WASHINGTON — Neither President Donald Trump nor Democratic nominee Joe Biden has made banking policy a cornerstone of their presidential campaigns. Yet whoever wins in November will face a task of utmost importance to financial institutions: selecting new heads of the financial regulatory agencies.
The new presidential term could start with a vacancy atop the Office of the Comptroller of the Currency if Trump fails to name a nominee who is then Senate-confirmed by January. The administration would also face a decision early on about whether to reappoint Federal Reserve Chair Jerome Powell, whose term ends in February 2022, or select a new head of the central bank.
“At some level, it’s just like with wars and everything else: the victor gets to write the story,” said Greg Lyons, a partner at Debevoise & Plimpton.
But if Biden wins, he could move more aggressively to change the leadership of the Consumer Financial Protection Bureau following a Supreme Court ruling allowing the president greater discretion to fire the head of the CFPB, currently Kathy Kraninger. An upcoming Supreme Court case involving the Federal Housing Finance Agency could give a Biden administration similar standing to remove Director Mark Calabria.
“One of the most important things that we've seen over the past five years is how influential political appointees are,” said Kathryn Judge, a professor at Columbia Law School. “There's the rules as they appear in the books and then there's the rules as they go into practice, and there's necessarily always some space there.”
How the economy recovers from the COVID-19 crisis will likely influence decisions about financial policy, regardless of who is elected.
If Trump is reelected, most industry observers expect his regulatory appointees to continue down a path of deregulation, perhaps loosening bank capital and liquidity requirements in an attempt to jumpstart lending.
In a Biden administration, the new president would have to decide whether to depart from Trump’s economic recovery efforts or stay the course, similar to decisions facing former President Barack Obama when he took office in 2009 in the midst of the financial crisis.
“Even though Obama was coming in, in choosing Tim Geithner as his Treasury secretary, who had been heading up the New York Fed and therefore a key player in the overall crisis response, he wanted to signal continuity,” said Judge. “That's one of the big questions that Biden is going to face is, does he want to signal continuity or signal a break from the previous administration?”
Renominate Powell or choose new Fed leadership?
Two Trump nominees for the Fed board — conservative economist Judy Shelton and Christopher Waller, the director of research at the Federal Reserve Bank of St. Louis — are still awaiting Senate confirmation. Meanwhile, the term of Fed Vice Chairman for Supervision Randal Quarles will expire in 2021.
Some have speculated that if Shelton is confirmed and Trump wins reelection, the president could nominate her to run the Fed once Powell's term expires in 2022. Shelton has questioned
“I believe in the ‘personnel is policy’ maxim, and I think some of these questions will be easier to home in on once we know who the key people are,” said David Portilla, a partner at Debevoise & Plimpton and a former Treasury official.
Earlier in the Trump presidency, it was hard to imagine Powell
But Powell, who is a Republican, has won high marks leading the Fed as the country has grappled with the economic realities of COVID-19. It would be difficult to replace him, said Judge.
“Despite earlier tweets, I don't see Trump now wanting to move away from Powell,” she said. “The other thing is that Powell has done just a really remarkable job throughout his tenure, which I think also helps explain why the Fed was given such a central role in managing this crisis.”
Mike Krimminger, former general counsel to the Federal Deposit Insurance Corp., also said it’s possible Biden would renominate Powell when his term as chair expires.
“While I know nothing of their internal views, I think it’s possible that Powell could be retained in a Biden administration,” he said. “I think that a President Biden would tend toward a moderate choice for the chair of the Federal Reserve because it’s such an important position, and frankly, it is a position that I think requires moderation.”
Powell has also worked to build relationships with both Democrats and Republicans in Congress, said Judge, an effort that has resulted in extensive praise from both sides of the aisle. In the month of May alone, Powell spent roughly seven hours on the phone with lawmakers, according to his public schedule.
Those interactions may have helped to get lawmakers on Powell’s side as he has stressed the importance of a strong fiscal response from Congress. Rep. Denny Heck, D-Wash., even joked at a recent congressional hearing that he would support a lifetime appointment for Powell.
The other agencies
But appointment decisions for other agencies besides the Fed could face either a Trump or Biden presidency much sooner in the new presidential term.
The comptroller of the currency serves a five-year term, but because acting Comptroller Brian Brooks is only serving in the position temporarily, a Biden or Trump administration could seek to replace him quickly with a permanent nominee.
The CFPB's Kraninger was confirmed for a five-year term in December 2018. But the Supreme Court decision in Seila Law v. CFPB determined that the president is able to fire the director at will, a decision that some speculate could also apply to Calabria's standing at the FHFA.
FDIC Chairwoman Jelena McWilliams was sworn in for a five-year term in June 2018, “which she intends to fulfill,” an FDIC spokesperson said.
The board term for National Credit Union Administration Chair Rodney Hood expires in August 2023. (The Senate only confirms NCUA members to their board seats, while the presidents designates a chair.)
Still, Krimminger expects that in a Biden administration, many regulators appointed under Trump would tender their resignation.
Of course, if the Republicans retain control of the Senate, it would likely be more challenging for Biden to get nominations through, and vice versa for Trump if Democrats were to gain a majority in the Senate.
Fintech integration, exam policy, CRA
Lyons said whoever gets appointed to the run the agencies in the new presidential term will help set the future of tech in banking, supervisory policy and other important matters.
“Who is there is really going to matter a lot,” he said. “We know what kind of people Trump appoints. You would think that that would lead to ongoing integration of banks and fintech, more tailoring for certain types of banks, perhaps more flexibility on exams and fewer enforcement actions and so forth.”
But the profile of regulators Biden might appoint is less clear.
While Biden took consistently moderate positions compared to some of his former Democratic rivals for the nomination, it remains to be seen the kind of influence more progressive figures like Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt., have on financial regulatory policy.
While both administrations would be focused on the effect the pandemic, a Biden administration might pursue policies to lessen inequality, said Judge, especially given the pandemic's disproportionate impact on minorities.
“One of the things we might see under a Biden administration would be efforts to think about diversity and financial inclusion in a more meaningful way,” she said. “We might see more efforts to accelerate efforts to advance the payment system or potentially to provide a public option, whether it's postal banking or something more modest.”
The OCC’s efforts to revamp the Community Reinvestment Act may also be walked back if Biden is elected, said Lyons. The agency's rule, which the agency
“I certainly think the OCC's CRA proposal is probably in some jeopardy,” said Lyons. “It doesn't come into effect for at least a couple more years, but neither the Fed nor the FDIC has gone along with it.”
But Krimminger says overall he doesn’t expect “very significant changes” in bank regulation from a Biden administration.
“I think you would see probably increased capital and liquidity requirements,” he said. “You might see some changes to the swap standards, etc. After all, most of the standards from the Dodd-Frank Act are still in place, though some components have been whittled away. They may seek to reassert the prior standards.”
With either outcome of the election, there will likely be a continuing conversation around appropriate capital and liquidity rules, Portilla said.
“If the banks perform well, some will say that was indicative of the fact that the post-2008 financial crisis reforms provided the protections that they were intended to provide, and others will say that capital levels were too stringent and constrained economic growth and distorted markets,” he said.
But a lot of those policies could also be predicated on how banks fare in the period between now and Inauguration Day, as well as the status of the economic recovery.
“There's always the tension between letting [banks] run a bit more to try to stimulate the economy or regulating them more because you're afraid of them failing,” said Lyons.
