THE BIG PICTURE
Results from the midterms continued to be finalized last week as mail-in and provisional ballots were canvassed, and recounts were conducted in some races. On Monday, the Arizona Senate race was officially called for Democrat Kyrsten Sinema. Ms. Sinema will fill the seat previously held by retiring Republican Senator Jeff Flake. In California, Democrat Gil Cisneros defeated Republican Young Kim in the 39th Congressional District, meaning that the traditionally conservative stronghold of Orange County has flipped to the Democrats. In Florida, after two state mandated recounts and multiple lawsuits which had dominated news coverage since election night, incumbent Democratic Senator Bill Nelson conceded to Rick Scott on Sunday. The final margin stood at just 10,000 votes. In the gubernatorial race, Democrat Andrew Gillum, who had rescinded his concession while calling for every vote to be counted, also formally conceded a second time to Ron DeSantis.
The new political order began to take shape as contests for Congressional leadership positions were held. On Wednesday, Rep. Kevin McCarthy (R-CA) was elected to be House minority leader in the next Congress, defeating a challenge by Rep. Jim Jordan (R-OH) by a vote of 159-43. Among the Democrats, behind the scenes jockeying played out as support for Minority Leader Nancy Pelosi (D-CA) for Speakership appeared to be wavering among some factions. Pelosi and potential challenger Rep. Marcia Fudge (D-OH) held “candid” talks on Friday. Rep. Pelosi gained support from an unlikely corner when President Trump announced his endorsement via Twitter saying “she has earned it” and said he could deliver her votes. The House Financial Services will be chaired by Rep. Maxine Waters (D-CA), with Rep. Patrick McHenry (R-NC) likely to be the Ranking Member. On the Senate side, Chuck Schumer (D-NY) was re-elected as minority leader, while Mitch McConnell (R-KY) is widely expected to maintain his post as Majority Leader. Sen. John Thune (R-SD) will replace term-limited Sen. John Cornyn (R-TX) as Majority Whip. On Friday, Sen. Chuck Grassley (R-IA) announced that he will take over the Chairmanship of the Senate Finance Committee, leaving the Judiciary Committee to Sen. Lindsay Graham (R-SC), a close confidant of the President With Sen. Grassley moving to Finance, Sen. Mike Crapo (R-ID) will likely remain Chair of the Banking Committee, with Sen. Sherrod Brown (D-OH) as Ranking Member.
On Tuesday, CNN filed a lawsuit in DC District Court against the Trump administration over its decision to suspend Jim Acosta’s press pass after a heated exchange during a press conference. The White House argued that the President has “broad discretion” to regulate access, while CNN responded that “if left unchallenged” the administration’s decision could “create a dangerous chilling effect for” journalists. On Friday, Judge Timothy Kelly, a Trump appointee, ruled in favor of CNN, granting a temporary restraining order and ordering that Mr. Acosta’s hard pass be restored, criticizing the decision to revoke it as “shrouded in mystery.” Further hearings are expected in the weeks to come, to consider whether the Administration’s decision violated First and Fifth Amendment rights. Following the decision, President Trump vowed to create “rules and regulations” to ensure “decorum” at the White House.
Other highlights of last week include:
- The House Ethics Committee released a report and sanctioned Rep. Mark Meadows (R-NC) and Rep. Ruben Kihuen (D-NV) over sexual harassment-related allegations. Rep. Meadows was fined US$40K for “failing to take appropriate steps to ensure that his House office was free from discrimination and any perception of discrimination.” Rep. Ruben Kihuen, who refused to resign, but did not seek re-election following revelations during the #MeToo movement, was found to have “made persistent and unwanted advances towards women who were required to interact with him as part of their professional responsibilities.”
- First Lady Melania Trump called for deputy national security advisor Mira Ricardel to be dismissed, declaring through a spokeswoman that she felt “she no longer deserves the honor of serving in this White House.”
- With the midterms behind us, speculation over the 2020 Presidential election has begun, with Sen. Sherrod Brown (D-OH) revealing that he’s weighing a run. He joins a wide range of politicians and public figures who are potential Democratic opponents to President Trump.
LAST WEEK ON THE HILL
HOUSE FINANCIAL SERVICES COMMITTEE
Hearing Entitled “Semi-Annual Testimony on the Federal Reserve’s Supervision and Regulation of the Financial System”: On Wednesday, the full Committee received the testimony of Randal Quarles, Member of the Board of Governors of the Federal Reserve and the Vice Chairman for Supervision. Mr. Quarles discussed his view that new accounting standards may end up having little meaningful impact on the outcome of stress tests, saying it “could actually be a wash, because to the extent that it means a larger reserve at the outset of the period of stress, then you’ll chew through that reserve before you chew through other things in the stress test. And it can be a one-to-one offset.” He emphasized the Fed has continued its effort toward greater transparency in stress testing, hoping to make them “more reliable, visible and credible.”
