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Financial Services Report (12/10)

December 10, 2018

Our Take

Over the next two weeks Congress and the President need to reach an agreement on the remaining spending bills in order to avoid a partial shutdown.  

As that debate is keeping Congress open (when frankly, everyone in town would prefer that they were done for the year) and therefore providing an opening for a variety of hearings this week.  Some a forum to look back over a Chairman's helm, others an opportunity to begin framing some of the agenda for next year. 


Looking Ahead

Near Term

  • With much of official DC shut down for the funeral of former President George H.W. Bush last week, the result is an incredibly busy week for December in DC.
  • While the House and Senate continue to make progress on a path forward for government funding, there will be a significant number of hearings and events this week.
  • The House Financial Services Committee will hold a series of “legacy” hearings on pet projects of the Chairman – federal spending and federal debt – but the Financial Institutions Subcommittee will hold a hearing on the FASB’s recent Current Expected Credit Loss (CECL) proposal that will likely be an area of attention in 2019.
  • On Tuesday the House Judiciary Committee will hold its rescheduled hearing on Google’s data collection practices that could be one of the most interesting hearings in Congress all year and then the next day the Judiciary Subcommittee will hold a hearing on anti-trust enforcement, another issue that will likely be at the forefront in 2019.
  • Chairman Clayton will be before the Senate Banking Committee this week and the Senate Judiciary Committee is holding a hearing on Chinese espionage.
  • In addition, the FTC will hold a two-day policy event on consumer protection and competition policy that will hit on data and privacy protection as well as competition issues.

Further Out

  • Funding for the unfunded portions of the federal government will expire on December 21.  While there are rumors that a deal could be struck to get members out of town by this Friday, we are willing to wager that Congress is in session to the 20th or 21st (if not later).
  • On December 19, the Senate Anti-trust Subcommittee is scheduled to hold a hearing entitled
  •  "A Comparative Look at Competition Law Approaches to Monopoly and Abuse of Dominance in the US and EU.”
  • The next Congress will be sworn in on January 3.

 

The Past Week

Legislative Branch
House
Bush Funeral Triggers Government Funding Punt
On Thursday, the House, shortly followed by the Senate, passed a continuing resolution keeping parts of the government funded through December 21 in order to avoid a contentious appropriations battle as the nation mourned the passing of former President George HW Bush. Prior to this two-week extension, funding for the 7 outstanding appropriations bills, including the Financial Services and General Government (FSGG) bill, plus a couple of other programs including flood insurance and the Violence Against Women Act were due to expire on December 7. The next two weeks likely set up a contentious appropriations battle to close out the 115th Congress, as both sides dig in on what constitutes sufficient funding for a wall along the US-Mexico border.
 
Pelosi Skeptical of NAFTA Passage Sans Changes – Senate Republicans Push Back on Unilateral Withdrawal
On Thursday, likely Speaker Nancy Pelosi cast doubt on whether or not the United States-Mexico-Canada Agreement (USMCA) could be approved by a Democratic controlled House. During a 30-minute call with United States Trade Representative Robert Lighthizer, Pelosi criticized the agreement as “just a list without real enforcement of the labor and environmental protections.” With the comments, Pelosi joins a long list of Democrats—as well as some Republicans—who want changes to the agreement signed at the end of November. Under trade promotion authority, Congress must give the deal an up or down vote without amendment, although Ambassador Lighthizer and others from the Administration have raised the possibility that certain changes could be made to the agreement through its implementing legislation.
 
On the other side of the aisle, several Congressional Republicans last week expressed opposition to President Trump’s announcement that he would withdraw from the North American Free Trade Agreement (NAFTA)—forcing lawmakers to approve USMCA or be left without any preferential trade regime between the United States, Canada, and Mexico. Incoming Senate Majority Whip John Thune (R-SD) said that withdrawing from NAFTA to strongarm Congress would be a “big mistake,” while Sen. Pat Toomey (R-PA) echoed criticisms that unilateral termination goes beyond the President’s legal authority.
 
