Trump vs. Biden: What’s at stake for banks

WASHINGTON — The November presidential and congressional elections will be key to the future of banking policy, and could be the make-or-break factor for partisan issues like pot banking and fine-tuning regulation to focus on racial equity.

President Trump’s four years in the White House have been characterized by deregulation, from rolling back Dodd-Frank Act rules to easing supervision for regional banks.

Much of what his administration was able to accomplish with bank regulation took place during the first two years of his presidency, when the GOP controlled both the House and Senate. In 2018, Congress passed and Trump signed a regulatory relief bill that loosened several post-crisis standards.

With control of the Senate up for grabs in November, it remains to be seen how Trump or Democrat Joe Biden would be able to influence regulatory policy with several landmark issues on the table. The House will likely remain under Democratic control.

Members of Congress have introduced bills in recent months that would open the door to the U.S. Postal Service offering banking services and compel the Federal Reserve to tackle inequality. Such legislation is currently a nonstarter, but would be on the table if power were to shift hands.

Regardless of who controls Congress, the president has the power to appoint officials to key positions — a power that has only recently been enhanced by a recent Supreme Court decision that allows the president to remove the director of the Consumer Financial Protection Bureau at will, and may also apply to the Federal Housing Finance Agency.

Those nominees will wield significant control not only over how the economy recovers from the pandemic-induced downturn, but also the role that banks play in facilitating that revival.

Here are the top issues for bankers to watch as the election approaches:

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New homes built by Pardee Construction LLC are seen in this aerial photograph taken over the Pacific Highlands Ranch master planned community in San Diego, California, U.S., on Monday, Aug. 31, 2020. U.S. homebuyers are favoring newly built properties at the highest rate in more than a decade. Photographer: Bing Guan/Bloomberg
Future of U.S. housing finance
The election could determine the fate of the Federal Housing Finance Agency's current efforts to free Fannie Mae and Freddie Mac from government conservatorship.

Should Trump win reelection, it’s likely that the administration’s plans will continue moving forward. But the administrative process championed by FHFA Director Mark Calabria could be dashed if Biden is elected president. A new Democratic administration could attempt to replace Calabria pending the outcome of a looming Supreme Court case. A Biden victory coupled with the Democrats' seizing control of the Senate could also revive a legislative effort to reform the government-sponsored enterprises, overtaking the FHFA's process.

The FHFA under Calabria has already taken several steps to shore up Fannie and Freddie’s capital position, proposing a post-conservatorship capital framework and striking an agreement with the Treasury Department to raise the GSEs' retained earnings.

But a Biden White House may have different ideas for the future of the GSEs. And several prominent Democrats, including Sen. Sherrod Brown of Ohio, have advocated for spinning Fannie and Freddie into public utilities — an idea that could gain more traction if Democrats were to gain control of the Senate.
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Small businesses line Bagley Avenue in the Mexicantown neighborhood of Southwest Detroit, Michigan, U.S., on Tuesday, Nov. 18, 2014. An influx of 16,000 immigrant Latinos and a commercial corridor where 17 taquerias opened in five years have spared Southwest Detroit from the city’s downward spiral. Photographer: Bryan Mitchell/Bloomberg
CRA reform
If Trump is reelected, the regulatory agencies could continue taking separate paths on reforming the Community Reinvestment Act. That could mean the OCC continues implementing its CRA rule even though no other regulatory agency has signed on to the plan.

But a White House win for Biden, who could get the chance to select a new comptroller of the currency, would potentially spell the end of the OCC's CRA rule finalized under former Comptroller Joseph Otting in May.

The Trump administration’s effort to reform the 1977 anti-redlining law, which has not been significantly updated since the 1990s, has been controversial at best. Leading consumer groups have panned the effort as an attempt to “gut” the law’s obligations for banks, undercutting efforts to help neighborhoods that need investment the most.

While the OCC and Federal Deposit Insurance Corp. issued a joint proposal without the Federal Reserve in December 2019, ultimately the OCC finalized the rule on its own in May. (The FDIC has cited the pandemic as the primary reason it has yet to finalize its portion of the rule.)

The Fed is expected soon to unveil its own competing CRA proposal, and there are signs Biden could appoint regulators who would take reform of the law in a different direction. One tenet of the former vice president’s housing policy platform is a call to “strengthen and expand the Community Reinvestment Act to ensure that our nation’s bank and non-bank financial services institutions are serving all communities.”
CFPB Director Kathy Kraninger testifies before the Senate Banking Committee
CFPB leadership
The outcome of the November election could decide who runs the Consumer Financial Protection Bureau.

The CFPB was at the center of a Supreme Court decision in June that struck down the agency's leadership structure established in the Dodd-Frank Act. That law had protected CFPB directors from being fired by the president at will, but the justices ruled that the "for cause" provision was unconstitutional.

