Our thinking

U.S. Financial Industry Regulation Newsletter - February 9, 2018

THE TOP LINE

Fed of the Future?

Jay Powell had his first official day in the chair on Monday, and was met with bouts of volatility in the stock market that have continued through the week. While volatility remained low over the first year of Donald Trump’s presidency, the current downturn is a reminder that U.S. policy since the financial crisis has been to strengthen the economy to withstand such cycles. While it is easy to get excited by a 1,000 point dip in the Dow, institutional stability is the key to maintaining financial stability in our economic system. Fed officials last week toughened stress test scenarios against far greater shocks than what we’re seeing in the markets, so it isn’t time to panic just yet, or to bet against another rate hike from the Fed in March.

Continued rate hikes from the Fed could halt economic growth, though, putting Powell at odds with a President who has taken pride in the state of the economy. And Janet Yellen didn’t hand over the chair quietly, with the Fed announcing an unprecedented growth ban on Wells Fargo last week. What remains to be seen is whether the sanction against the scandal-ridden bank is merely a feather in Yellen’s cap, or if it is a reflection of how the Fed plans to operate going forward.

But first, the markets will test the new Fed chair, who seeks to continue a trend of low and contained inflation. Powell made his goal clear in the early minutes of his tenure (before volatility set in), saying, “Our financial system is now far stronger and more resilient than it was before the financial crisis that began about a decade ago. We intend to keep it that way.”

Seating Trump’s Party

Elsewhere, Trump nominees are moving to take their seats at agencies, though plenty of regulatory positions have yet to get a nominee from the administration. In a positive sign for the deregulatory agenda, Trump nominees finally gained the majority at FSOC, with Mick Mulvaney replacing Richard Cordray, and the council dropped an appeal that sought to maintain MetLIfe’s SIFI designation.

With Mulvaney at the helm of the CFPB, the agency has made a series of moves to ease oversight on high-interest lenders. Mulvaney has said that the agency will not go beyond its statutory mandate and that it will review its payday rule. The consumer-finance regulator dropped a four-year investigation into World Acceptance Corp. and a lawsuit against a group of payday lenders.

Also in the year so far, the Senate Banking Committee voted 24-1 to advance FDIC chair nominee Jelena McWilliams to a full vote before Congress where she is expected to win confirmation. McWilliams hasn’t committed to a plan of action for the FDIC, but has said that reducing regulations on community banks is a top goal.

The Senate Banking Committee also advanced Marvin Goodfriend, nominated to a Fed board seat, though he did not attract any Democratic support and faces shaky odds in a Senate vote after Rand Paul announced his opposition to the nomination. Goodfriend, if confirmed, would fill one of four open seats on the Fed board. The other three spots, including one as vice chair, remain without nominees. 

 

SUMMARY OF U.S. NEWS AND TRENDS 

  • On February 6, two top financial regulators said that Congress may need to grant them new powers in they are to protect consumers from fraud on cryptocurrency exchanges. The SEC and CFTC have broad authority over stock markets and investment product, but those powers don’t extend over currency markets.
     
  • On January 30, the House approved The Senior Safe Act, which provides liability protection for financial professionals who report cases of suspected elder abuse to regulators or other authorities. 
     
  • On January 30, a legislative effort to relax postcrisis money-fund rules hit a snag that makes it unlikely to move to the House floor without changes. The legislation, which aims to kill an SEC rule that forced certain money-fund shares to fluctuate in value, passed the House Financial Service Committee this month.

Federal Reserve

  • On February 8, Marvin Goodfriend’s nomination to the Fed board passed the Senate Banking Committee on party lines. Goodfriend, a Trump nominee, might not have enough support to win confirmation in the Senate after Senator Rand Paul said he would vote against the nomination.
  • On February 4, the Fed banned Wells Fargo from growing until it can convince authorities that it’s addressing shortcomings. The move caps Wells Fargo’s total assets, which could cost the bank $400 million in profit this year and handicap it in the long-term.

  • On January 23, the Senate voted 84-13 to confirm Jerome Powell as the next chairman of the Federal Reserve. Powell, who was appointed to the Fed board in 2012 by Barack Obama, was granted a four-year term with the vote. 

Consumer Financial Protection Bureau

  • On January 31, the constitutionality of the CFPB was held up in a D.C. Circuit Court of Appeals, though the diverse opinions from the circuit open the agency to constitutional review.

Commodity Futures Trading Commission (CFTC)

  • On February 1, the CFTC fined Deutsche Bank $70 million to punish attempted manipulation of interest-rate benchmarks. The agency recognized Deutsche Bank’s cooperation in the investigation. 

  • On January 29, the CFTC announced civil settlements with Deutsche Bank, UBS and HSBC related to commodities fraud and spoofing. The banks are set to pay $30 million, $15 million and $1.6 million, respectively.