- The Honorable Randal Quarles, Vice Chairman for Supervision, Board of Governors of the Federal Reserve System
SENATE BANKING COMMITTEE
Hearing Entitled “The Semiannual Testimony on the Federal Reserve’s Supervision and Regulation of the Financial System”: On Thursday, the full Committee held a hearing to receive the testimony of Federal Reserve Vice Chairman for Supervision Randal Quarles regarding the efforts, activities, objectives and plans of the Federal Reserve Board with respect to the conduct, supervision and regulation of financial firms supervised by the Federal Reserve Board. Mr. Quarles faced tough questioning from Sen. Elizabeth Warren (D-MA) over the rapid increase in the US$1.3T leveraged loan market, which she likened to the subprime mortgage market prior to the 2008 crisis. Mr. Quarles sought to assure the Senator that the Fed is “holding them to standards of safety and soundness.”
- The Honorable Randal Quarles, Vice Chairman for Supervision, Board of Governors of the Federal Reserve System
ON THE FLOOR
Cloture Filed on CFPB Nominee: On Thursday, Senate Majority Leader Mitch McConnell (R-KY) filed cloture on the nomination of Kathy Kraninger to lead the CFPB, succeeding acting Director Mick Mulvaney. The Senate is expected to consider her nomination after Thanksgiving.
LEGISLATION INTRODUCED AND PROPOSED
Data Breach Bill: Senators Marco Rubio (R-FL) and John Kennedy (R-LA) circulated a draft bill which would require credit bureaus to inform small businesses within 30 days if they suffer a data breach. Sen. Kennedy said credit bureaus must be held to account for “gross negligence and data mismanagement” and since measures were taken to protect consumers, small businesses “deserve protection as well.”
THIS WEEK ON THE HILL
Congress will be in recess in observance of Thanksgiving.
SEC Issues Statement on Digital Assets Securities Issuance and Trading: On Friday, the SEC’s Division of Corporation Finance, Investment Management and Trading and Markets issued a statement on digital assets, noting that technological advances of blockchain and distributed ledger technologies have impacted the markets, and aimed to highlight that “market participants must still adhere to our well-established and well-functioning federal securities law framework when dealing with technological innovations, regardless of whether the securities are issued in certificated form or using new technologies, such as blockchain.”
Two ICO Issuers Settle SEC Registration Charges, Agree to Register Tokens as Securities: On Friday, the SEC announced it had settled charges against two companies that sold digital tokens in initial coin offerings (ICOs). These are the Commission’s first cases imposing civil penalties solely for ICO securities offering registration violations. Both companies have agreed to return funds to harmed investors, register the tokens as securities, file periodic reports with the Commission, and pay penalties. “We have made it clear that companies that issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities,” said SEC Enforcement Division Co-Director Stephanie Avakian.
Treasury Sanctions 17 Individuals for Their Roles in the Killing of Jamal Khashoggi: On Thursday, the Treasury’s Office of Foreign Assets Control (OFAC) designated Saud al-Qahtani, his subordinate Maher Mutreb, Saudi Consul General Mohammed Alotaibi, and 14 other members of an operations team for having a role in the killing of Jamal Khashoggi. “The United States continues to diligently work to ascertain all of the facts and will hold accountable each of those we find responsible in order to achieve justice for Khashoggi’s fiancée, children, and the family he leaves behind,” said Treasury Secretary Steven Mnuchin. “The Government of Saudi Arabia must take appropriate steps to end any targeting of political dissidents or journalists.”
Financial Regulators Release Statement on Financial Institutions and Customers Affected by California Fires: On Thursday, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the California Department of Business Oversight released a statement recognizing the serious impact of the California wildfires on the customers, members, and operations of many financial institutions and noting that they intend to provide appropriate regulatory assistance to affected institutions subject to their supervision.
Jelena McWilliams Discusses Potential Living Will Reforms: On Friday, FDIC Chairwoman Jelena McWilliams discussed her view that a recalibration of the so-called “living will” requirements for big banks may be needed to create a “more tailored” approach. In an interview she questioned, “After the years of submitting so much information, should we have a more targeted approach? We’re looking at that.”
