Election 2020: Is nightmare scenario closer to reality for banks?

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WASHINGTON — The rise of Sen. Bernie Sanders to front-runner status in the race for the Democratic presidential nomination is increasingly causing alarm among industry insiders, but there are widely differing opinions over whether the Vermont senator poses a direct threat to banks.

Observers say a Sanders presidency could lead to a reversal of Trump regulatory relief initiatives, turnover at the top of the regulatory agencies, and a newfound focus on both enforcement actions and proposals that Sanders has supported in Congress to overhaul the banking industry's structure.

Jeffrey Naimon, a partner at Buckley LLP who defends financial services companies in enforcement matters, said that his clients are starting to consider the impact of a Sanders presidency.

“We are starting to see both banks and other financial services companies get interested because Sen. Sanders would represent a significant policy pivot, and obviously, federal policy has a great effect on the industry," Naimon said. "They are starting to consider what the possible ramifications might be, what initiatives they might take, and the kind of things they may not do.”

Sen. Bernie Sanders has long been one of the harshest critics of Wall Street in Congress, advocating for sweeping reforms such as breaking up the big banks and reinstating Glass-Steagall.
Sen. Bernie Sanders has long been one of the harshest critics of Wall Street in Congress, advocating for sweeping reforms such as breaking up the big banks and reinstating Glass-Steagall.

Others say there is no cause for panicking just yet. Sanders, a democratic socialist, has jumped out to a sizable lead in delegates after strong showings in early state contests, including a commanding victory in the Nevada caucuses Saturday. But it is still early in the Democrats' nominating process, and the South Carolina primary and Super Tuesday could offer more clarity.

Some analysts and bank representatives say they believe President Trump would have the advantage going into a general election against Sanders. And even if Sanders won, many said the GOP is still likely to hold the Senate and he would face other hurdles to enacting reforms detrimental to the industry.

“I think very few see him as the president of the United States and I think that’s why the market is pretty sanguine about the election so far,” a banking industry source said on the condition of anonymity. “They see it either being Trump or [former New York City Mayor Mike] Bloomberg, or a couple of others. … If Bernie becomes the nominee, they think it is much more likely that Trump will stay president.”

Sanders, an independent who caucuses with the Democrats in the Senate, has long been one of the harshest critics of Wall Street in Congress, advocating for sweeping reforms such as breaking up the big banks and reinstating Glass-Steagall, among other things.

In May 2019, Sanders along with Rep. Alexandria Ocasio-Cortez, D-N.Y., introduced a bill to cap credit card interest rates at 15%, though it is viewed as dead on arrival in the current Republican-controlled Senate.

The previous October he introduced a bill that would cap a financial institution’s total exposure at 3% of the nation’s GDP, saying at the time that "the four largest financial institutions in this country are on average 80% larger than they were before we bailed them out” in the financial crisis.

Some commentators have declared that the Democratic race is Sanders' to lose. But several analysts still doubt his chances.

“Sanders has a strong base, but one that is hard to expand,” Jaret Seiberg, an analyst at Cowen Washington Research Group, said in a note Thursday. “It is why we still see a moderate winning the nomination, though it is becoming a closer call.”

Even if Sanders is the nominee, Isaac Boltansky, director of policy research at Compass Point Research & Trading, suggested that the market doesn’t think he could win the general election.

“Whether correct or incorrect, the market believes that Trump is the clear favorite in a matchup against Sanders,” Boltansky said.

Even so, should Sanders win the White House, financial services policy could undergo a sea change.

“We would expect dramatic change in the industry,” said one bank lobbyist. “The executive power over the financial sector and the banking sector is significant. … [Bankers] believe that if he won, [a Sanders administration] could break up the largest banks, impose a lot of new rules that wouldn’t require congressional actions and could survive court.”

Sanders’ anti-Wall Street rhetoric gained notice in the congressional debate of financial reforms that became the 2010 Dodd-Frank Act. After the financial crisis, Sanders proposed several failed pieces of legislation that he is still endorsing to this day.

“I hope that my Republican colleagues who have come to the floor expressing concern about Wall Street, I hope that what they are saying is more than just rhetoric, that they really want to do something,” Sanders said on the floor of the Senate in April 2010. “And if they want to do something, I hope very much that they will join me when I offer an amendment as part of financial reform to cap credit card interest rates at 15%.”

After the crisis, Sanders was also was one of the loudest voices calling to break up the largest U.S. banks, which would go several steps further than Dodd-Frank.

