Fall legislative preview: Risk and reward ahead for banks in run-up to midterms

September 2, 2022 1:05 PM

WASHINGTON — It's been a historically busy session for Congress, but lawmakers may not be quite done yet as the nation barrels toward a midterm election.

Today's legislative landscape is a far cry from the winter of 2021, when it had appeared that the legislative core of the Biden administration's agenda — the Build Back Better Act — had been scrapped over differences between moderate and progressive Democrats.

But months later, Democrats on Capitol Hill shocked observers and insiders alike when Senate Majority Leader Chuck Schumer and West Virginia Sen. Joe Manchin announced a deal that would eventually usher in the federal government's largest investment towards climate change preparedness — the Inflation Reduction Act.

Analysts note that the 117th Congress has been surprisingly kind to the banking industry as a whole: practically no provision passed by the legislature will have any meaningful impact on financial institutions — with the possible exception of a 1% stock buyback tax — and the sector should broadly benefit from the billions of dollars in federal investments promised by the IRA and other laws, including the Bipartisan Infrastructure Act.

"The fact that the banking industry was able to make it through both reconciliation bills largely unscathed, and we did not see an increase in the corporate rate — I think would surprise many bankers and observers if you would have asked us the morning after Georgia flipped the Senate to Democratic control," Isaac Boltansky, a managing director of BTIG, said in an interview. "The banking industry has fared far better during this Congress than some of us would have expected at the beginning of this session. "

This session of Congress won't gavel out until Jan. 3, 2023. That doesn't leave much time for lawmakers in legislative terms, and analysts tend to be bearish about dealmaking in the run-up to an election. But the lame duck session of Congress after Nov. 8 could be fertile ground for compromise, said Ian Katz, a managing director at Capital Alpha Partners, particularly if Republicans have a weaker showing than expected and take the House by a thin margin.

"If Republicans have like a 20- to 30-seat margin, they're more likely to have an attitude of, 'No, we're not going to do anything with Democrats, we're running it all in January, come back then,' " Katz said. "A small victory is probably more helpful for a lame-duck session."

A customer lights a joint at the Lowell Cafe, a new cannabis lounge in West Hollywood, California.

A bill to open legal cannabis operations to the banking system has been working its way through Congress for years, but whether it can cross the finish line in the 117th Congress depends on the outcome of the 2022 midterms.

Bloomberg News

A final push for cannabis banking?

This could be the big moment for cannabis banking reform, but souring bipartisan sentiment on Capitol Hill could make the exercise even more perilous than usual.

Make no mistake: The Secure and Fair Enforcement Banking Act is a popular bill designed to address a long-running issue for the legal cannabis market — an overabundance of cash — by creating a regulatory safe harbor for banks to work with law-abiding companies in the sector. First championed by Democratic Rep. Ed Perlmutter of Colorado in 2013, the law has passed through the House of Representatives several times with healthy bipartisan support.

The problem remains the Senate, which is currently controlled by Democrats. Progressives led by New Jersey's Sen. Cory Booker have argued the SAFE Banking Act as written is inadequate for addressing the broader harms of the federal government's war on drugs. For months, analysts have mulled the possibility of a "SAFE-plus" Banking Act, which could include restorative justice components for progressives as well as broader capital markets access to appeal to conservatives.

Analysts are skeptical that lawmakers would throw their support behind the bill anytime before the 2022 midterm election on Nov. 8. "No one wants to take a vote on more controversial subjects or things that could be politicized," said Ed Mills, a managing director at Raymond James. "Anything related to marijuana policy probably falls into that camp."

But even in a lame-duck session, recent developments on Capitol Hill have left Republicans bruised and less enthusiastic about the prospect of dealmaking. In July, Senate Majority Leader Chuck Schumer secured enough Republican votes for a manufacturing and research bill for the measure to pass. Then, hours later, Schumer announced the surprise deal with Manchin for the Inflation Reduction Act.

Republicans have accused Democrats of poisoning the well with the maneuver, which will make it tougher for the parties to come together on even the simplest of compromises — among them, cannabis banking reform.

"The general animosity and distrust between the parties will definitely be unhelpful to that legislation. It could overcome it," Katz said. "But if you're the Republican Party, and you're coming up on an election or coming right after one, and you think the Democrats would portray [SAFE Banking] as a victory, do you want to take part in that?"

At the same time, proponents of the SAFE Banking Act still have a reliable legislative vehicle for their measure to pass: the National Defense Authorization Act. If Senate leadership allows the SAFE Banking Act to be included in the upper chamber's version of that bill — as it was in the House version, passed in July — it might be difficult for Republicans to vote against the must-pass legislation.

"There will definitely be an impact from that political maneuver on the calculus for all legislation this year. I think that it makes it incrementally more difficult," Boltansky said. "But when I look at the annual defense bill, which has been passed over 60 times for 60 years, you have a clear vehicle."

