Banking

What to expect when you’re expecting divided government

Below is an edited transcript of the podcast:

JAKE TAPPER: Joining me now one of the people in charge of the binary transition team. Jen Psaki, Jen, thanks for joining us. Let’s talk about Biden’s cabinet picks — President-elect Biden’s Cabinet picks. cere told this week, perhaps as he’s as early as Tuesday, he’s going to make some announcements on that. Do you have concerns that senate republicans are going to block the members of the Biden cabinet from being confirmed?

JEN PSAKI: Well, there are a number of Republicans who have come out this week who have said they would support experienced and qualified nominees. I that’s exactly those are exactly the kind of people who Joe Biden is going to announce and nominate this week and in the weeks to come.

JOHN HELTMAN: So you may have already heard the news that former Vice President Joseph Biden won the presidential election last month, tallying a projected 306 electoral votes to incumbent President Donald Trump’s 232. And what happens next — indeed, what’s happening right now and will continue to happen over the next several months — is that the president-elect will start announcing his nominees for cabinet-level positions, starting with the most consequential seats first.

NPR: Biden’s early cabinet picks suggest an emphasis on experience and also on diversity. The office of Treasury secretary has existed since Alexander Hamilton’s time and there’s never been a woman in that job. Until now, Biden says Janet Yellen will be his nominee sent to the Senate.

HELTMAN: There’s this fun game that journalists and pundits play at the dawn of any new administration, and it’s called the “Who will President X pick for Y post” game. It can get a little silly, but it’s important, because, as they say, personnel is policy.

But policy is also policy, and in the case of the incoming Biden administration, there is a big gap between the policies that the president-elect campaigned on and what he will actually be able to deliver. That is because the blue wave that was expected to give Democrats a Senate majority of between one and four seats never materialized; instead, Senate control hinges on a pair of runoff elections in Georgia on January 5 in which Republicans are widely favored, and Democrats’ majority in the House also narrowed by a dozen seats.

So if you’re the Biden administration, you have to be thinking about what you can get done without a cooperative Congress — what your priorities are and how much latitude you have in pursuing them. So what do we know about what those priorities might be, and what kinds of options does the incoming administration have to further those goals?

From American Banker, I’m John Heltman, and this is Bankshot, a podcast about banks, finance, and the world we live in.

So let’s start with Congress. As I just said, we’re waiting for the results of the Georgia runoff elections to know for sure who will control the Senate. But regardless of that outcome, we already have reason to suspect that a lot of the initiatives that Biden ran on aren’t going anywhere.

ISAAC BOLTANSKY: I think all of us spent so much time contouring, what the blue wave would look like.

HELTMAN: Yeah.

BOLTANSKY: You kind of got to throw a fair amount of that out. This is Isaac Boltansky. I am the director of Policy Research for Compass Point Research and Trading, a boutique investment bank based in D.C. At most you can say that you got a bit of a blue low tide. On given that in the house, Democrats actually lost seats, they’ll still have the majority, but they lost seats on a net basis. So Speaker Pelosi will have to govern with a narrower margin, which is going to impact policymaking. The White House is obviously going to shift. But what’s most important for banks is that it looks as though the Senate is going to stay in Republican control.

NEIL HAGGERTY: … meaning that Senator Pat Toomey from Pennsylvania will be the likely chairman of the Senate Banking Committee. I’m Neil Haggerty, and I’m the Congress reporter at American Banker. He is a very sort of free market, conservative, limited government. That is, that is how he is in his ideology, and so he’s probably going to clash with Senator Sherrod Brown, who’s the top Democrat on the committee. Sherrod Brown has pushed for, you know, the Fed to offer free digital bank accounts to consumers. Don’t see that happening with Pat Toomey. Senator Sherrod Brown, you know, has pushed for tougher, stricter regulations on Wall Street — I don’t think that’s going to happen with Pat Toomey. The democrats have also pushed for a moratorium on negative credit reporting during the pandemic. And I don’t think Senator Pat Toomey is interested in in putting a moratorium on negative credit reporting. I think he is of the belief that our credit reports need to be accurate. So that could pose some gridlock in the Senate.

HELTMAN: Most of the bank-facing regulators come before the Senate Banking Committee for confirmation, and one question going into this administration is gauging just how tough a Republican Senate is going to be on Biden’s nominees. That of course depends on who the nominees are and what the post they’re being nominated for is. It’s also worth mentioning that most of those regulators won’t come up at the beginning of the administration. Federal Reserve Vice Chairman for Supervision Randal Quarles’s term expires in October 2021; Federal Reserve Chairman Jerome Powell’s term expires in February 2022. FDIC chair Jelena McWilliams has said she intends to finish out her term, which expires in 2023. And there is some debate about whether or when the administration will fire acting Comptroller of the Currency Brian Brooks if he is confirmed to the post in the lame duck session, or when and whether Biden will fire CFPB Director Kathy Kraninger. But at least in the abstract, Sen. Toomey told Neil in an interview that he plans on being open-minded about Biden’s picks.

