Could Dem takeover of House rock the boat for banks?

May 31, 2018 3:45 PM

The GOP's clean sweep in the 2016 election was broadly favorable to banks, but midterms usually favor the opposition party. The political analysis newsletter Sabato's Crystal Ball, from Larry Sabato of the University of Virginia, said Thursday that the two parties have "equal odds" of taking the House majority. Others argue the Democrats are the favorites to win the House.

Effects on banking policy of a House flip would likely stop short of regulatory toughening. Most analysts still project the GOP to hold on to the Senate, and there will still be a Republican in the White House come January. The recent package of provisions rolling back the Dodd-Frank Act will remain the law of the land.

But a Democratic takeover in the House would upend the chamber's priorities, slowing down regulatory relief initiatives, putting more heat on Trump-appointed regulators who appear before the congressional committees, and giving Democratic leaders a bigger soapbox to criticize the industry and push for reforms that could expand regulatory burden.

Here are four banking-policy effects of a potential party flip in the House:

House Minority Leader Nancy Pelosi, a Democrat from California, speaks during a news conference on Capitol Hill in Washington, D.C., U.S. on Thursday, March 22, 2018. Congressional leaders released a $1.3 trillion government spending plan for the rest of the fiscal year and asked lawmakers to begin voting on it with only hours to read and analyze the 2,232-page text. Photographer: Joshua Roberts/Bloomberg

Joshua Roberts/Bloomberg

WASHINGTON — Projections for the midterm elections raise the prospect of Democratic gains, particularly in the House. But would a flip of power in the lower chamber lead to real policy change for banks, or just a change in rhetoric?

The GOP's clean sweep in the 2016 election was broadly favorable to banks, but midterms usually favor the opposition party. The political analysis newsletter Sabato's Crystal Ball, from Larry Sabato of the University of Virginia, said Thursday that the two parties have "equal odds" of taking the House majority. Others argue the Democrats are the favorites to win the House.

Effects on banking policy of a House flip would likely stop short of regulatory toughening. Most analysts still project the GOP to hold on to the Senate, and there will still be a Republican in the White House come January. The recent package of provisions rolling back the Dodd-Frank Act will remain the law of the land.

But a Democratic takeover in the House would upend the chamber's priorities, slowing down regulatory relief initiatives, putting more heat on Trump-appointed regulators who appear before the congressional committees, and giving Democratic leaders a bigger soapbox to criticize the industry and push for reforms that could expand regulatory burden.

Here are four banking-policy effects of a potential party flip in the House:

New agenda for House Financial Services Committee

Rep. Maxine Waters, D-Calif., who was a strong opponent of the bill passed last week, would likely chair the House Financial Services Committee if Democrats took control of the House.

Waters' leadership could mean a newfound focus on criticizing the largest banks, strengthening consumer protection measures, prioritizing fair lending and other housing-related issues, and taking GOP-appointed regulators to task.

The new rhetoric could complicate regulators' efforts to recalibrate the post-crisis regulatory regime.

“Tone matters and you do have regulators who don’t want to run afoul of Congress, generally,” said Ian Katz, a director with Capital Alpha Partners.

The continuing Wells Fargo scandals will also likely be a key issue for Waters and other Democrats in their messaging. For example, former Federal Reserve Chair Janet Yellen slapped the bank in February with an enforcement action barring it from growing any larger. Democratic control of the House committee could quell efforts to lift that cap.

“Wells Fargo will eventually have its cap lifted, but if then-Chairwoman Waters is focusing her oversight on Wells Fargo and the regulators as it relates to Wells Fargo, then I think it’s harder to loosen the grip on the bank,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading.

More soft power than hard power

Even if the House flips, the regulatory relief bill signed by President Trump is safe. But negative headlines and messaging risk will likely hit the banking industry as Democrats will push for heightened regulations and enforcement.

“The congressional agenda impacts financial regulators' agenda,” said Aaron Klein, a fellow at the Brookings Institution. “I think often the world outside of the Beltway overestimates congressional hard power — that is law — and underestimates congressional soft power — the ability to hold hearings, send letters, ask questions. A change in leadership of the Congress is a large change in who can wield soft power.”

But Katz and others said that likely will not translate into any real practical effect on banks.

"I’m a little skeptical that when it comes to rulemaking, especially technical rulemaking, whether it is the [enhanced Supplementary Leverage Ratio], or the liquidity coverage ratio or how ... [regulators] oversee stress tests," Katz said.

Katz added that regulators might get requests from congressional Democrats to produce studies that would not normally be their focus. Yet those requests would likely not have much bearing on the agencies' regulatory priorities.

“It could be inconvenient to feel like the new leadership is more antagonistic to what they want to do,” Katz said. “If [Fed Vice Chairman for Supervision] Randy Quarles comes up and says in speeches that he wants to look at liquidity rules, for instance the [total loss-absorbing capacity] rule, I think he’s going to do it regardless of who wins the elections in November.”

Boomerang effect on Dodd-Frank asset threshold?

A Democratic-controlled House could not enact legislation without the Senate and Trump administration on board. But just like GOP lawmakers voted on and passed legislation during the Obama administration — drawing the spotlight for their legislative priorities — House Democrats could do the same if they seized power.

One area they could focus on is the asset level at which large banks are considered systemically important financial institutions, or SIFIs, under the 2010 Dodd-Frank law.

The recent reg relief law raised that asset threshold, which qualifies a bank for enhanced supervision by the Fed, from $50 billion to $250 billion.

That provision, a compromise between Republicans who didn’t want any threshold and moderate Democrats open to raising the threshold, was sharply criticized by progressive Democrats who said it was too much of a giveaway to banks.

Former Democratic Rep. Barney Frank, one of the authors of Dodd-Frank, has publicly acknowledged that the original $50 billion threshold was too low, but he has also said that the recent reg relief legislation went too far in raising it to $250 billion.

Boltansky said Democrats who opposed the provision will try to propose legislation to bring the SIFI threshold down, possibly to a hard $100 billion asset level.

“There will be a Democratic bill next year that tries to move that $250 billion threshold down to $100 billion,” Boltansky said. “It will not become law, but it will be proposed.”

Boltansky added that Democrats might also try to propose bills aimed at the Senate reg relief bill’s exemption for banks that originate fewer than 500 mortgages a year from Home Mortgage Disclosure Act requirements.

Refocusing of bank lobbying efforts

Bank lobbyists, including both those who advocate for individual institutions and industry's trade associations, celebrated the passage of the Senate’s regulatory relief bill. But they would need to be ready to play more defense against Democratic leadership in the House.

“It does make it tougher for them because they have a less receptive audience in the chairmanship of that [House Financial Services] committee,” said Katz. “It may be harder to talk to people and then when they do, they talk to people who aren’t as inclined to take their side. I’m sure it is a tougher time if the House changes.”

For now, however, industry representatives say political volatility in Washington will not change their strategy.

“I think the priorities stay the same,” Rebeca Romero Rainey, the new president and CEO of the Independent Community Bankers of America, said in a recent interview with reporters and editors of American Banker. “Obviously, we engage in some good conversations, trying to tell our story and meeting with whoever is the chairman at that point in time to move it forward. Knowing that yes there will be questions and things that we’ll have to figure out and we’ll continue to do that.”