Although Republicans have fought to remove that provision, Biden would be the first president authorized to remove a CFPB chief at his discretion if he wins the election. If Trump wins a second term, CFPB Director Kathy Kraninger would continue to lead the agency, focusing on a deregulatory agenda and overhauling longstanding consumer protection laws.

If Biden wins, Kraninger is widely expected to submit her resignation. A career civil servant, Kraninger announced last year that she believed the CFPB's director could be fired at will by the president.

A Democratic-appointed CFPB director would take the agency in a new direction, including unwinding several of Kraninger's deregulatory actions.

Meanwhile, a separate Supreme Court decision is still pending over whether a president can fire the head of the Federal Housing Finance Agency.
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Jars of cannabis sit on a counter at the Harborside dispensary in Oakland, California, U.S., on Monday, March 23, 2020. California's shelter-in-place order vastly expands mandates put in place across the San Francisco Bay Area. It allows people in the most populous U.S. state to leave their homes for needed items like groceries and medicine, while otherwise requiring that they limit their social interactions. Photographer: David Paul Morris/Bloomberg
Pot banking
The banking industry has spent years lobbying Congress to remove barriers that have inhibited their ability to offer services to cannabis-related businesses in states that have legalized the substance. But if Democrats win control of the Senate in November, banks could be closer to removing the regulatory restrictions on pot banking.

The Democratic-controlled House in 2019 passed the Secure and Fair Enforcement Banking Act, or SAFE Banking Act, which would bar federal regulators from penalizing financial institutions that offer services to cannabis businesses that are compliant by state law. But the Republican-controlled Senate hasn’t taken any action on the legislation and Senate Banking Committee Chairman Mike Crapo, R-Idaho, has raised objections to the legislation.

The legislation was supported by nearly all of the Democrats in the House, and it is widely expected to meet the 60-vote threshold to pass the Senate if Democrats win control of the chamber, since several Republicans have signed on as co-sponsors.
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Senator Kamala Harris, Democratic vice presidential nominee, speaks during the Democratic National Convention at the Chase Center in Wilmington, Delaware, U.S., on Wednesday, Aug. 19, 2020. Harris's prime-time speech is the first glimpse of how Joe Biden's campaign plans to deploy a history-making vice presidential nominee for a campaign that has largely been grounded by the coronavirus. Photographer: Stefani Reynolds/Bloomberg
How bank regulators respond to racial justice movement
The protests across the U.S. early this summer responding to police killings of Black citizens sparked a number of Democratic legislative proposals that would force the Federal Reserve to address racial equity issues in the economy and its own ranks.

Those bills could gain traction and a focus on racial justice could intensify if Democrats gain control of the Senate or the White House.

In August, House Financial Services Chair Maxine Waters, D-Calif., along with Sens. Elizabeth Warren, D-Mass., and Kirsten Gillibrand, D-N.Y., introduced a bill that would require the Fed to promote racial and income equality when setting monetary policy and conducting bank supervision.

Sen. Kamala Harris, D-Calif., Biden's running mate, has also introduced legislation along with Rep. Joyce Beatty, D-Ohio, that would require at least one gender-diverse candidate and one racially or ethnically diverse candidate be interviewed to fill an open position heading a Fed regional bank.

Currently, the Fed’s dual mandate handed down from Congress is to promote maximum employment and stable prices. But if Democrats win big in November, the proposal to update that mandate to include a focus on inequality wouldn’t be as much of a long shot as it is now.

Biden has also called for revising the Federal Reserve Act to give the Fed a greater role in tackling economic inequality, saying in a July speech that “for generations, Americans who are Black, brown, Native American, immigrant, haven’t always been fully included in our democracy or our economy.”
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Steven Mnuchin, U.S. Treasury secretary, speaks during a House Select Subcommittee on the Coronavirus Crisis hearing in Washington, D.C., U.S., on Tuesday, Sept. 1, 2020. Senate Republicans are pulling together a narrow $500 billion Covid-19 relief package, aiming for a vote next week, in an effort to prod Democrats back to the negotiating table. Photographer: Graeme Jennings/Washington Examiner/Bloomberg
FSOC's approach to nonbank regulation
The Financial Stability Oversight Council, which is chaired by Treasury Secretary Steven Mnuchin, has changed its approach under the Trump administration, emphasizing a preference for activities-based regulation of nonbanks rather than designating "systemically important financial institutions" for banklike supervision.

The council has yet to designate any specific activities as risky, although it has initiated a review of the secondary mortgage market as part of the council's activities-based approach. The FSOC identified nonbank mortgage origination as a new potential threat in December, which could include a focus on Fannie Mae and Freddie Mac.

If Trump is reelected, the FSOC will likely continue to focus on the role of nonbanks in the mortgage market, and could even move to designate some of Fannie and Freddie’s activities as systemically important.

Democrats have also endorsed the idea of taking a closer look at the growth of nonbanks in the mortgage market. But many, including House Financial Services Committee Chair Maxine Waters, D-Calif., have also criticized the FSOC’s new activities-based approach to designations.