SEN. PATRICK TOOMEY: I don’t know the exact number. But I think that I supported something like 70% of President Obama’s nominees that occurred while I was in the Senate. So my record is clear. I am willing to work with a president of the other party to populate his cabinet and the other confirmable posts. Having said that, I see it as a shared responsibility. The fact that a nominee requires a Senate confirmation imposes an obligation or responsibility on the Senate. And I take the advice and consent responsibility very seriously. So I’m happy to work with the administration with the next administration on and how we go forward.

HELTMAN: As for legislation, there are two big legislative items relevant to banks that seem to have a strong chance of making it through a divided Congress: a law related to corporate disclosure, and another related to cannabis banking. The corporate disclosure bill was passed out of the House last year and would effectively require companies to disclose their true owners to banks rather than requiring banks to try to figure it out for themselves — an issue that makes it harder for banks to comply with anti-money laundering rules. That provision was included in the final version of a defense spending bill just before Thanksgiving, giving it a good chance of passing in the lame duck session. And the cannabis banking bill — which would allow banks and credit unions to extend their service to cannabis businesses in states where it is legal — may have a better shot at passing the Senate in the next Congress than it has in the current one, and that is largely because the current Senate Banking Committee Chairman, Mike Crapo of Idaho, will most likely not chair that committee next year.

HAGGERTY: Crapo was the big roadblock there being that he’s from Idaho, one of the states that does not have any legal cannabis whatsoever. However, a number of new states in this 2020 election through these sort of ballot measures approved legalizing cannabis. So, you know, we could see some more drumming up of interest of that, more senators from more states realizing that these businesses should have access to financial services and getting cash off the street. And you know, Senator Toomey told me point-blank …

TOOMEY: … I am open to working with my colleagues on how we could enable businesses that are operating legally in their respective states to be able to have ordinary banking services. I think that is that’s something we should work on.

BOLTANSKY: But beyond that, maybe you’ll have some agreement around China. And that’s something that is in that sphere. Other than that really difficult to find any areas of potential agreement.

HELTMAN: So if legislation is going to be stalled — at least, that’s the way it appears right now — the administration is left with regulatory and executive prerogatives. And one of those prerogatives is a renewed focus on antitrust enforcement.

BOB COOPER: My name’s Bob Cooper. I’m a partner at the law firm King & Spalding in Washington, D.C. I have been practicing in the antitrust area, for the better part of about 20 years in Washington. For the first time in a while, I think antitrust has moved from a subject that is primarily of interest to those who regulate it, at practice in that area, to something that’s part of the more general political conversation. I think in certain quarters, there is a perception that big is bad. And one of the few mechanisms the government has for dealing with a perception that big is bad, is antitrust enforcement. Antitrust enforcement tends to ebb and flow over time with changes in industry changes in the administration. But we appear to be entering into a period where there will be increased antitrust scrutiny of a whole variety of industries. I don’t know that any industry is exempt. But I think certain industries, and certainly including banking and financial services will be very much a subject of attention.

HELTMAN: Antitrust law goes back more than a 130 years and was originally aimed at breaking up the gilded age monopolies in commodities like steel, coal and oil. It also has gone in and out of fashion several times over that period. And it seems that, after a long lull, it’s back in style.

COOPER: I think a couple of things have changed. One, we just had an election, and there is a lot of interest, particularly on the more so-called progressive side of the Democratic Party, in more vigorous antitrust enforcement generally, not limited to banking. Secondly, you know, banking and financial services is something that is present in every member of Congress’s district. It touches every voter to some extent. And it’s not coincidental that industries like banking, like healthcare, tech — which really touch every single voter in some way — are the subject of increased attention. Those are also industries where you’ve seen increased consolidation over the past several years.

HELTMAN: And the thing is, this swing toward antitrust enforcement isn’t even necessarily a progressive agenda item. In October, the Trump Department of Justice filed a suit against Google claiming the company had engaged in anticompetitive practices in areas like text-based search and advertising. The suit is the first of its kind brought against a tech giant, but it is unlikely to be the last. And around the same time as the Google suit was filed, the Department of Justice’s Antitrust Division also laid the groundwork for their successors to make some meaningful inroads on antitrust enforcement in the banking sphere as well.