FDIC Requests Information on Small-Dollar Lending: The FDIC announced that it is seeking public comment on issues related to small-dollar lending by FDIC-supervised financial institutions. The request solicits comments on the consumer demand for small-dollar credit products, the supply of small-dollar credit products currently offered by banks, and what the FDIC can do to better enable banks to offer responsible, prudently underwritten credit products to meet consumer demand.
FDIC Releases 2018 Version of Money Smart for Adults: On Wednesday, the FDIC released the 2018 version of its popular instructor-led Money Smart for Adults financial education curriculum. Instructors can use the fully scripted materials with minimal preparation to deliver unbiased, relevant, and accurate financial education. “The FDIC’s Money Smart for Adults helps people gain the knowledge, confidence, and skills to use banks more effectively and manage their finances. And it gives banks a valuable tool to build deeper relationships with their customers,” said FDIC Chairman Jelena McWilliams.
FDIC to Have High Standards for Industrial Bank Charters: Speaking at a conference on Thursday, FDIC Chairwoman Jelena McWilliams discussed the high standards the agency will have for firms seeking an industrial loan company charter, saying that applications will be reviewed very carefully, and that “the threshold is not low. The statutory requirements are pretty difficult to meet.”
Office of Financial Research Releases Annual Report to Congress: On Thursday, the OFR released its 2018 Annual Report to Congress. The report stated that risks to U.S. financial stability remain in the medium range, reflecting a mix of high, moderate, and low risks to the financial system. Market and cybersecurity risks were described as being the highest, reflected in historically high stock prices and the sensitivity of bond prices to changes in interest rates. Credit risk was described as moderate, with risk rising from leveraged lending (lending to companies with lower credit ratings), tempered somewhat by risks from consumer credit. The report also included a spotlight on financial markets, a discussion of OFR data initiatives, and information about the initiative to refocus the OFR mission on primarily supporting the Financial Stability Oversight Council and its member agencies.
Federal Housing Administration Releases Annual Report: On Thursday, the FHA released its annual report to Congress. The report revealed that for fiscal year 2018 the Mutual Mortgage Insurance Fund had a total net worth of US$34.8B, a US$8B increase over fiscal year 2017. Commissioner Montgomery remarked that “While the MMI fund is sound at this point in time, I think we’re still far away from being in a position to consider any reduction in our mortgage premiums.”
Federal Reserve Reveals Plans for Monetary Policy Review: Fed Chairman Jerome Powell announced that, “with labor market conditions close to maximum employment and inflation near our 2 percent objective, now is a good time to take stock of how we formulate, conduct, and communicate monetary policy.” The Fed plans to host a series of public events to gain input.
COMINGS AND GOINGS AT THE AGENCIES
Senate Confirms Michelle Bowman as a Member of the Federal Reserve Board: On Thursday, the Senate voted 64-34 to confirm Michelle Bowman as a member of the Federal Reserve Board. Ms. Bowman was nominated in April, and served most recently as the Kansas State Banking Commissioner having previously worked as an aide to Sen. Bob Dole. Her board term will end on January 31, 2020.
Neomi Rao Nominated to D.C. Circuit Seat: On Tuesday, President Trump nominated Neomi Rao, who currently serves as the head of OMB’s Office of Information and Regulatory Affairs to fill the seat vacated by Justice Brett Kavanaugh on the DC Circuit Court of Appeals. Ms. Rao was confirmed to her current post last July by a vote of 54-41 along largely partisan lines.
Director of Federal Insurance Office to Depart Treasury after Five Months: Steve Dreyer, who has served as the Treasury Department’s point person on insurance issues, has resigned after just five months. Mr. Dreyer joined Treasury this summer from the credit ratings firm S&P where he spent nearly 30 years. Deputy Director Steven Seitz will lead the office on an interim basis.
OTHER NOTEWORTHY ITEMS
Fintech Groups Agree to Cross-Border Cooperation Pledge: Groups representing the fintech industry in the UK and Singapore signed a cooperation agreement pledging to collaborate and promote the growth of startups in both countries. The agreement enables them to share research and conduct joint events and programs. Natalie Ceneey, who serves as Chairwoman of the UK’s Innovate Finance, touted the agreement as representative of their “support for both business and regulatory alignment between international fintech hubs.”
House Democrats Call for OCC to Reconsider CRA Overhaul Plans: The 11 Democrats on the House Financial Services Committee sent a letter to Comptroller of the Currency Joseph Otting, asking for him to reconsider proposed changes to the Community Reinvestment Act, detailing concerns that his approach was “overly prescriptive” and could creative perverse incentives by using a “purely numeric or quantitative framework.” They additionally raised the issue that Mr. Otting had not sought consensus with the Federal Reserve or FDIC before issuing the proposal.