Senate
CFPB Director Kraninger Confirmed in Party-Line Vote
On Thursday, the Senate confirmed Kathleen Kraninger to be Director of the Consumer Financial Protection Bureau (CFPB) in a 49-50 party-line vote. With every Democrat voting against her nomination, the vote concludes a contentious nomination fight for Ms. Kraninger, who has faced substantial Democratic opposition to her nomination over an alleged lack of experience in consumer finance issues, her involvement in the Trump Administration’s separation of migrant families, and changes enacted by CFPB acting Director Mick Mulvaney. One of those changes –officially renaming the agency the Bureau of Consumer Financial Protection (BCFP)—may cost regulated businesses more than $300 million according to reports released in advance the vote. 
 
Banking Committee Holds Hearing on Proxy Process
On Thursday, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Proxy Process and Rules: Examining Current Practices and Potential Changes” to examine possible reforms to the U.S. shareholder proposal and proxy processes. The witness panel featured significant disagreement between representatives of institutional investors and publicly traded companies over issues including raising the shareholder proposal resubmission threshold and regulations on proxy advisory firms. Republicans including Chairman Mike Crapo raised concerns that excessive shareholder proposals—including those with “social and political objectives”—waste corporate resources, an allegation that prompted significant Democratic pushback.
 
Banking Committee Member Kennedy Won’t Run for Governor
On Monday, Sen. John Kennedy (R-LA) announced that despite strong rumors to the contrary, he would not run for Governor of Louisiana in 2019 against Democrat John Bel Edwards.  First elected in 2016, had the Senator resigned to run for governor it would have created an opening on the Senate Banking Committee. 
 
Brown, Rubio Introduce Bill Restricting Confessions of Judgement
On Thursday, Senate Banking Committee Ranking Member Sherrod Brown (D-OH) and Sen. Marco Rubio (R-FL) introduced the Small Business Lending Fairness Act (text) that would codify the Federal Trade Commission’s (FTC) ban on confessions of judgement in consumer loan contracts and extend the ban to include small business borrowers. A confession of judgement clause requires a borrower to forego the right to contest seizure by a lender in court, allowing lenders to seize a borrower’s assets without warning in order to satisfy a debt. Although a 1985 FTC judgement currently bans these clauses from consumer loan contracts and several states also have imposed additional restrictions on confessions of judgement, small business borrowers do not currently have nationwide protection against confessions of judgement.
 
Select Highlights from the Administration
The White House
Kudlow Says Extension of Chinese Trade Truce Possible While Navarro Reiterates Ultimatum
On Friday, National Economic Council Director Larry Kudlow told CNBC that President Trump would consider extending the 90-day trade “truce” reached at November’s G20 summit, if progress is made. The same day however, White House trade policy advisor Peter Navarro doubled down on the deadline, saying that the United States would increase tariffs sans an agreement between the two countries. After President Trump and Chinese President Xi Jingping met at the G20 summit at the end of November, the two leaders agreed attempt to negotiate a resolution to the trade countries between their two nations, and President Trump agreed to delay the escalation of 10% tariffs to 25% for 90 days. The discord highlights a rocky first week for the “truce,” during which President Trump referred to himself as “tariff man” and Canadian Meng Wanzhou, CFO of the embattled Chinese telecommunications giant Huawei, was arrested in Canada at the request of U.S. authorities.
 
Department of the Treasury
Postal Task Force Releases Report
On Tuesday, the Department of the Treasury’s Postal Task Force released its report on recommendations to reform the US postal system. The report describes the Postal Services as being on an “unsustainable financial path” and makes several recommendations, including: (1) Improving governance; (2) more clearly defining the Universal Service Obligation by specifying “essential postal  services;” (3) developing a new market-based price model without price caps for non-“essential postal services;” (4) modernizing the cost standards and allocation methodology; (5) reforming employee compensation and restructuring benefit liabilities; and (6) exploring new services. The report was issued pursuant to President Trump’s April executive order on the postal system, issued amid weeks of criticism of e-commerce giant Amazon and its relationship with USPS.
 