COOPER: The antitrust division, sought public comment, which is a mechanism by which agencies kind of seek input from various stakeholders on what are called their bank merger guidelines. And these bank merger guidelines have been around for about 25 years. And the basic question they’re looking at is whether bank mergers should be subject to — at least in part — to their own unique set of rules, or whether they ought to be treated like mergers in any other industry, and analyzed through the same mechanisms that the antitrust agencies use. You know, more specifically, I think the Department of Justice is looking at, you know, the traditional ways in which they fought about banking, you know, retail versus small business versus middle market, whether those are still delineations that make sense. And also how to think about competition from a geographic perspective. You know, our local markets, for example, the right way to think about consumer and small business banking. So that was the first development this fall. And the second was the Department of Justice and the SEC released a memorandum of understanding that signals and increased antitrust focus on the financial sector.

HELTMAN: Now, to be fair, just because the government has begun to pursue antitrust litigation doesn’t mean they will expand on such litigation, much less that they will prevail. But what it does mean is more pressure — and potentially a shifting regulatory landscape — on banks that are looking to merge and grow. And we just saw one such example of that kind of M&A activity in the last few weeks.

YAHOO! FINANCE: Welcome back to Yahoo Finance live. It’s been a very quiet deal season in terms of the activity we’ve seen between banks but a little bit of a break from that theme this year in 2020. After Spanish Financial Group BBVA announced it’s agreed to sell its U.S. business to PNC for more than $11 billion. It’s a pretty big deal, especially considering the slowdown we’ve seen and want to get to Yahoo Finance’s Brian Cheung has the details on that. Brian?

BRIAN CHEUNG: Well, Zach, as you mentioned a pretty big deal $11.6 billion for PNC to buy the U.S. subsidiary of the Spanish financial firm BBVA This is the biggest deal in bank land since that BB&T-SunTrust merger not so long ago …

COOPER: The takeaway from this — these developments with the Department of Justice and SEC — from my perspective, are really, kind of, three. One, you know, banks need to integrate any trust considerations into their strategic and operational decision making. And decisions really need to be examined through an antitrust lens early in the process. Secondly, financial institutions need to take a holistic look at the competitive landscape in which they operate, and really think creatively about who and where their competition is. And the third is that personnel need to be trained and retrained on what the antitrust laws mean, and what the risks are and best practices. And so when you kind of take those three points and apply them in a merger context, it is incumbent upon institutions that are proposing to merge to be able to tell a pro-competitive story to the regulators.

HELTMAN: But while both the outgoing Trump administration and the incoming Biden administration may agree on using antitrust laws to meet policy goals, those are still very different policy goals that are not necessarily in harmony. But what they do agree on is the shifting standard of what demonstrates harm.

BOLTANSKY: If you take a step back, there is a shift away from the consumer harm standard that’s been sort of the bedrock for the past four years since Bork, and which basically said, “Yeah, merging is fine. As long as you don’t hurt the consumer,” to more of what’s been somewhat derisively described as hipster antitrust, it’s obviously much more involved and nuanced than that. But for our purposes, it’s fine to call it that, where you try to look at it. You try to look at it antitrust a different way, and say, hey, are is this company buying a nascent competitor good for the overall market functioning and long term health of society? Right? Because in when you read the visa plaid, DOJ suit that we got just a few weeks ago, it’s right in line with that, which is, look, this is part of their argument, I think, is at least tangentially connected to, “Hey, they’re trying to buy out a decent competitor in a in a vertical where visa is 70% market share.” And so that might not have immediate impact on consumers. Right? But it could over time if that competitor was allowed to grow.

HELTMAN: And that shift is also happening in the context of a progressive demand to reign in the power of banking and financial services companies more generally — you may recall the earnest policy discussion in the 2016 election around breaking up the biggest banks. That discussion hasn’t really gone away, but it has evolved.

BOLTANSKY: You know, let’s talk about breaking up the banks. I’ve been we’ve all watched this for some time. And I always find noteworthy when you see conversations in D.C. slowly but steadily shift. And it has shifted from too big to fail to too big to manage. And so I don’t think that we’re going to “Break Up Big Banks.” But I do think that the asset cap that we saw imposed upon Wells Fargo is a tool in the regulatory toolbox. And so, look, it’s incredibly difficult for me to see, given the electoral configuration that’s most likely, “Breaking Up Big Banks.” But there are some levers that they can make, that they can use to make it increasingly uncomfortable — and more importantly, unprofitable — for certain business loans. Right? So, look, for the Fed, once they get their new ranks of folks, I think that you’re going to have more of a focus on physical commodities. And that’s something that the Fed can try to impose through capital charges and the stress test, right? And that’s something that they will have the power to do when I think is opaque enough that Congress won’t get involved.

