Partisan gridlock appears intact. Why that's good for banks.

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WASHINGTON — As the nation awaited the conclusion of a bitter 2020 election, the fears among bankers of a "blue wave" bringing new regulations and higher taxes quickly dissipated.

With Joe Biden on the verge of winning the presidential election, Republicans appeared close to keeping their Senate majority, although the outcome in two Georgia races could ultimately determine which party controls the upper chamber.

With divided government a likelier prospect than before the election, when many pollsters were predicting a Democratic sweep, bankers and other analysts sounded increasingly confident that the industry dodged a bullet.

Two-party control of Washington "serves as a backstop" to prevent "some of the most extreme progressive legislation coming over from the House of Representatives that we witnessed over the last two years,” said Richard Hunt, president and CEO of the Consumer Bankers Association.

The final count in the Senate was still uncertain late Friday. The race in North Carolina was not yet decided, although Sen. Thom Tillis, R-N.C., appeared close to reelection. Meanwhile, both Senate races in Georgia appeared headed for runoffs Jan. 5 to determine the winners.

With a divided Congress a likelier prospect than before the election, when many pollsters were predicting a Democratic sweep, bankers and other analysts sounded increasingly confident that the industry dodged a bullet.
With a divided Congress a likelier prospect than before the election, when many pollsters were predicting a Democratic sweep, bankers and other analysts sounded increasingly confident that the industry dodged a bullet.

If Tillis can hold on and the GOP can win one of the two seats in Georgia, banks will likely be able to fend off progressive legislative proposals to cap interest rates on credit cards, break up "too big to fail" institutions, create a postal banking system, and establish a public credit reporting agency. It also means that potential Biden picks for cabinet and regulatory positions would need approval from GOP senators.

Ideas such as a cap on interest rates, a national consumer credit reporting bureau, and "breaking up the big banks" can "rest in peace," Hunt said.

But divided government could have some negative consequences for banks. The industry's two main legislative priorities — making it easier for banks to serve cannabis businesses and easing anti-money-laundering requirements — were both backed by the Democratic House and face opposition from GOP senators.

J.W. Verret, an assistant professor of law at George Mason University, said legislative gridlock between House Democrats and Senate Republicans that started after the 2018 midterm elections will likely continue.

“It’s hard to see what sort of financial services legislation the House and the Senate can agree on," Verret said.

Hunt said that banks will be able to fend off new tax increases with the divided government scenario. He said that the election, which resulted in Democrats losing several House seats, could make the party rethink tax increases.

“Moderate Democrats, given what they saw" in the election, "are going to be embracing tax increases with less enthusiasm than they would have otherwise," Hunt said. "I think it’s highly doubtful that the kind of tax increases that Biden laid out in his stump speeches and his platform, none of that gets through.”

From the perspective of bank investors, divided government would be mostly a plus for banks.

A split Senate would be a relief to an industry that had worried about a “blue wave” that led to higher taxes, said Bradley Rinschler, managing partner at the Dallas hedge fund Down Range Capital Management, which invests in small banks under the direction of the activist investor Johnny Guerry.

“We think that the corporate tax rate staying neutral would be a fantastic win for the banks,” Rinschler said Friday.

But the gridlock may put a damper on several industry-backed proposals.

Bankers have been pushing for Congress to pass legislation to enable banks to service cannabis businesses in states that have legalized the substance. The Secure and Fair Enforcement Banking Act, which would bar federal regulators from penalizing financial institutions that serve state-legal cannabis businesses, passed the House in 2019 with some Republican support. But the bill has stalled in the Senate where a number of Republicans oppose legislation viewed as benefiting the cannabis industry.

In addition, one of the most vocal supporters of cannabis banking in the Republican party, Sen. Cory Gardner of Colorado, lost his reelection bid.

“That actually is going to hurt the chances of the kind of pot banking bill that the industry would like,” said Camden Fine, president and CEO of Calvert Advisors and former head of the Independent Community Bankers of America.

Still, Aaron Klein, policy director at the Brookings Institution’s Center on Regulation and Markets, said he thinks the cannabis banking issue is still alive after several new states legalized cannabis for recreational purposes, including South Dakota, which had some of the strictest cannabis laws prior to the election.

“Election results showing big wins for cannabis in deep red states like South Dakota and Mississippi are a reminder that cannabis is not a partisan issue,” Klein said. “Cannabis is a bipartisan issue. Americans of both parties throughout the country want a change in how cannabis is dealt with.”

Bankers have also been pushing for Congress to reform anti-money-laundering regulations. A bill that would remove the burden for banks to report their customers’ beneficial ownership information to the Financial Crimes Enforcement Network and require companies to report their true owners instead, also passed the House in 2019.

Senate Banking Committee Chairman Mike Crapo, R-Idaho, and Sen. Sherrod Brown of Ohio, the top Democrat on the panel, have supported an amendment to include the beneficial ownership legislation in a defense spending bill that must be authorized by the end of the year.

“Beneficial ownership will be a top priority,” said Hunt. “That’s also bipartisan.”

But the Republican party has been divided on beneficial ownership, and if the amendment is not included in the National Defense Authorization Act, it could face an uphill battle if Sen. Pat Toomey, R-Pa., takes over the gavel at the Senate Banking Committee.

Toomey, currently the panel's No. 2 Republican, could succeed Crapo as chairman if Crapo fills an expected opening atop the Senate Finance Committee. Toomey has suggested that Congress should not accept it as a given that businesses should report their ownership information to Fincen.

But Fine said there is reason to hope that even with the two parties sharing control, lawmakers may work together on legislation benefiting the financial services industry. Community bankers could see additional bipartisan regulatory relief, such as legislation to reduce paperwork burdens on mortgage loans or legislation to relieve community bankers’ compliance with the Current Expected Credit Losses accounting standard.

“I actually think that community banks will have a decent shot over the next two years to get some regulatory relief through the Congress and signed by President Biden,” Fine said. “I think community banks are in a good position to make the case, particularly because of the pandemic, that they need some regulatory flexibility and relief.”

But Hunt said that legislation in the banking space likely won’t be as much of a priority for Congress as it was after the 2008-2009 financial crisis.

“This is much different than in 2009 when banking was in the crosshairs,” Hunt said. “Many times it’s great for Congress to do nothing when it comes to banking and let regulators do it, unless there is a crisis."

Jaret Seiberg, a policy analyst at Cowen Washington Research Group, said Friday that a split Congress would take off the table some “onerous” legislation for Wall Street, such as changes to consumer bankruptcy laws or new taxes on financial transactions.

“Progressive Democratic priorities … just have no path forward in a Republican Senate,” Seiberg said.

Allissa Kline, Jon Prior and Laura Alix contributed to this article.

This article originally appeared in American Banker.
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