FinCEN, Banking Regulators Issue Joint Statement on BSA/AML Innovation
On Monday, the Financial Crimes Enforcement Network (FinCEN) and the federal banking regulators issued a joint statement encouraging banks explore innovative tools to fulfill their Bank Secrecy Act and anti-money laundering (BSA/AML) obligations. While regulators will not advocate for particular methods or technologies for BSA/AML compliance, the statement identifies artificial intelligence and digital identity technologies as two emerging technologies with the potential to improve BSA/AML compliance. Additionally, agencies said unsuccessful pilot programs using innovative technologies should not be subject to supervisory criticism, that FinCEN would consider requests for exceptive relief to facilitate the innovative use of technology, and that agencies without projects or offices dedicated to innovation and the financial system would establish them. Following an October statement on resource sharing. The joint statement is the second action from the interagency working group on the BSA/AML regime
 
Federal Reserve
Fed Governor Brainard Hints At Countercyclical Capital Buffer Activation
On Friday, Federal Reserve Governor Lael Brainard in a speech at the Peterson Institute for International Economics raised the possibility of imposing a counter cyclical capital buffer (CCyB) on banks in light of increased risk conditions. Under the Basel III capital standards, central banks can impose an additional capital requirements on internationally active banking institutions during times of elevated risk, although that buffer is currently set at zero. In her speech, Governor Brainard raised concerns about increased corporate borrowing and deteriorating underwriting standards and noted “it a time when cyclical pressures have been building and bank profitability has been strong, it might be prudent to ask large banking organizations to fortify their capital buffers, which could subsequently be released if conditions warrant.” It is worth noting that beyond Governor Brainard—the last Obama appointee on the Fed Board—the Fed’s other governors have been skeptical of activating the CCyB.
 
Office of the Comptroller of the Currency
OCC Calls Credit Quality “Strong” Despite Rising Credit Risk
On Monday, the Office of the Comptroller of the Currency (OCC) published its Semiannual Risk Perspective for Fall 2018. Key findings from the report include: (1) Credit quality remains “strong,” despite increasing credit risk resulting from successive years of incremental easing in underwriting and risk layering, particularly with respect to leveraged loans; (2) cybersecurity threats have increased operational risk; (3) compliance risk remains elevated as sophisticated money laundering threats and a complex regulatory environment; and (4) changes in technology and consumer behavior cast uncertainty over the impact of interest rate hikes on institutions.
 
Securities and Exchange Commission
Proxy Advisory Firms Among Items on 2019 SEC Agenda
On Thursday, Securities and Exchange Commission (SEC) Chair Jay Clayton delivered a speech in New York City in which he outlined several SEC priorities for 2019. Items on the 2019 agenda include: (1) finishing work on rules regarding the standards of conduct for financial professionals; (2) overhauling the “plumbing” of the proxy advisory process, including possible reviews of the ownership and resubmission threshold and changes to the supervision of proxy advisory firms; (3) facilitating access to capital, including allowing more companies to “test the waters” before IPOs and examining the quarterly reporting regime; (4) examining ways of encouraging long-term investment; and (5) better coordinating SEC treatment of cryptocurrency and initial coin offerings (ICO).
 
Federal Deposit Insurance Corporation
Banking Regulators Release Appraisal Exemption Threshold Hike
On Thursday, FDIC, the Federal Reserve, and OCC published a proposed rule that would increase the appraisal exemption threshold for residential real estate transactions. Implementing changes contained in the Economic Growth, Regulatory Relief, and Consumer Protection Act, the rule would increase the threshold under which appraisals would not be required from $250,000 to $400,000. The proposed rule would also implement the bill’s appraisal exemption for rural residential properties. The appraisal exemption threshold was last changed in 1994.


Next Week’s Schedule

Mon. (12/10)

  • No events scheduled.