HELTMAN: That brings us to a broader question of how the Biden administration might approach enforcement generally. And we’ll talk more about that after this short break.

HELTMAN: Regulators in the Trump era have taken a somewhat muted approach to enforcement, with some notable exceptions like the Wells Fargo asset cap imposed in 2018. The Consumer Financial Protection Bureau, for example, levied only $8 in fines in the second quarter of 2020, and that’s a trend that is unlikely to continue in a Biden administration, particularly with respect to redlining and fair-lending laws.

JEREMY KRESS: If you look at how Biden campaign, it was very much on a platform of racial and economic justice. And I would expect that to be the guiding principles for the Biden ministration financial regulatory agencies, regardless of who ends up leading those agencies. My name is Jeremy Kress. I’m an assistant professor of business law at the University of Michigan’s Ross School of Business. Before that, I was a lawyer at the Federal Reserve Board in Washington, D.C., for about four years, post-Dodd-Frank. I would expect to see those agencies take a number of steps that are both explicitly aimed at addressing racial and economic justice. And then other steps that, although not overtly, motivated by racial and economic aims, would have the effect of reducing racial wealth disparities and economic wealth disparities. So in terms of initiatives that are likely to have an explicit racial or economic objective, I would expect to see the agency’s focus on the Community Reinvestment Act, likely undoing. The Office of the Comptroller of the Currency is reforms from last year, and trying to get all of the agencies finally on the same page, to reform the CRA in a way that will truly help low and moderate income communities and hold banks to account for making the investments that the law requires them. I would expect to see a very strongly renewed focus on consumer protection and anti-discrimination. That will happen on day one.

BOLTANSKY: I think that the supervisory and enforcement landscape for banks and nonbanks in the financial services sector will become a lot less hospitable. I think that even when you look at the totality of, for example, the CFPB fines in this space, they may have done a larger number, but there really weren’t big numbers behind them. They were small dollar figures and not and not massive, not massive, in terms of the structural changes that were required. So look, no matter how you cut it, it’s going to be tougher for banks on the supervisory and enforcement front. I don’t think it’s going to be like it was in terms of the huge dollar payouts in the Obama years, largely because we were dealing with the aftermath of a crisis. And I know this is tough because we all see the world through our lens, right? But I just don’t think financial aervices is as much of a focus for the Biden administration, as it was for the Obama administration in the enactment of Dodd-Frank, the rollout of the associated rules, and all of the uncertainty, missteps and enforcement actions that followed.

HELTMAN: That brings up a broader question of how the Biden administration will approach core bank regulatory issues — things like capital and liquidity, stress testing, supervision and enforcement. The progressive wing of the Democratic Party — lawmakers like Rep. Katie Porter of California and Senator Elizabeth Warren — have made it widely known that they believe the Trump administration’s regulatory changes leave the financial system vulnerable. And that view could find its way into the Biden administration even if those lawmakers personally do not.

KRESS: Banks thus far seem to have been performing adequately during the COVID crisis. However, I think that the majority of the write downs and losses that we’re going to see are still ahead of us. What I would like to see is the Fed, in connection with the other banking agencies, come out and do an advance notice of public rulemaking on the capital dramework, and holistically assess and request public comment on how the Capital Framework is working and in what ways it should be reformed to strengthen the resilience of the financial system. Over the past decade, we have implemented so many different moving pieces of the Capital Framework between Basel III standardized and Basel III advanced, and the G-SIB surcharge and the countercyclical capital buffer and the capital conservation buffer and stress tests. We should take a moment to step back and assess holistically. This Federal Reserve didn’t really do that under the Trump administration, they made changes that were always incrementally rolling back the resilience of the capital framework. But I think it’s necessary to do a holistic evaluation because all of the Federal Reserve research suggests that if we are within range of the optimal capital levels, we are at the very low end of that range. And perhaps more should be done to get us more solidly in the sweet spot of that optimal range of capital levels.

WADE: I would preface that by saying, unfortunately, or fortunately, depending on how you look at it, unless the democrats take Georgia and retake the Senate. Any form of wide-scale transformative change seems dead out of the gate.

HELTMAN: That’s Thomas Wade.

WADE: I’m Thomas Wade, director of financial services and housing policy at the American Action Forum. The American Action Forum is a center right free-market think tank based here in Washington, D.C. This financial crisis has had very little in common with the previous one. I do like the same financial crisis crises are never the same, but they often rhyme. But I do feel like this one has rhymed the least. And as a result, we haven’t seen enormous stresses in particularly, as you say, the vanilla or Main Street banking industry.

