WASHINGTON -- The banking industry will be fighting a compressed legislative schedule and heightened focus on the 2016 elections, but the effort to move regulatory relief and other key provisions in Congress this coming year is expected to continue in earnest.
The past year has proven to be a mixed bag for financial services officials, who won a host of smaller, bipartisan measures earlier in December as part of the federal transportation bill and saw the passage of a long-sought cybersecurity bill in the budget deal.
But lawmakers were unable to move more sweeping reforms, including a bill by Sen. Richard Shelby, R-Ala., chairman of the Banking Committee, that would offer additional relief to small and regional banks, as well as make changes to the Federal Reserve, the Financial Stability Oversight Council and the insurance industry. That leaves plenty remaining on the agenda for the coming year, though lawmakers will have to contend with the Democratic and Republican conventions this summer and other presidential fanfare as the race for the White House heats up.
Below is a roundup of what to watch in 2016, including a few new fights on the horizon.
Dodd-Frank and Regulatory Relief
Despite a few small gains in recent years, regulatory relief will remain a top priority for banks in the coming year. Several presidential candidates have warned about the impact of the Dodd-Frank Act on small institutions, and lawmakers on both sides of the aisle continue to express interest in the issue.
"I'm optimistic that the bulk of Shelby's bill, particularly Title I, which deals with community banks, will be enacted by Congress before they adjourn for the elections this fall," said Camden Fine, president and chief executive of the Independent Community Bankers of America.
There might not have been enough time to move the Alabama Republican's legislation in the lead-up to the budget deal, but Fine argues that the conditions in 2016 are actually more favorable for the cause.
"It's a bipartisan issue -- both Democrats and Republicans gain politically by assisting small, local community banks with regulatory relief," he said. "That plays very well on Main Street and in an election year -- what politician doesn't want to go back to their home state or district and say, I helped you with regulatory burden?"
To be sure, lawmakers face a tough road ahead. Progressives remain deeply skeptical about many proposed changes to the Dodd-Frank Act, particularly those that would benefit larger firms as well as community banks. Their public efforts to keep financial industry provisions out of December's spending package were largely successful, even as lawmakers agreed to a handful of less controversial, bipartisan measures as part of the highway bill.
"The budget deal and transportation bill showed that a bipartisan approach can work to provide meaningful regulatory relief for community banks and credit unions, without rolling back Wall Street reform," Sen. Sherrod Brown, D-Ohio, ranking member on the banking panel and a vocal critic of Shelby's bill, said in a statement. "We should take a similar approach to strengthen consumer protections for renters, servicemembers and others."
The tight calendar means that Congress will have to act fast to move any bill through regular order. Adding to that pressure, the political climate is bound to grow more partisan as the months pass, with neither party wanting to hand the other a victory.
James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association, said that after the disappointing effort to advance Shelby's bill this year, the industry will be hedging its bets -- advocating for broader packages, as well as piecemeal bills.
"We have seen Congress has an inability to do broad regulatory relief legislation, so we will take our opportunities to do comprehensive and singular efforts," he said.
Bankers will be pushing hard for additional changes to the Consumer Financial Protection Bureau's "qualified mortgage" rule, particularly the ability to qualify for safe harbor on loans held in portfolio, and relief from requirements under the Basel III accord, among other priorities.
The fight over Dodd-Frank's $50 billion threshold for heightened capital and liquidity rules is also expected to continue. Shelby's bill included a provision that would raise that level to $500 billion, while giving regulators the discretion to subject risky banks under that threshold to tougher regulations.
Moderates on the Banking Committee were reportedly in talks for months leading up to the budget fight over the $50 billion line and other key aspects of the Shelby bill, and while they have not yet struck a deal, there's optimism those negotiations will continue.
"We know a bipartisan framework for an agreement can come together – it's been out there for months," Sen. Mark Warner, D-Va., said in a statement. "I have great respect for Chairman Shelby and hope he will renew conversations with our bipartisan group of senators in the new year to achieve meaningful regulatory reform."
For his part, Shelby "intends to pick up where the committee left off and remains focused on examining the damage done by Dodd-Frank," a committee spokeswoman said in a statement.
House lawmakers, meanwhile, are also expected to renew their focus on the financial reform law.
Rep. Jeb Hensarling, R-Texas, chairman of the Financial Services Committee, announced in December that he will produce a "visionary piece of legislation" that will include rolling back "huge swaths of Dodd-Frank" as part of Speaker Paul Ryan's plan to shape the Republican message on policy.
