Will GOP shield big banks from Democrats' attacks, or pile on?

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WASHINGTON — The new Democratic majority on the House Financial Services is likely to subject the biggest banks to a harsher spotlight, but less certain is what reception will Wall Street get from Republicans on the committee.

Chairwoman Maxine Waters, D-Calif., has signaled interest in taking the industry to task over various issues, and the committee will now include newly elected progressive Democrats such as Alexandria Ocasio-Cortez of New York and Katie Porter of California.

The committee is reportedly seeking to hold a hearing with the CEOs of the biggest banks. Waters has indicated a pivot away from the deregulatory bent of the panel's prior leadership. But with Wall Street still politically unpopular on Capitol Hill, it remains to be seen how the minority will respond.

“How the Republicans react during this hearing is the most important takeaway that we are going to get. The issue is whether they are going to defend the biggest banks or join in criticizing them,” said Jaret Seiberg, an analyst with Cowen Washington Research Group. “If the Republicans attack the biggest banks, then it is going to suggest that the biggest banks really haven’t made much political progress since the financial crisis.”

For all the scrutiny that Wall Street has attracted from Congress in recent years, the two past years of GOP White House and congressional control allowed the biggest banks to fly somewhat under the radar. That is expected to change pretty dramatically in the Democratically controlled House.

The hearing with big-bank CEOs has not been officially scheduled, but it is being pitched as a look back at the financial crisis, according to a financial services executive familiar with the discussions. Committee staff are attempting to include executives from large banks — such as Goldman Sachs, Bank of America, Wells Fargo, Citigroup, JPMorgan Chase and Morgan Stanley — that are still subject to the 2010 Dodd-Frank Act regulatory regime. Smaller firms that benefited from reg relief enacted by Congress last year are not expected to be the focus.

The new Democratic majority will likely target banks' business practices, employee compensation models and possibly consumer protection scandals (particularly in the case of Wells), while Republicans could be forced to take a more cautious approach in their questioning.

“I think traditionally Republicans have pushed for America to be the lead of global finance,” said Travis Norton, counsel at Brownstein Hyatt Farber Schreck, who was a staffer for the committee’s Republican majority under former Chairman Jeb Hensarling, R-Texas. “I think Republicans would be wise to defend the need of large banks to the financial system.”

Republicans may not want to let big banks off the hook, but they also won’t want to defend the post-crisis regulatory regime that they have argued has hindered economic growth. With that in mind, Republicans on the committee could use the hearing to question the executives about their regulators.

“Republicans can make it about the" Federal Reserve, said Ed Mills, a policy analyst at Raymond James. “They have to be critical of something. When in doubt, blame the regulator.

“They can kind of insinuate that the regulators and Fed monetary policy are heading down the path for another crisis.”

Some Republican members have been highly critical of the Fed in the past, such as Rep. Andy Barr, R-Ky., who pushed for further accountability for the central bank while serving as chair of the subcommittee on monetary policy.

Republicans could also decide to use the hearing to explore other opportunities where the banking industry would like to see legislation. Senior members such as Rep. Patrick McHenry, R-N.C., the committee's ranking member, and Rep. Blaine Luetkemeyer, R-Mo. — who both played roles last Congress in drafting regulatory relief provisions — could revisit proposals to further roll back Dodd-Frank.

But reg relief is unlikely to gain much traction with Democrats having gained more power in Congress. Alternatively, Republicans on the committee could attempt to redirect criticism of banks toward other risks to the financial system.

“Because they don’t want to give too much credit to Dodd-Frank ... you might hear a lot of them ask questions to speculate as to what keeps them up at night,” said a former senior congressional staffer. “Everything from corporate debt levels, international concerns, the impact of trade wars. … Try to sort of use these guys as people who can help us identify the next big set of problems. ... That clearly falls into the category of softball questions.”

Mills said it is possible Republican members may push back on the Democratic majority to focus on issues like housing finance reform, rather than bank oversight.

“We have spent all the time and are once again starting off on our oversight with a big-bank hearing,” Mills said. “But we still haven’t done anything about" Fannie Mae and Freddie Mac.

In some cases, criticism of the industry could be bipartisan. This is particularly the case if Wells Fargo CEO Tim Sloan attends the hearing. The rebuke of the bank over its various consumer-related scandals has come from both parties; President Trump vowed tough action against Wells in 2017, and the Consumer Financial Protection Bureau under a Republican appointee levied a record $1 billion fine against the bank last year.

“We expect Wells Fargo to get a disproportionate amount of attention at the hearing,” Seiberg said in a note last week. “This is because the controversies that have surrounded the bank have most impacted consumers. This hearing, in our view, will show the political trouble the Federal Reserve would face if it lifted the asset cap. It also will likely be a preview of what to expect when Waters holds a separate hearing solely on troubles at Wells Fargo.”

Mills agreed that Wells will draw a lot of the hearing's focus.

“I think members are going to take this first as a Wells Fargo hearing,” Mills said. “Members of Congress are going to be critical, they are going to be forceful. But absent a scandal, you generally are not going to incur wrath for wrath’s sake.”

But other banks may not be off the hook with Republicans either, but for different reasons. Some institutions — notably Bank of America and Citigroup — announced steps to restrict services to firearms-related businesses in the wake of several mass shootings. But Republicans immediately criticized those decisions, arguing that banks shouldn’t be cutting off legal businesses from financial services.

“I think that the gun issue ... could be one thing that some members will latch onto,” Norton said.

With the committee’s gavel under Democratic control, Republican comments could be a sign of whether tougher regulations on the biggest banks — such as through a modern-day Glass-Steagall Act — are possible in the new Congress.

“If it is clear that the GOP won't bash the biggest banks, then we don't see how House Democrats can craft bipartisan bills to restore the Glass-Steagall Act's prohibition on the mixing of commercial banking and trading,” Seiberg said in the note last week.

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