HELTMAN: So any legislative solution that cracks down on the banking industry is probably out of the question, Wade says, and regulators also may spend more of their time directing their attention away from banking altogether.

WADE: What this is … is exposing is the idea that more and more traditional banking services are being provided by nonbanks, and as the longstanding trio of banking functions — taking deposits, making loans and processing payments — gets hired out, or to different firms, and in particular, the rise of fintech companies, we are entering a world in which risk is no longer pooled in the obvious places. The idea of this shadow banking world is becoming increasingly more and more present. And as a result, to my mind, this is an enormous challenge, but also an enormous opportunity, which is that I would hope that Biden’s administration invites agencies take a moment to think that legislation regulation will need to change to address the fact that risks are moving within the financial sector.

HELTMAN: And if there is going to be an attempt to reign in risky activities that occur largely outside of the banking sector — and there are a number of areas, from money market funds to leveraged lending to corporate debt, that regulators could profitably examine in the wake of the COVID pandemic — the venue for that examination would be the Financial Stability Oversight Council. And that council, known as the FSOC, will likely get more active in a Biden administration.

BOLTANSKY: Dodd-Frank, did a lot of things, right. But some of its by products, I think we can all agree, were unintended consequences, and one of which was, we push certain activities out of the depository sphere. Right? And so we can talk about small dollar lending, right is one example. And then we can talk about leverage lending as another, and you can see the spectrum there. Look, the FSOC will take time to ramp up, but it will become more active. It has to become more active, because all it’s done during the Trump administration is its annual report, change its non-bank designation process, so that it’s harder to designate individual firms and released something effectively just saying, “Yeah, the FHFA is capital rule is good. Thanks a lot.” So that’s all that they’ve done. That’s all they’ve done during this phase, so they will become more active. It’s a little bit tough to know, John, exactly how they’re going to go after these problems. I just know that they will.

KRESS: I think that the Financial Stability Oversight Council, FSOC, is going to play a critical role in the next administration. The FSOC agenda under a Biden administration will be twofold. One is reverse the Trump administration’s nonbank SIFI guidance. It is foolish to take that powerful tool off the table, I don’t necessarily expect the Biden administration to come out and designate any nonbank SIFIs. But I do expect that they will knock down those barriers such that if any nonbank in the future warrants designation, the FSOC will be able to use it without having its hands tied behind its back as the Trump administration has done. So I think there will be movement on the nonbank designation side and that I expect the Biden ministration will try to use FSOC’s activities-based authority in a way that the Trump administration has not really, I think that there will be some holistic evaluations of what the problems were over the past year, and then some really deep thinking about what meaningful reforms could be implemented.

HELTMAN: And, perhaps ironically, this leads us back to where we began, because the FSOC’s ability to designate activities as systemically risky isn’t the same as its ability to designate individual firms. The FSOC has the power to designate a firm as a systemically important financial institution, or SIFI, and as such subject that firm to enhanced prudential standards under Federal Reserve jurisdiction. But when it comes to activities-based regulation, the FSOC simply has the power to ask the primary regulator to pass a rule, or to ask Congress for additional authority — presenting the FSOC, in all likelihood, with the same Republican-controlled Senate that is so reticent about passing legislation in the first place.

KRESS: Republicans have embraced the idea of activities-based regulation. That has been their calling card over the past four years. I would love to see if FSOC went to Congress and asked for more activities-based authority, whether the republican embrace of activities based regulation is genuine, and they’re willing to beef up FSOC’s activities-based powers, or if the apparent embrace of activities based regulation was just a fig leaf to try to de-emphasize FSOC’s entity-based designation authority. I fear that it’s the latter — that Republicans will resist giving FSOC any more activities based authority. But it’s worth trying, because this is a big hole in our financial regulatory system. And if … if Republicans will meet Democrats where Republicans said they were — which is, let’s focus on activities based regulation — and if they could get something through Congress to really amplify FSOC’s activities-based powers, that could go a long way toward safeguarding the financial system, and making us more resilient the next time we experience a shock.

HELTMAN: Is there additional FSOC authority to be had, do you think? Or is the activities-based argument really kind of a shorthand of saying, “We’d really rather that FSOC didn’t really do anything of consequence”?

WADE: I think the incoming Biden ministration would seek to do all in its power to empower FSOC in a way that the current Trump administration has very clearly not done. As to whether or not that requires legislative change, and as to whether or not a Senate — Republican Senate — would agree to that, I am significantly less optimistic.


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