At the same time, House members are expected to pursue a host of smaller measures as well.
That includes a competing provision to change the $50 billion threshold. The plan, by Rep. Blaine Luetkemeyer, R-Mo., would remove the line altogether, instituting qualitative measures of systemic risk instead of using a size cutoff.
"There's a little bit of difference of opinion over on the Senate side, but I think there's bipartisan agreement that the current framework is not a fair and accurate reflection of whether is a bank is a SIFI or not," Rep. Randy Neugebauer, R-Texas, a senior lawmaker on the banking panel, said in an interview, adding that he's supportive of the Luetkemeyer plan.
But House Democrats remain watchful of any changes.
Asked about her goals for 2016 on the committee, Rep. Carolyn Maloney of New York, said that the biggest is to stop anything damaging from being passed into law.
"We don't set the agenda, so it's to do no harm," she said in an interview.
Rep. Maxine Waters, D-Calif., ranking member on the banking panel, echoed concerns from other progressives about the scope of any regulatory relief provisions considered by the committee.
"Every time we try and come up with a way of helping community banks, Mr. Hensarling and other Republicans say, well we can do it if we can do the same thing for the big banks," she said in an interview. "We have not been able to get them to separate themselves from the biggest banks in the country and wanting to use whatever reforms or protections we come up with for the community banks for those big banks – so we're going to keep trying."
Changes to CFPB
The consumer agency, in particular, is expected to remain a flashpoint as debates over Dodd-Frank continue. Republican presidential candidates have been critical of the agency and GOP lawmakers have long sought to change the agency's structure to a commission and subject it to the congressional spending process. While it remains extremely likely that the current White House would veto either measure, especially one changing the agency's funding mechanism, the issue could get teed up for next term if a Republican presidential candidate wins the election.
Hensarling and Republican colleagues "hate Dodd-Frank, they hate the Consumer Financial Protection Bureau, which is one of the centerpieces of Dodd-Frank," Waters said. "And whether we're talking about that or we're talking about [the Volcker Rule] or we're talking about other issues in Dodd-Frank, he's been clear. It's not something he's tried to sneak in – he's been very open about that."
Neugebauer, who will be pushing his own bill to remove the CFPB's director in favor of a commission, said he'll also be focused on the bureau's forthcoming payday loans rule and efforts to limit mandatory arbitration clauses in consumer contracts.
Additionally, lawmakers are also expected to continue the push for a bill passed by the House this fall that would force the agency to throw out its 2013 guidance on indirect auto lending.
Federal Reserve and FSOC Reforms
The Fed has come under increasing scrutiny over the past year for everything from its handling of interest rates -- raised in December for the first time in nine years -- to the scope of banking industry influence on its actions.
Senate Republicans have already scheduled Kentucky Republican Rand Paul's "audit the Fed" bill for January, a move that will likely spark additional discussion around the agency's board structure and its transparency. Shelby's bill also contains a number of Fed provisions on the handling of monetary and regulatory policy that could gain new attention as part of that debate.
Lawmakers are also expected to renew their call for a more transparent FSOC, particularly when it comes to the designation of certain non-banks as "systemically important financial institutions." Members on both sides of the aisle have raised concerns that institutions are not given enough of a chance to de-risk their business lines before being designated. They argue that the point of the designation process is to ultimately make the system safer, which de-risking would accomplish.
"There ought to be a more thoughtful, bipartisan way to get around this whole SIFI designation issue - we've had some bills recently to do that -- Mr. Delaney's bill, that would have allowed for de-risking, which frankly should be what we're about. We should be incentivizing institutions to de-risk and become less complicated and less risky," Rep. John Carney, D-Del., said in an interview, referring to a bill by Reps. Dennis Ross, R-Fla., and John Delaney, D-Md., that would allow a company to remove certain risks from its business lines before it is designated as a SIFI.
Others worry that there's no clear roadmap for how a firm can successfully shed the SIFI label once it's been applied, creating what some have termed a "Hotel California" scenario.
General Electric sold off its lending and leasing business, GE Capital, this past year, providing the first case study for how de-designation might work.
