Plenty of smoke, but how much fire? Banking’s 2019 legislative agenda

WASHINGTON — After a banner year that included the passage of a significant regulatory relief package easing portions of the Dodd-Frank Act, the banking industry is now likely facing a period of legislative gridlock in 2019.

Although Republicans maintained control of the Senate in the November midterm elections, Democrats won the House, setting the stage for political clashes ahead.

“Broadly … I don’t think this is going to be a year marked by legislative agreement," said Ian Katz, a director at Capital Alpha Partners. “I think it’s going to be a year marked by the differences between the two parties.”

Rep. Maxine Waters, D-Calif., the current ranking member of the House Financial Services Committee who will now chair the panel, strongly opposed the reg relief legislation, and she has sparred with Republicans over bills that help Wall Street and limit consumer protection. On the Senate side, Banking Committee Chairman Mike Crapo, R-Idaho, is expected to continue to hold the gavel.

What will likely result is heated rhetoric from Democrats in the House and negative headlines for the firms in their crosshairs. That may include companies like Equifax and Wells Fargo that have already been under a political microscope. Additional investigations by House Democrats are expected to focus on Deutsche Bank and Citigroup and their ties to the Trump family.

“I am committed to strong oversight and following the Trump money trail, starting with Deutsche Bank and suspicious activity reports (SARs) filed with the Financial Crimes Enforcement Network, or FinCEN,” Waters said in a memo to her caucus after the November midterm elections.

Republicans, meanwhile, are expected to push back and argue that banks have been hampered by burdensome regulations and need additional relief to better serve their customers.

Lawmakers also face a smaller window for legislation with the looming 2020 elections. Several outspoken members of the Senate Banking Committee, including Sens. Sherrod Brown, D-Ohio, the panel's ranking member, and Elizabeth Warren, D-Mass., are said to be considering White House bids, which could also limit their focus on banking issues.

“Going into a presidential election year, the window for advancing legislation has historically been narrow,” said James Ballentine, executive vice president for political affairs and congressional relations at the American Bankers Association. “We are hopeful that the banking committees will be able to fully debate and advance issues this year.”

Still, despite these challenges, the banking debate on the Hill is unlikely to grind to a halt, and there remain several core areas of focus that will be front and center in the term to come.

Below is a look at some of the top financial issues that are likely to be on the agenda.

Money laundering

Mark Warner
Senator Mark Warner, a Democrat from Virginia and ranking member of the Senate Intelligence Committee, speaks during a hearing on worldwide threats in Washington, D.C., U.S., on Feb. 13, 2018. From missiles to cyberattacks, the annual intelligence assessment of global threats paints a world where China and Russia seek to upend U.S. influence as allies uncertain of American commitment may turn away from Washington. Photographer: Zach Gibson/Bloomberg
For years, the banking industry and members of both parties have recognized the need to reform anti-money-laundering regulations, and there are signs of potential bipartisan movement in the Senate to fix those rules.

Senate Banking Committee members Thom Tillis, R-N.C., Tom Cotton, R-Ark., Mark Warner, D-Va., and Doug Jones, D-Ala., are currently negotiating changes to the Bank Secrecy Act, according to Senate aides familiar with the discussions.

The debate so far has partly centered around whether the dollar thresholds for filing currency transaction reports and suspicious activity reports should increase, and by how much.

But there is still some disagreement among Republicans and Democrats about whether there should be a requirement for companies to disclose their beneficial owners at the time of incorporation, a policy that is supported by the banking industry but concerns companies worried about burdens during the incorporation process.

Warner said in an email to American Banker that he is “working on a bipartisan basis to bring reforms to our anti-money laundering system and require beneficial ownership disclosure.”

Data security

A monitor displays Equifax signage on the floor of the New York Stock Exchange.
A monitor displays Equifax Inc. signage on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, Sept. 8, 2017. The dollar fell to the weakest in more than two years, while stocks were mixed as natural disasters damped expectations for another U.S. rate increase this year. Photographer: Michael Nagle/Bloomberg
The security of consumer information has become an increasingly hot topic in Congress, following a series of data breaches at retailers and financial companies, including the massive Equifax hack in 2017, along with subsequent revelations about Facebook's unauthorized sharing of user data.

What followed were hearings in multiple committees, including with former Equifax CEO Richard Smith, and several legislative proposals. For example, Warner and Warren have introduced a bill that would impose mandatory penalties on firms that breach customers’ data, but the mandatory fines would likely fail to get Republican support.

Another bill, led by Rep. Blaine Luetkemeyer, R-Mo., would set a federal data breach notification standard. But that legislation has faced backlash from consumer groups concerned that it would preempt state laws that already have stricter consumer protections. It's so far unclear whether either of these provisions will gain traction in the coming term or whether policymakers will have to go back to the drawing board.

Warner said data breach legislation will still be a priority in the next Congress.

“I continue to be very concerned that well over a year after the Equifax data breach, Congress still has not updated data security rules for credit bureaus and established penalties for failing to secure our personal data,” he said in an email.

The issue will also remain a crucial one for the banking industry, which is eager to push Congress to make changes to current law now to avoid simply legislating in response to a crisis.