It’s unclear whether Democrats would try to reverse the new activities-based approach, but they have made clear their preference for the FSOC to play a larger role in supervising the financial system, which could also include moving forward with designating activities using the Trump-era process.
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Randal Quarles, vice chairman of supervision at the U.S. Federal Reserve, speaks during the American Bar Association Banking Law Committee annual meeting in Washington, D.C., U.S., on Friday, Jan. 17, 2020. The Federal Reserve is shifting its focus from writing and revising rules aimed at limiting risk in the banking system to a concentration on how lenders interpret the restrictions, Quarles said. Photographer: Zach Gibson/Bloomberg
How far the Fed goes to revamp supervision regime
Fed Vice Chairman for Supervision Randal Quarles kicked off 2020 with a speech detailing how he would update the central bank’s supervisory regime, a proposal that has largely faded into the background with the economic fallout of COVID-19.

However, should Trump win a second term, the Fed might look to move down the path Quarles initially laid out, which envisioned aligning its supervisory work with the bank tailoring rules the Fed finalized under Trump.

While banks welcomed the Quarles proposal, consumer advocates and some Democrats were appalled and said the actions he suggested would have the net effect of weakening the Fed’s supervision of the largest U.S. banks.

Although the Fed is an independent agency, Quarles’s term expires in 2021, meaning that a President Biden would be able to replace him with someone of his own choosing.

Trump, meanwhile, has nominated the economist Judy Shelton and Christopher Waller, the director of research at the Federal Reserve Bank of St. Louis, to serve on the Fed board. Although Waller appears to have enough support in the Senate to be confirmed to the seat, it remains to be seen if Shelton would be able to get confirmed.

If Biden wins the election and Trump isn’t able to get his nominees approved in a lame-duck period, a Biden administration could wield even more power to block Quarles’s planned supervision revamp.
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Senator Sherrod Brown, a Democrat from Ohio, listens during a news conference at the U.S. Capitol in Washington, D.C., U.S., on Tuesday, July 28, 2020. The two parties in Congress staked out battle lines over liability protections for employers and jobless benefits ahead of another round of negotiations Tuesday between Democratic leaders and President Donald Trump’s representatives. Photographer: Stefani Reynolds/Bloomberg
Anti-money-laundering reform
A blue wave in the Senate would likely be good news for banks looking to ease anti-money-laundering reporting burdens. The Democratic-led House passed industry-backed legislation in 2019 that would require companies to report their true owners at the point of incorporation to the Financial Crimes Enforcement Network, removing the burden on banks to report their customers’ beneficial owners.

The legislation likely has bipartisan support in the Senate, as Senate Banking Committee Chairman Mike Crapo, R-Idaho, and Sherrod Brown, the top Democrat on the committee, sponsored an amendment to a defense spending bill that would require companies to report beneficial ownership information to Fincen. But it’s unclear whether the House and Senate will agree to the amendment when they negotiate the final National Defense Authorization Act.

If Congress doesn’t pass beneficial ownership legislation through the Defense act, its passage likely hinges on Democrats' winning control of the Senate in the November elections. Crapo is expected to take over as chairman of the Senate Finance Committee, which would give Sen. Pat Toomey, R-Pa., the gavel at the Senate Banking Committee if Republicans retain control of the Senate. Toomey has indicated that he does not support a requirement for companies to report their beneficial owners to Fincen.
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A pedestrian wearing a protective mask walks out of a Wells Fargo & Co. bank branch in New York, U.S., on Thursday, July 9, 2020. Wells Fargo is scheduled to release earnings figures on July 14. Photographer: Peter Foley/Bloomberg
Limits on bank shareholder payouts
In the publication of its annual stress-test results in June, the Fed said it would require big banks to suspend share repurchases during the third quarter and limit dividend distributions to the levels that banks had paid out in the second quarter.

But the decision to allow banks to pay dividends at all proved controversial. Fed Gov. Lael Brainard voted against the move, saying in a statement that she did “not support giving the green light for large banks to deplete capital.” Some analysts have calculated that only two banks, Wells Fargo and Capital One, would have to make cuts to their dividends based on the Fed's new mandate.

Warren and Sen. Brian Schatz, D-Hawaii, asked the Fed in July to suspend bank dividend payments altogether due to the ongoing coronavirus crisis and called the board’s vote to allow banks to continue payouts — though at a limited level — “a grave error.”

Although there is little elected officials could do to compel banks to halt dividend payments, the pressure to do so could mount if Democrats were to sweep the November election.

Given that the Fed’s stress-test results in June showed that several banks breached the 4.5% minimum common equity Tier 1 capital requirement under the most severe scenarios, capital levels will be closely watched as economic recovery efforts move forward. If data emerges to indicate that bank capital has become severely depleted, the attention paid to dividend payments will likely increase and could influence the Fed’s thinking on the issue.
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