A blue wave is coming. Banks need to get ready

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The final votes for a House special election in Ohio are still being tallied, but the broader takeaway is clear: A blue wave is coming.

Whether or not the Democratic surge proves big enough to win back the House (let alone the Senate, a much tougher battle) remains to be seen, but Tuesday’s results suggest that the party is galvanized. Flipping the House would upend Republican control in Congress, complicating efforts to pursue additional bank regulatory relief and to overhaul Fannie Mae and Freddie Mac in coming years.

Although nothing is guaranteed at this point, bankers should be preparing themselves for the possibility.

Tuesday's results "fell right in line with expectations based on all the of the other data we have," said Geoffrey Skelley, associate editor at Crystal Ball, a political analysis website hosted by the University of Virginia's Center for Politics. "The range of outcomes is mostly favorable to Democrats — and if Republicans do retain the House, it will be by an extremely narrow margin."

Political pundits have been arguing for months that Democrats have an opening to take back control of the House, but Ohio’s race this week, less than 100 days out from the midterms, further cements that likelihood. Results from Washington State’s open primary results on Tuesday also show several Republican incumbents holding on to particularly slim leads ahead of a difficult general election fight this fall.

The candidates in the Ohio House race, Republican Troy Balderson, a state senator, and Democrat Danny O’Connor, a county recorder, remained neck and neck in the vote count as of Wednesday morning. Balderson is narrowly leading the tally by fewer than 2,000 votes, with election officials preparing to count provisional and absentee ballots.

The result is surprising for this longtime Republican stronghold. President Trump won Ohio’s 12th district by more than 11 points in 2016, and the seat has been reliably in GOP hands for 30 years.

The closeness of the race has left many observers questioning whether the GOP will be able to maintain its House majority this fall. No matter who wins the runoff, the tight race is likely an indicator of what’s to come in the next few months — big spending, tough messaging campaigns and some very narrow victories.

"After spending millions struggling just to hang on in OH-12, Republicans should be terrified," Charlie Kelly, executive director of House Majority PAC, a Democratic group, said in a statement Tuesday night. "Whatever the final result in this special election, the battlefield next expands nationwide to a map that includes dozens of Republican-held seats with far more competitive landscapes.”

For the banking industry, the prospect of a divided Congress is hardly good news.

If Democrats win House control, “we’re going into a cycle of gridlock again,” said Brian Gardner, a policy analyst at KBW. “There's going to be very little legislation coming out of Congress — certainly nothing transformational.”

A Democratic House, with the Financial Services Committee likely led by Rep. Maxine Waters of California, would not be expected to pursue further efforts at regulatory relief, particularly for the country’s larger banks.

The divide would also create yet another hurdle for those seeking an overhaul of the mortgage finance system, potentially increasing the odds that the White House would pursue administrative changes instead led by the Federal Housing Finance Agency.

“The House flipping would certainly complicate passing legislation that would transform the current [housing finance] system into something else,” said Gardner.

With three months to go until November, there’s still room for plenty of surprises. But those hoping to see more legislative action on banking issues next year should be hedging their bets.

Bankshot is American Banker’s column for real-time analysis of today's news.

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