His campaign website again calls for breaking up the big banks, as well as reinstating Glass-Steagall, the Depression-era framework dividing commercial and investment banking that was repealed by Congress in 1999.

Sanders also calls for an audit of the Federal Reserve, banking services being offered at every U.S. post office, and a financial transaction tax.

But as drastic as those changes sound to the industry, observers question whether Sanders would be able to turn them into reality.

“The odds still favor the Senate still being under Republican control,” Boltansky said. “And even if it isn’t, there will still be a contingent of centrist red-state Democrats in the Senate that will slow or stop many of the progressive proposals. … That means what matters most for bankers is what can be changed administratively.”

While Sanders would struggle to impose tougher regulations on the banking industry through legislation, his power would likely come through the regulators he appoints.

For example, Boltansky said he expects the Supreme Court will knock down a controversial provision in Dodd-Frank that restricts a president's ability to fire a sitting director of the Consumer Financial Protection Bureau. That would allow Sanders immediately to name a new CFPB director if elected president, and make an imprint on several rulemakings at the bureau.

“As we’ve seen, a single agency director wields considerable power,” Boltansky said. “To me, I think that matters for small-dollar lending. I think it matters for debt collection, which is an ongoing rulemaking. And I think it matters for mortgages given the uncertainty around the [qualified mortgage] patch. … You will see a more aggressive supervisory and enforcement posture.”

The bank lobbyist added that a Sanders administration “probably could be heavily populated with academics and activists.”

But Naimon said that Sanders would likely need to wait to replace several other Trump-appointed regulators.

"A new president won’t have the immediate opportunity to change the chair of the FDIC, the Comptroller of the Currency, or the chairman of the Fed, but would have to wait until their terms expired," Naimon said.

To be clear, Sanders isn’t the only progressive Wall Street critic in the Democratic primary. Sen. Elizabeth Warren of Massachusetts has heavily criticized the Trump administration's financial regulators, Wells Fargo and other large banks, and was the architect of the CFPB.

"From my perspective, I think that a lot of the proposals that [Sanders] has put forward … are not entirely dissimilar from the proposals that Sen. Warren has put forward," Naimon said.

But Warren’s rhetoric on the presidential campaign has been viewed as less worrisome for banks.

“Elizabeth Warren reiterated that she’s a capitalist,” the industry source said. “Bernie talks about a revolution and Sen. Warren talks about using government to help those who have been left behind.”

Industry representatives say banks' fears will grow if Sanders becomes president and tries to make his policy proposals a reality.

“I think an outcome that we would be most concerned about ... is that our business models would cease to exist,” the industry source said. “I think the bigger concern is anything else that he does to fundamentally alter this idea of a banking and securities industry that work together and are combined under one entity. … You could do that by massively raising capital requirements for large financial institutions. You could do that through certain Fed rules.”

And it is not just larger financial institutions raising concern about Sanders’ policy positions.

Paul Merski, group executive vice president for congressional relations and strategy for the Independent Community Bankers of America, said many of the policies Sanders supports would likely be detrimental to the sector, although the ICBA will not endorse or oppose any presidential candidates.

“Some of the policies of the Sanders platform are things that we’ve been concerned with and opposed for a long time,” Merski said. “Anything like a financial services tax and forgiving debt or any new rules and regulations on the financial sector would be troubling. Since Dodd-Frank and some of the reforms passed, the regulatory burden has been lightened on the community banking sector and has been going in the right direction.”

McCall Wilson, president and chief executive of the $660 million-asset Bank of Fayette County in Tennessee, said he worries community banks will cease to exist if Sanders is president.

“If he gets elected, it’s probably the beginning of the end for community banks,” Wilson said. “It will be the final nail on the coffin.”

Wilson added that he thinks a Sanders administration will lead to continued industry consolidation.

“When I graduated high school there were 18,000 banks in the country and now there’s less than 5,400,” Wilson said. “If he gets elected, I’m sure I’ll last 10 years, the bank will get sold, and people will lack the access to credit.”

The Sanders campaign did not respond to a request for comment.

However, there is one policy that could help Sanders score points with the banking industry.

Banks have long wanted to serve the cannabis industry in states that have legalized the substance, but a federal ban on pot has prevented them from doing so. Sanders has said he would legalize marijuana within his first 100 days in office.

"We don't believe that is possible, though he could direct the Justice Department not to pursue cannabis-related activity," Seiberg said in his note. "More broadly, he would sign whatever cannabis bill can emerge from Congress."

This article originally appeared in American Banker.
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Policymaking Regulatory reform Election 2020 Community banks Bernie Sanders Elizabeth Warren Dodd-Frank