"We're going to be able to test SIFI de-designation in action this year," said Justin Schardin, associate director of the financial regulatory reform initiative at the Bipartisan Policy Center. "We're going to need to see whether there's a robust system that makes sense as to whether companies that have been designated as SIFIs can de-risk and get out of that so-called 'Hotel California.' "
Anti-Money-Laundering and Cybersecurity
Though Congress finally passed a long-standing bill that will make the sharing of cyber threat information easier between the private sector and government as part of the budget package, there's still plenty to do when it comes to monitoring potential threats to the industry. That includes both the potential for abuse of the financial system for illegal purposes and attacks on individual institutions and the system more broadly.
Lawmakers are expected to review long-standing anti-money-laundering rules as part of that effort.
"The existing AML regime has not been seriously looked at in over a decade by Congress," said Aaron Klein, director of the financial regulatory reform initiative at BPC. "The tools necessary to effectively fight ISIS are very different than the regime put in place in the 1970s to go after the mafia and 1980s to go after organized drug dealers."
The attack last month in San Bernardino, Calif., has thrust online lenders back in the spotlight, after reports that one of the shooters had recently taken out a loan from Prosper Marketplace, although there's not yet any evidence the firm should have been able to detect the plot at that time.
Hensarling has said the financial services panel was already in the process of looking at the banking industry's links to terrorist financing and that he expects to unveil legislation soon.
"Clearly the financing linked to terrorism is a critical one. It's part of the critical fuel line of radical Islamic jihadism," he told reporters in December. "Sooner or later, the funds that are used in these terrorist acts, by and large, enter the financial system. And we are looking at the points where they enter and, again, we will have a legislative response early in the new year."
Waters said that she is also hoping to address the issue, after reintroducing her bill to strengthen anti-money laundering rules several weeks ago.
"I will work with the opposite side of the aisle on terrorism funding, but since I've at least shown some leadership in one way they're funding money laundering, I expect to be a significant part of that and have some of what we have learned be part of any bill that we come up with," she said.
ICBA's Fine agreed that there will be greater attention on some of these issues as Congress and regulators grapple more broadly with how to supervise new entrants in the financial industry.
"I think you're going to see a number of bills dropped dealing with online lending, offshore companies and so forth, where they're not subject to the kind of regulation that commercial banks are subject to," he said. "I think there will be a lot of attention paid to the nontraditional bank lenders and the nontraditional financial service providers to try to plug the gaps in our cyber security infrastructure."
Housing and the GSEs
While few predict that comprehensive mortgage finance reform is in the offing for 2016, there's likely to be continued discussion around what to do with Fannie Mae and Freddie Mac. The budget deal contained a provision co-authored by Sen. Bob Corker, R-Tenn., that would prohibit the Treasury Department from selling its shares of the government-sponsored enterprises until 2018, putting the onus back on Congress to come up with a legislative solution. That effort could help spur further talks about the future of the housing giants, which have been in conservatorship since 2008.
The provision "has reignited in a very significant way people's desire to address this issue," Corker told American Banker in December. "I understand what the dynamics are going to be in 2016 — I understand it's a presidential year, I understand the calendar is short. But my guess is, because of what has happened, people will be working on a foundational opportunity for something really big after the elections, if not before, and the incremental pieces you're talking about to me are a real possibility this next year."
Over in the House, Carney said that he's also going to continue his work with Delaney and Rep. Jim Himes, D-Conn., on their bill to establish a mortgage insurance program through Ginnie Mae.
"We're looking at maybe a way to do something other than the full bill that would move the ball down the field a little bit on how to provide a government guarantee for mortgage-backed securities with private capital in a first-loss position," he said, noting that the lawmakers are looking into possible pilot programs based on the legislation.
White House Nominations
Senate lawmakers are also continuing to battle over a stack of White House nominations to positions at the Treasury Department, the Federal Deposit Insurance Corp., the Fed and several other agencies that have yet to be considered by the Banking Committee.
It's possible Shelby could be using the nominations as another bargaining chip in the negotiations over his regulatory reform bill, and he's indicated he won't consider the nominees until President Obama names a candidate to be the vice chair of supervision at the Fed, a new position created under Dodd-Frank more than five years ago.
Democrats on the banking panel wrote a letter over the summer pressing Shelby to take up the White House nominees, but so far the chairman hasn't budged. Brown, the ranking member on the panel, took to the Senate floor in December, highlighting again the lack of movement on the names.
"The Banking Committee has failed for an entire year to vote on any of the President's nominees. It is well past time to fulfill this basic duty," Brown said in his statement.