 
Tues. (12/11)

  • Press Club Event on Tariffs – 9:30 AM – The National Press Club will host an event entitled "The Real Economic Effects of President's Trump's 232 Aluminum and Steel Tariffs." Details here.
  • Hearing: Senate Banking on SEC Oversight – 10:00 AM – The Senate Committee on Banking, Housing, and Urban Affairs will hold an oversight hearing of the Securities and Exchange Commission (SEC), featuring testimony from SEC Chairman Jay Clayton. Details here.
  • Hearing: House Financial Services on the National Debt – 10:00 AM – The House Financial Services Committee will hold a hearing entitled "The National Debt: Washington, We Have a Spending Problem." Details here.
  • FTC Hearing: Competition and Consumer Protection – 10:00 AM – The Federal Trade Commission (FTC) will hold a hearing entitled "Competition and Consumer Protection in the 21st Century." Details here.
  • Hearing: House Judiciary Committee on Google's Data Collection Practices – 10:00 AM – The House Judiciary Committee will hold a hearing entitled "Transparency & Accountability: Examining Google and its Data Collection, Use and Filtering Practices" featuring testimony from Google CEO Sundar Pichai. Details here.
  • Hearing: House Oversight and Government Reform Sub on Federal Spending – 10:00 AM – The House Oversight and Government Reform Subcommittee on Intergovernmental Affairs will hold a hearing entitled "Examining 'Backdoor' Spending by Federal Agencies." Details here.
  • Confirmation Hearing: Senate Finance Committee. – 10:00 AM – The Senate Finance Committee will hold a hearing on the nomination of Courtney Dunbar Jones to be a judge of the United States Tax Court. Details here.
  • Hearing: House Energy and Commerce Sub on the RAY BAUM's Act – 2:00 PM – The House Energy and Commerce Subcommittee on Communications and Technology will hold a hearing entitled "RAY BAUM's Act: A Bipartisan Foundation for Bridging the Digital Divide." Details here.
  • Hearing: House Financial Services Sub on CECL – 2:00 PM – The House Financial Services Subcommittee on Financial Institutions and Consumer Credit will hold a hearing entitled "Assessing the Impact of FASB’s Current Expected Credit Loss (CECL) Accounting Standard on Financial Institutions and the Economy." Details here.

 
Wed. (12/12)

  • FTC Hearing: Competition and Consumer Protection – 9:30 AM – The Federal Trade Commission (FTC) will hold a hearing entitled "Competition and Consumer Protection in the 21st Century." Details here.
  • Hearing: House Education and the Workforce Sub on Minimum Wage – 10:00 AM – The House Education and the Workforce Subcommittee on Workforce Protections will hold a hearing entitled "Mandating a $15 Minimum Wage: Consequences for Workers and Small Businesses. Details here.
  • Hearing: House Financial Services Sub on International Financial Institutions –10:00 AM – The House Financial Services Subcommittee on Monetary Policy and Trade will hold a hearing entitled "Evaluating the Effectiveness of the International Financial Institutions." Details here.
  • Hearing: House Oversight and Government Reform Subs on Federal Spending – 10:00 AM – The House Oversight and Government Reform Subcommittees on Information Technology and Government Operations will hold a joint hearing on the Federal Information Technology Acquisition Reform Act (FITARA) Scorecard 7.0. Details here.
  • Hearing: Senate Judiciary Committee on China – 10:00 AM– The Senate Judiciary Committee will hold a hearing entitled "China’s Non-Traditional Espionage Against the United States: The Threat and Potential Policy Responses." Details here.
  • Hearing: House Judiciary Sub on Antitrust Enforcement – 2:00 PM – The House Judiciary Subcommittee on Regulatory Reform, Commercial, and Antitrust Law will hold an oversight hearing of the antitrust enforcement agencies. Details here.

 
Thurs. (12/13)

  • SEC Meeting: Dodd-Frank Investor Advisory Committee – 9:00 AM – The Securities and Exchange Commission (SEC) will hold a meeting of the Dodd-Frank Investor Advisory Committee. Details here.

 
Fri. (12/14)

No events scheduled.