rep. Blaine Luetkemeyer (R-MO) intended to assist of small business investment companies (“SBICs) which are funds that receive capital from the Small Business Administration to back small businesses.  In addition, by a vote of 422 – 0 the House passed “Regulation D Study Act,” authored by Rep. Robert Pittenger (R-NC) that would require a study of Federal Reserve’s reserve requirements and its impact on consumers.  While none of these bills are expected to clear the Senate before the end of the year, they could certainly see a brighter future next year. 
House Passes Bank Bankruptcy Bill
Earlier this week, by a voice vote the House approved a bill that would make it easier for banks, but especially very large banks, to go through the bankruptcy process.  Among other things the measure creates a series of court deadlines for the early hours of a bankruptcy and also requires a delay of up to 48 hours before creditors could terminate certain contract with the bankrupt institution.  Although Democrats supported the measure, it is viewed by some as the first step to eliminating Dodd-Frank’s Title II resolution authority. 

Republicans Poised to Attach Riders to Spending Bill
According to a Bloomberg Report from Friday, there were as many as 75 policy riders being sought by Republicans as part of the end of year spending bill.  While it is unclear how many will ultimately be included in the final spending measure, reportedly one of them would preclude the Department of Labor from issuing its Fiduciary rule, while another would include a Dodd-Frank tweak that would allow FDIC insured banks to more broadly engage in swaps trading.
Hatch Speaks Positively of  Treasury Nominee
While some Democrats continue to express concerns about the nomination of Antonio Weiss to serve as the Treasury Department’s undersecretary for domestic finance, he did receive some positive news this week, as the incoming Chairman of Senate Finance Committee that will be tasked with approving his nomination indicated that Weiss had “a lot of experience, a lot of ability” and an “attractive resume.”  The nomination is not expected to be considered before next year.

Select Highlights from the Administration
Deputy  Secretary Raskin Offers “Road Map” for Banks on Cybersecurity
On Wednesday, during a speech to the Texas Bankers’ Association Executive Leadership Cybersecurity Conference, Deputy Treasury Secretary Sarah Bloom Raskin unveiled 10 questions that said would create a “roadmap” for Bank CEO’s to deal with cybersecurity threats.    The questions were: (1) Is cyber risk is part of an overall risk posture; (2) Does the organization follows the NIST framework; (3) what are the risks from third-party vendors; (4) does the organization has adequate cyber insurance (5); is basic cyber hygiene is practiced; (6) is information is shared with industry groups; (7) who is the point person is for a response and what the incident plan is; (8) what the roles are for executives and senior leadership; (9) how law enforcement is engaged; and (10) how the public and customers are informed.
OFR Releases Annual Report – Notes Increase in Systemic Risks
On Monday, the Office of Financial Research (OFR) the research arm of the FSOC released its annual report, where among other things it noted that excessive risk-taking (caused in part by low interest rates), a decline in market liquidity and the movement of certain activities into unregulated areas all played a role in increasing risks to our nation’s financial stability this past year.  
Federal Reserve Board
Governor Brainard’s Series of Speeches offer Insight into Fed Thinking
On Tuesday, Federal Reserve Governor Lael Brainard gave here first public speech since joining the Fed in June, speaking as part of the first outreach meeting in advance of the upcoming 10 year review of industry regulations under the Economic Growth and Paperwork Reduction Act (EGRPRA).   Notably the CFPB’s regulations – except for the Community Reinvestment Act – will not be part of the review.  During her remarks she noted the Fed’s interest in tailoing rules whenever possible to reduce the burdens on smaller banks.  Although she noted that “[t]ailoring regulations may be more challenging in some areas, such as rules that provide transparency and fairness in consumer transactions,” she added that “[t]hose are standards that apply throughout the financial system.”   
Then on Wednesday Brainard gave another speech to the OFR and then to the Cleveland Fed, where she outlined the Fed’s “stability agenda” and laid out four pillars that regulators are engaged in as they continue to implement Dodd-Frank.  They are:  (1) Surveillance, (2) Macroprudential policy, (3) Working across the regulatory perimeter, and (4) Monetary policy. 
Fed Adopts Changes to ACH System
On Monday, the Federal Reserve adopted new rules for when it will post automated clearinghouse (ACH) transactions and checks to banks’ accounts at the Reserve Banks.   Under these new rules, ACH debit transactions processed overnight will post at 8:30 a.m. Eastern Time to banks’ Federal Reserve accounts, rather than 11 a.m., to align with the time that ACH credit transactions post. For commercial checks, posting times for both debit and credit transactions will move to 11 a.m., as well as two new posting times — 1 p.m. and 5:30 p.m. The posting changes will take effect July 23.
The board also adopted a set of principles for establishing future posting rules for the Reserve Banks’ same-day ACH service. And it adopted companion amendments  to Regulation J to permit the Reserve Banks to require paying banks to settle any checks within a half hour after receiving them from the Fed.
Consumer Financial Protection Bureau (CFPB)
CFPB Proposes Expansion to Consumer Complaints on Company Portal
On Thursday, the CFPB published a notice in the Federal Register today’s Federal Register stating that the CFPB is developing a new form to allow companies to “proactively participate” in the CFPB’s online consumer complaint portal.  According to the notice, the CFPB’s proposed form, the “Company Portal Boarding Form,” will “serve to streamline information collection” from companies seeking to register to use the company portal and “result in a greatly enhanced and efficient experience from both the consumers and companies’ perspectives.”  Comments are due by February 2, 2015.
Office of the Comptroller of the Currency (OCC)
Comptroller Calls for Congress to Exempt Community Banks from Volcker
Speaking as part of the first outreach to industry in advance of the ten year review under Economic Growth and Paperwork Reduction Act (EGRPRA), Comptroller Curry shared his belief that Congress should exempt community banks with less than $10 billion in assets from the Volcker Rule investment prohibitions.  Later in the week, Comptroller Curry shared his concerns about the inability of some banks to comply with the Bank Secrecy Act and Anti-Money Laundering compliance, saying that there’s been a rise in number of higher-risk, cash-intensive customers at community banks, as well as increase in internationally oriented transactions.  He went on to add that banks have “failed to evolve or to incorporate appropriate controls into new products and services” though he did not indicate any specific product or service. 

Commodity Futures Trading Commission (CFTC)
CFTC Reopens Comment Period on Position Limit Rule
On Wednesday, the CFTC announced that it was reopening the comment period on its proposed “position limits rule.”  Comments will be open until January 22nd.   The rule, which was proposed last November following the vacation of an earlier effort by the CFTC to impose speculative position limits on 28 physical commodity futures contracts and their “economically equivalent” swaps.  The CFTC said it was reopening the comment period in anticipation of questions that may come during tomorrow’s meeting of the agency's Agricultural Advisory Committee.  In a statement announcing the decision, CFTC Commissioner Sharon Bowen indicated that the decision to reopen should not be read by industry as an effort to delay this further and that the Commission indents to release a final rule by spring 2015.”

This Week’s Schedule
On Tuesday, December 9th in Room 538 Dirksen at 11:00 A.M., the Subcommittee on Housing, Transportation, and Community Development will hold a hearing titled “Inequality, Opportunity, and the Housing Market.” 
On Wednesday, December 10th in Room 328A Russell, the Senate Agriculture Committee will hold a hearing entitled, “The Commodity Futures Trading Commission: Effective Enforcement and the Future of Derivatives Regulation. 
On Wednesday, December 10th in Room 538 Dirksen the Banking Committee will hold a hearing titled, “"Cybersecurity: Enhancing Coordination to Protect the Financial Sector."