Industry braces for a Durbin card fee redux

The return of a dreaded fight between retailers and the financial services industry over credit card fees has bank advocates on edge, though the reform faces long odds of passing Congress for now.

Illinois Democratic Sen. Dick Durbin introduced the Credit Card Competition Act of 2022 in July, which would require Visa- and Mastercard-issuing banks with more than $100 billion of assets to add a second payment card routing option to cards to lower merchants' card-processing costs.

The bill is a follow up on a much-reviled Dodd-Frank reform among bankers — the Durbin amendment — which first required financial institutions to provide a second payment card routing option in physical stores. The requirement has not kept up with the rise in online shopping, which are largely dominated today by Visa and Mastercard.

Analysts are skeptical that the new Durbin bill is ripe for passage in the current session. Unfortunately for banks, Durbin's bill had a notable co-sponsor: Sen. Roger Marshall of Kansas, a Republican. That means that the bill is unlikely to fade away after 2022.

"Longer term for the industry, [banks] are going to have to reconcile the fact that Sen. Durbin now has a Republican dancing partner. That is the most meaningful development," Boltansky said. "They're going to have to watch to see if Sen. Marshall is an outlier, or if he's the first of many."

Durbin's push also coincides with another legislative priority that Democratic congressional leadership hopes to accomplish before the end of the session: a landmark antitrust bill aimed at Big Tech. That legislative effort could overlap nicely with Durbin's bill, which he has described as taking aim at a "Visa-Mastercard Duopoly."

"I would be watching for any antitrust legislation because [Durbin] is a very savvy senator. He looks for opportunities for deals," said Mills. "But the addition of the Credit Card Competition Act could actually make it more difficult to pass antitrust reform, which is already considered a difficult enough task as is."

Stablecoin and overdraft reform face dwindling odds — for now

Other widely discussed legislative efforts from the past year are more likely to take a backseat this fall, analysts say, even as they loom over the 118th session.

Take overdraft reform, for one — consumer advocates and their allies among the Biden administration's regulators have taken an increasingly harsh look at banks' reliance on overdraft fees, which has prompted many of the country's largest institutions to abandon or significantly reform their nonsufficient-funds-fees programs.

That change to date hasn't been sufficient for key lawmakers like Rep. Carolyn Maloney, the New York Democrat who has led the push for the Overdraft Protection Act. Passed out of the House Financial Services Committee in July, the bill would introduce limits on how often banks can charge nonsufficient-funds fees and explicitly require customers to opt into overdraft programs.

But Maloney, a 30-year veteran of Congress, will leave office in January following a gnarly primary election against fellow-heavyweight Rep. Jerry Nadler, another New York Democrat. The two were pitted together after the 2020 census stripped one congressional seat from New York's congressional delegation.

It remains to be seen whether any lawmakers will formally take up the mantle from Maloney as a champion of overdraft reform. Democratic Sens. Elizabeth Warren of Massachusetts and Cory Booker of New Jersey have publicly backed Maloney's bill. But analysts say the fight ahead will be trickier in part because of differences in how overdraft fees are used between large and small banks, putting would-be sponsors at risk of alienating their hometown financial institutions.

"The interesting part of overdraft reform is how [the fees make up] disproportionately a larger portion of revenues for smaller and medium-sized banks than large banks," Mills said. "And in D.C., the small and medium-sized banks have a lot more political capital and have a better relationship with members of Congress across the board."

Another high-profile legislative effort faces the prospect of limbo until the results of the 2022 midterms become clear: stablecoin regulation, which would set rules for a type of digital asset intended to maintain a steady value to help facilitate other cryptocurrency transactions. Biden administration regulators have repeatedly urged Congress to introduce rules to better police the sector before it becomes a threat to financial stability.

This fall, policymakers may get their first look at a highly anticipated stablecoin bill between the top lawmakers on the House Financial Services Committee, Chair Maxine Waters of California and ranking member Patrick McHenry. But even if that bill appears, analysts see long odds of it passing through the Senate for now, especially while Chair Sherrod Brown remains in control of the Senate Banking Committee.

"Even if we get something from McHenry and Waters, Brown's office has absolutely no reason whatsoever to compromise in any way, shape, or form on stablecoin legislation," said Boltansky.

"There is no reason, even with strict consumer protections as defined by his office, for there to be a compromise when I believe that their office is positioned in such a way that they believe this whole ecosystem should not exist," Boltansky added. "I think this is going to be one of those instances where lawmakers let the perfect be the enemy of the good."

A spokesperson for Brown said the Ohio Democrat "is continuing to evaluate proposals from his colleagues in Congress and is committed to developing a framework that sufficiently protects Americans' hard-earned money and our economy from the risks of digital assets."

"The stability of the U.S. markets and banking system is critical to supporting families, communities, and small businesses. We must protect that," the Brown spokesperson said. "Much like over-the-counter derivatives led to financial meltdowns that hurt workers, families, and small banks the worst, we know who's going to lose the most from crypto — consumers and our economy."