“What we don’t want to happen is for some major breach to occur that launches members into saying we should have done something about that,” said James Ballentine, executive vice president of congressional relations and political affairs for the American Bankers Association. “The best time to enact legislation is when it is not in reaction. Congress has been working on this issue for several years and the time is right to advance a comprehensive data breach measure.”

GSE reform

Fannie Mae building
A Fannie Mae logo is pictured outside their headquarters in Washington, DC, on Wednesday, December 29, 2004. Fannie Mae, the biggest provider of money for the U.S. mortgage industry, will sell as much as $4 billion of preferred stock after its regulator said it broke accounting rules and is ``significantly undercapitalized.'' Photographer: Jay Mallin / Bloomberg News
For years, Congress has struggled to come up with a solution to the current housing finance system, with mortgage giants Fannie Mae and Freddie Mac under government conservatorship for a decade and counting.

But the issue will likely come up in 2019 following the Trump administration's announcement that it would nominate Mark Calabria, chief economist for Vice President Mike Pence and a former Republican Senate Banking Committee staffer, to replace Federal Housing Finance Director Mel Watt. Calabria has long supported shrinking the footprint of the government-sponsored enterprises.

And while it's very possible that the White House could pursue an administrative solution to ending the decade-long conservatorship of the government-sponsored enterprises, the process is likely to engender debate in Congress as well. Treasury Secretary Steven Mnuchin has continued to say publicly that he supports an effort with "bipartisan legislative support."

There was also a last ditch effort in the House this fall by outgoing House Financial Services Committee Chairman Jeb Hensarling, R-Texas, and Reps. John Delaney, D-Md., and Jim Himes, D-Conn., to introduce a bill to repeal the GSEs’ charters and transfer some of their responsibilities to Ginnie Mae. But it is not clear whether the proposal has enough support to move through the full House or Senate.

Democrats have historically pushed to ensure that affordable housing issues remain front and center in any debate over Fannie Mae and Freddie Mac, a position that is unlikely to change as debate on this issue heats up. Waters has indicated that any housing finance reforms she would endorse would need to support affordable housing goals. In the letter to members of her caucus, she highlighted a separate initiative she pushed in the previous Congress that she said stakeholders supported because it “would enhance our nation’s commitment to affordable, accessibly housing.”

Pot banking

A marijuana leaf is displayed at a grow facility in Winnipeg, Canada.
Bankers have long been looking for regulatory clarity on whether they can serve cannabis companies in states that have legalized the substance for medicinal or recreational purposes, given the ongoing federal ban on marijuana.

Several bills have been introduced that would enable banks to skirt the federal ban and provide services to those businesses without facing repercussions from regulators. But despite growing bipartisan support, those measures haven’t gained traction in the House or Senate under Republican leadership this Congress.

More recently, Sen. Cory Gardner, R-Colo., tried to attach an amendment to a criminal justice reform bill that would include a bill co-sponsored by Sen. Elizabeth Warren, D-Mass., to exempt businesses from the federal ban on marijuana in states where it is legal. That amendment failed, but could signal cannabis banking reforms in the future.

“That is I think an opportunity for that issue to ripen, the more people have to think about it and are forced to think about it,” the former senior Senate staffer said. “It sometimes takes a while … for the Hill to kind of get comfortable, but I think they made a lot of progress by trying to push it on the sentencing reform bill.”

Waters told The Wall Street Journal that the issue will inevitably come up in the committee. At the same time, the banking industry has been supportive of a proposal by Rep. Ed Perlmutter, D-Colo., and Sen. Jeff Merkley, D-Ore., which would prohibit federal regulators from restricting deposit insurance for legitimate marijuana businesses, known as the Secure and Fair Enforcement Banking Act.

“I think growing concern on the issue of cannabis banking will spark congressional hearings. … Members on both sides of the aisle see it as a growing problem,” Ballentine said.

JOBS Act 3.0

Rep. Maxine Waters, D-Calif.
Representative Maxine Waters, a Democrat from California and ranking member of the House Financial Services Committee, questions witnesses during a hearing in Washington, D.C., U.S., on Wednesday, Oct. 25, 2017. The hearing was titled Examining the Equifax Data Breach. Equifax Inc., already reeling from American probes into the loss of data on 145.5 million customers in a computer hack, will face an investigation in the U.K., where 694,000 consumers had information stolen. Photographer: Andrew Harrer/Bloomberg
One bill that passed the House almost unanimously this term is a capital formation bill, characterized as a third iteration of the Jumpstart Our Business Startups Act, or the JOBS Act 3.0.

The bill was supported by Waters and includes some banking reforms, setting a two-year schedule for large banks to submit resolution plans known as "living wills," and requiring the Federal Reserve and the Federal Deposit Insurance Corp. to provide feedback within six months after a living will submission. It also includes a provision hailed by credit unions to set a two-year delay for the National Credit Union Administration’s risk-based capital rule.

It passed the House with more than 400 votes, but has yet to be considered on the Senate floor or by the Senate Banking Committee, despite statements by Hensarling that Senate Majority Leader Mitch McConnell promised a floor vote on the bill.

But despite its popularity in the House, the measure may still go through some additional changes, if it is approved at all.

"If it passes, it will probably be watered down even more than it already has,” said Katz.
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