WASHINGTON — No matter the outcome of the divisive 2016 election, the many regulations still in the pipeline from banking regulators are not going to come to a screeching halt when the next president takes the helm in January.
When administrations change hands, the incoming staff of the Office of Management and Budget and its Office of Information and Regulatory Affairs traditionally scrap all the previous administration's unfinished rules and start over — a powerful incentive for the outgoing administration to push to get as many rules finalized as possible.
But banking regulators — namely the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. — are insulated from that pressure as independent agencies whose rules are not subject to OMB review. Though bankers would likely be anxious for a Republican president to begin immediately halting banking regs once taking office, the insulation is mostly to their benefit.
"When you're talking about the banking system, you really do the economy and the nation a disservice if policies are seen as oscillating back and forth for political purposes," said Wayne Abernathy, executive vice president of financial institutions policy and regulatory affairs at the American Bankers Association. "I think there was a general belief in Congress when they passed the laws that … because the central element of banking is confidence, you don't want to make your regulation to appear to be anything other than based upon sound judgment."
Even so, administrative transitions can be bumpy times for bank regulators.
Karen Shaw Petrou, managing partner at Federal Financial Analytics, noted that the transition from the Reagan administration to the George H.W. Bush administration occurred in the midst of a recession and at the height of the savings and loan crisis. The most recent administration change came amidst the near-collapse of the international financial system.
"We don't really have a good model here," Petrou said. "The [George W. Bush] to Obama transition in the fourth quarter of 2008 was in the midst of a hellish financial situation. There wasn't the continuity of construct because everything had blown up — there was nothing to continue."
Oliver Ireland, partner with Morrison & Foerster and a former Fed official, said if Hillary Clinton wins the White House, the most recent analogous transition would be the transition from Reagan to Bush. At that time, the new Bush staffers came into the regulatory agencies and laid out an aggressive agenda to addressing the crisis — moves that ultimately resulted in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. But those reforms were already in the works before Bush took over, Ireland said, and if Clinton prevails, it is not abundantly clear where she wants the agencies to go.
She's called for targeting the shadow banking system and giving regulators more power to deal with systemically important financial institutions.
"If Clinton came in, would Clinton come up with a proposal to break up the big banks? I don't know," Ireland said. "There are regulatory requirements already ratcheted up on the big banks. Does that just get incrementally a little bit tighter, or does she have something specific in mind?"
Both Clinton and her Republican rival Donald Trump have laid out some priorities for financial regulation if they are elected. Clinton has said she would push regulatory relief for community banks in addition to her focus on shadow banking, while Trump has evinced a less coherent vision, but has repeatedly disparaged Dodd-Frank reforms and said he would prioritize economic growth.
Ernie Patrikis, partner at White & Case and former official with the New York Fed, said the main lever that an incoming administration has over independent regulators is in selection of personnel. Typically that selection will roll out over time as the previous administration's appointees' terms expire, though he said there is some precedent for the heads of some agencies to formally or informally offer their resignations upon the new president's arrival.
"Even some of those who are not required to do so do it, and that's really the key to all of this," Patrikis said. "If the president keeps people in the independent agencies in place, then they may well continue with what they've started."
The Treasury Department is the financial regulator most directly linked to the White House, and as such will likely be the conduit through which the new administration influences the other independent financial regulators, particularly through the Treasury secretary's capacity as chair of the Financial Stability Oversight Council. If Clinton wins, that will likely be the venue from which the administration sets out its agenda in the short term, Petrou said.
"The major area where you would see it is in FSOC, in terms of how the new Treasury secretary as chair of FSOC influences issues," Petrou said. "For example, in the Clinton platform the shadow banking discussion would probably … take added priority. It depends on who it is, but I think that would happen regardless in a Clinton administration."
Another important question affecting this year's administrative transition is how independent regulators remain in the wake of a federal appeals court's ruling last month that declared the Consumer Financial Protection Bureau an arm of the White House — a decision that might have ramifications for other agencies as well. Abernathy said that, if the ruling stands, it could have major implications for the future of pending CFPB rules as well as the CFPB's budget.
"Not only would regulations would have to go through there, but the budget would," Abernathy said. "I could imagine … if you had an OMB that asserted its authority [it could tell the bureau], 'You may get your budget from the Fed, but you have to run it by us first.' "
Some rules that are already in process might also get influenced by the incoming administration, if not necessarily reproposed, if they are not completed by the end of the current administration. A prime example of this is the multiagency executive compensation rule, which was reproposed in April after almost five years in limbo.
Many observers, including leading Senate Democrats, have pointed out that the plan would not have prevented the kinds of practices that led to the Wells Fargo phony accounts scandal. Because of that scandal, the plan is high on the list of pending regulations to get another look even before inauguration day.
"The agencies are going to look at the executive compensation issue in light of Wells Fargo no matter what," Ireland said. "That's going to happen."
But the banking regulatory structure does not turn on a dime, Patrikis said. So whichever candidate wins on Nov. 8, their expectations should be tempered.
"All of these agencies … have a huge bureaucracy," Patrikis said. "That thing does not move much. While we have this group at the top, it takes them a while to get their arms around it. They can't just change things overnight, no matter what they say."