Washington can’t save community banks. It can’t even save itself
WASHINGTON — It was the kind of victory that appeared ripe for President Trump and Republicans to celebrate — the repeal of a rule that bankers and credit unions agreed would only raise costs on customers.
The passage of a repeal bill was particularly noteworthy given that the president has struggled to see his agenda enacted nearly 10 months after taking office, including passage of any significant legislation.
But when it came time to sign the bill on Nov. 7, Trump did so in the least Trumpian way possible — out of the public spotlight. The signing ceremony, attended by financial services industry leaders and top Republicans, was closed to the press.
Trump made no mention of Republicans’ overturning the Consumer Financial Protection Bureau’s rule banning mandatory arbitration clauses on his Twitter feed and the White House made note of it only in a short press release. It was almost like the administration didn’t want anyone to know about it.
It isn’t hard to figure out why.
For all the GOP opposition to the CFPB and its rules, the agency remains broadly popular with the American public, including Republican voters. And though bankers and credit unions maintain the arbitration rule would have opened them up to a flood of litigation, Trump and his allies knew that overturning it looked like a gift to Wall Street rather than a populist win for the little guy.
The muted way the signing was publicized was as clear a sign as any of the political headwinds facing banks these days. Even when they win, their victories are celebrated behind closed doors.
And it may be the last victory the industry sees for quite some time.
Just a short year ago, bankers, particularly those from smaller institutions, had every reason to be optimistic that Washington would shortly ride to its rescue. With control of both chambers of Congress and the White House in Republican hands, the chances for meaningful tax reform, regulatory relief and even housing finance reform appeared high.
But fast forward to now and the situation is very different. Reg relief talks are teetering after Senate Banking Committee Chairman Mike Crapo failed to cut a deal with Sen. Sherrod Brown, the panel’s top Democrat. Tax reform, which would benefit banks by lowering the corporate tax rate, is facing a series of obstacles as Trump and his allies push to complete it by yearend.
And even the Republicans’ razor-thin margin in the Senate — 52 seats compared with Democrats’ 48 — appears in danger of weakening. Sexual-assault allegations against the GOP’s Alabama Senate candidate have spurred prominent Republicans to call for his withdrawal a month before a special election, a move that could hand the seat to Democrats.
Next year is no more promising. The strong showing by Democratic gubernatorial candidates in Virginia and New Jersey in last week’s election, both of whom easily vanquished their GOP opponents, signals that a wave election may be in the offing in midterm elections next year.
That is giving moderate Democrats more leverage in negotiating with Crapo over reg relief. Any bill liable to result from such talks is likely to be a modest one, particularly as Democrats will be worried about alienating progressives by going too far. A bill signed behind closed doors is exactly the kind they will want to avoid supporting.
Additionally, Republicans in swing districts may be reluctant to support an aggressive tax cut, particularly one billed as primarily benefiting corporations and the wealthy.
To be sure, there is still momentum for reg relief and tax reform. A deal on relief could be announced as early as Monday. But time is running out, and whatever legislation can pass is likely to be far less than bankers were hoping for. Will a probable exemption for small institutions from the Volcker Rule help community banks? Yes. Will it significantly stem the tide of consolidation? Not a chance. Most of the provisions are likely to fall into that category.
To even pass the bill, Crapo will have to work fast. As the midterms get closer, it will become almost impossible for anything major to pass. If policymakers cannot manage to push it through within the next three to four months, the chances of either relief or tax reform happening will dwindle rapidly.
Meanwhile, if Democrats do seize control of the House and even the Senate next year, bankers can expect a whiplash effect, with Congress pushing to add more restrictions on institutions, not less.
Even the Trump-appointed regulators appear likely to move cautiously (read: slowly) in easing rules. Whatever help is coming will take some time to arrive.
What does all this mean for bankers? During the past year, many have hoped for action from Washington that can alleviate burden and stem the rapid pace of consolidation.
But in the current political environment, with Washington battling itself and new controversies appearing every day, it appears increasingly unlikely that will happen.
If banks are counting on Washington to save them, it’s time to find a Plan B.