Federal Deposit Insurance Corporation (FDIC)

  • On February 8, the Senate Banking Committee approved Jelena McWilliams to serve as the next chair of the FDIC. McWilliams was nominated to the position by President Trump in December.

  • On January 23, McWilliams vowed to review the regulators informal moratorium on issuing ILC licenses for non-bank deposit taking. The removal of an obstacle to the program would pave the way for fintech firms to enter the banking sector.

Financial Stability Oversight Council (FSOC)

  • On January 18, FSOC dropped its appeal of a ruling that rescinded MetLife’s SIFI designation. The decision comes after Trump appointees gained a majority on the council with Mick Mulvaney replacing Richard Cordray.

Enforcement Actions

  • On January 29, Federal prosecutors announced charges against eight traders for deceptive trading practices in the futures markets. The charges against the traders primarily reference activity before 2015, when both firms and regulators lacked sufficient controls to monitor for spoofing activity, as trading migrated from open pits to electronic platforms.

  • On January 18, HSBC agreed to pay $101.5 million to resolve fraud charges related to front-running practices at the bank. HSBC admitted to using confidential information in two instances for its own profit as part of the agreement, which must be approved by a judge. 

  • On January 26, BNP Paribas agreed to plead guilty to rigging foreign currency prices and pay a $90 million criminal fine. The bank will not be put on probation, given its efforts to improve oversight.

Federal Deposit Insurance Corporation (FDIC) 

  • On December 26, the Senate proposed bill to exempt thousands of banks from the Volcker rule restrictions on speculative trading saw a rise in support. Despite this positive reception, the Federal Deposit Insurance Corp. still has objections. The FDIC has advised against the bill, saying the exemption could allow new risks into the banking system. 

  • On December 19, the eight largest and most complex U.S. banks avoided a major rebuke on their latest “living will” bailout prevention plans. This was a reversal from April 2016, when the Federal Reserve and Federal Deposit Insurance Corp. shocked the firms by determining five of eight deficiencies.

The Federal Reserve

  • On December 13, the Fed voted to raise short-term interest rates for the third time this year, expressing optimism about the state of the U.S. economy. The central bank also signaled that it would stay on a similar course next year through its leadership transition. The Fed board voted 7-2 in favor of the rate hike.

  • On December 8, the Fed announced that it would begin publishing new reference rates in the second quarter of next year.

  • On December 7, the Fed proposed changes to the annual stress test process, offering to provide a list of hypothetical loan portfolios and then allow banks to see how those portfolios perform under the Fed's model before testing begins each year. The Fed also said it would be providing more detailed descriptions of its models, including certain equations and variables it uses. The central bank is soliciting public comment on those changes until January 22.

Office of the Comptroller of the Currency (OCC)

  • On December 12, a federal judge dismissed a lawsuit brought by New York’s banking regulator against the OCC proposal to grant fintech charters that would allow online lenders to do business on a national scale.  The judge said the OCC’s actions over the last seven months support the finding that the federal regulator has not determined whether it would issue the charters. A similar lawsuit from a nationwide organization of state bank supervisors is pending.

Consumer Financial Protection Bureau (CFPB)

  • On December 22, the CFPB announced first steps in undoing Obama-era regulations under its new Trump-appointed acting director, Mick Mulvaney. The CFPB will delay the rollout of its prepaid-card rule and is reconsidering aspects of a 2015 mortgage-data disclose rule. The prepaid rule, intended to limit consumers’ losses when prepaid debit cards are stolen or lost, was set to go into effect in April 2018.

  • On December 8, Attorneys General from across the country filed a brief to challenge President Donald Trump’s appointment of Mick Mulvaney as acting director of the CFPB. Seventeen states and Washington, D.C. filed the motion.

 

U.S. EVENTS

CONGRESSIONAL HEARINGS

SENATE BUDGET COMMITTEE HEARING ON THE WHITE HOUSE BUDGET
The Senate Budget Committee holds a hearing on President Donald Trump's budget request for fiscal 2019. OMB Director Mick Mulvaney will testify.
Tuesday, February 13, 2018, 10:00 AM
Washington, DC

HOUSE FINANCIAL SERVICES SUBCOMMITEE HEARING ON DATA SECURITY AND BREACH NOTIFICATION
The House Financial Services Financial Institutions and Consumer Credit Subcommittee holds a hearing on "Examining the Current Data Security And Breach Notification Regulatory Regime."
Wednesday, February 14, 2018, 10:00 AM
Washington, DC

HOUSE BUDGET COMMITTEE HEARING ON THE WHITE HOUSE BUDGET
The House Budget Committee holds a hearing on President Donald Trump's budget request for fiscal 2019, featuring OMB Director Mick Mulvaney.
Wednesday, February 14, 2018, 10:00 AM
Washington, DC

SENATE FINANCE COMMITTEE HEARING ON THE 2019 TREASURY BUDGET REQUEST AND TAX REFORM IMPLEMENTATION
The Senate Finance Committee will hold a hearing on the Trump administration's fiscal 2019 budget request for the Treasury Department and include discussion of the tax reform law's implementation.
Wednesday, February 14, 2018, 10:30 AM
Washington, DC

HOUSE FINANCIAL SERVICES COMITTEE HEARING ON DERIVATIVES
The Capital Markets, Securities and Investments Subcommittee holds a hearing: "Legislative Proposals Regarding Derivatives."
Wednesday, February 14, 2018, 2:30 PM
Washington, DC

SENATE FINANCE COMMITTEE HEARING ON THE 2019 IRS BUDGET REQUEST
The Senate Finance Committee will hold a hearing on the president's budget request for the IRS and its implementation efforts.
Wednesday, February 14, 2018, 2:30 PM
Washington, DC

SENATE AGRICULTURE COMMITTEE HEARING ON CFTC OVERSIGHT
The Senate Agriculture Committee holds a hearing on CFTC oversight, featuring CFTC Chairman Christopher Giancarlo.
Thursday, February 15, 2018, 9:30 AM
Washington, DC

GENERAL EVENTS, PRESS CONFERENCES AND SPEECHES

CFTC TECHNICAL ADVISORY COMMITTEE MEETING
The Commodity Futures Trading Commission's Technical Advisory Committee holds a public meeting to discuss the committee's efforts in 2018. Live webcast available here.
Wednesday, February 14, 2018, 10:00 AM
Washington, DC

 

MEDIA COVERAGE (January 18, 2018 - February 9, 2018)                                                                               

  1. The Wall Street Journal: Wells Fargo's Political Penalty; Janet Yellen offers a Fed parting gift to Elizabeth Warren.
  2. *The Washington Post: U.S. regulators say they don't have enough power over cryptocurrency exchanges; The SEC and CFTC lack the authority to protect investors from cryptocurrency trading fraud, officials say.
  3. *Reuters: CFPB scores too low on Equifax transparency
  4. *Bloomberg: Fed's Wells Fargo Punishment Sets Precedent for Harsher Era
  5. The Wall Street Journal: Deutsche Bank Fined for Attempting to Manipulate Interest-Rate Benchmarks; CFTC imposes $70 million penalty, the latest in a series of actions against major banks
  6. The Wall Street Journal: A Case Ripe for the Supreme Court; The D.C. Circuit tees up the CFPB for constitutional review.
  7. The New York Times: Kodak’s Dubious Cryptocurrency Gamble; The Shift
  8. Bloomberg: Signaling Crackdown, SEC Boss Emerges as Crypto Skeptic-in-Chief
  9. InvestmentNews: House approves legislation to help advisers combat senior exploitation
  10. The Wall Street Journal: House Money-Fund Bill Hits a Snag; Legislation is unlikely to move to floor without changes, Republican aides say
  11. The Wall Street Journal: Justice Department Charges Eight Traders With Deceptive Futures Market Trading; The Commodity Futures Trading Commission announced related civil charges against three banks and six individuals
  12. Reuters: U.S. CFTC to fine UBS, Deutsche Bank, HSBC for spoofing, manipulation: sources
  13. Reuters: BNP Paribas unit pleads guilty in U.S. to currency rigging, fined $90 mln
  14. The Washington Post: As Congress prepares to loosen bank regulations, it still refuses to address the cause of the two worst financial meltdowns in history
  15. Bloomberg: Volcker Rule Rollback Gains Steam With Help From a Top Bank Ally
  16. The Wall Street Journal: A Rogue Treasury Department Turns Toward the 1930s; The president shouldn’t allow an Obama appointee to guide housing finance policy toward disaster.
  17. The New York Times: Mick Mulvaney Calls for ‘Humility’ from Consumer Financial Protection Bureau
  18. The Washington Post: Senate confirms Powell for Fed chair, handing Trump's pick enormous influence over the economy ; Jerome H. Powell just got a 4-year term as one of the most powerful stewards of the global economy.
  19. The Wall Street Journal: Court Drops Government's Appeal of MetLife Case; Panel of judges signs off on Trump administration's decision last week to end appeal
  20. Bloomberg: Trump's FDIC Pick Plays It Safe on Fight Over Big Bank Leverage
  21. Reuters: Trump's pick to head FDIC vows to address non-bank licenses 'hold-up'
  22. The Washington Post: Why Democrats need to stand with working Americans vs. big banks
  23. The Wall Street Journal: AIG Returns to Expansion Mode
  24. The Wall Street Journal: The MetLife Saga's Mostly Happy Ending; The government drops its appeal but with an odd and unhelpful demand.
  25. The Wall Street Journal: HSBC to Pay $101.5 Million to Resolve Federal Fraud Charges; Bank admits to misusing confidential client information for its own profit, a practice known as front-running

  

For the full newsletter, please click here.