What a Shelby-Hensarling Alliance Could Mean for Banks

WASHINGTON — On paper at least, a legislative partnership between Sen. Richard Shelby, who is poised to take over the Banking Committee next year, and Rep. Jeb Hensarling, who will again head the House Financial Services Committee, sounds like a match made in heaven.

Both are ideological conservatives with a deep skepticism of the Consumer Financial Protection Bureau and the Federal Reserve Board, as well as similar opinions about the future of housing finance.

But though they have much in common, their approaches to policymaking are expected to be significantly different — due in part to the chambers they are in — and it may make enacting legislation much harder.

Republicans have just a slim majority in the Senate, which means they need to win at least a few moderate Democrats over to their side to reach the 60-vote threshold needed to avoid a filibuster. In the House, meanwhile, Republicans have managed to strengthen their hold on a body already designed to be majoritarian.

"Shelby and Hensarling may be ideologically similar, but as a political matter Shelby has to be more practical in terms of what he can or cannot pass," said Brian Gardner, an analyst at Keefe, Bruyette & Woods. "Shelby has to do his negotiating early in the process, just to get it through the chamber."

Practical realities aside, the two lawmakers share a similar world view. The southern Republicans are both skeptical of overactive government and supportive of markets. While it's not clear that the two have a deep personal relationship, they run in related circles. Shelby, for example, is said to be close with former Sen. Phil Gramm, R-Texas, a longtime mentor to Hensarling.

"Both have a philosophy about the constrained role of government and the bigger role of markets, and both have a suspicion of big government and big finance," said Mark Calabria, director of financial regulation studies at the Cato Institute, and a former Shelby staffer. "If both put out pieces of paper on their agendas — there will have been no coordination, but the agendas will look a lot alike."

Still, even if their goals align, both lawmakers will first have to move legislation through their respective chambers — perhaps the more challenging task relative to negotiating with each other. Shelby will, by definition, have to take a more centrist approach on various issues from the start, perhaps setting his stronger ideological beliefs aside if the right deal comes along. Hensarling, meanwhile, is known for being more of a hardline advocate for his views. That approach works better in the House, which abides by different voting rules and doesn't have a filibuster provision like that in the Senate.

But the Texas lawmaker has also struggled — in some cases he's even had difficulty getting support from his own caucus, such as on his controversial housing finance reform proposal, which died before getting to the House floor last fall.

Much of the early action next year is bound to take place separately in the two chambers, before any thoughts about reconciling Senate and House legislation begin to crop up.

Still, there are a number of overlapping issues that the two lawmakers could address next term — chief among them changes to the Dodd-Frank Act. Both Shelby and Hensarling were members of the Dodd-Frank conference committee, and have been critical of the law, including provisions establishing a consumer protection agency and directing regulators on how to wind down big banks.

How the lawmakers approach joint efforts like changes to the financial reform law remains to be seen. Hensarling has been aggressive in passing tweaks to the law, including many bipartisan reforms, over the past year, though Sen. Tim Johnson, D-S.D., and Senate Majority Leader Harry Reid, D-Nev., have not pursued them. Johnson, who is retiring at the end of the year, has based his legacy around delaying efforts to open the law back up.

"It will be more interesting to watch Hensarling over the next two years than it has been in the past, because Johnson and Reid were so reluctant to move legislation on Dodd-Frank," said Gardner. "Now he has a willing partner in the Senate, so it's possible that they get some legislation passed."

Hensarling will likely have to shift his strategy now that the GOP controls both chambers, to avoid putting undue pressure on Shelby. He's still expected to reintroduce and pass some of the top provisions that made it through the House this year, but the Texas lawmaker may also have to be more deliberate in deciding which bills he chooses to back.

"What will be fascinating is how they coordinate their efforts so there are not multiple bills sitting on Shelby's desk making him look inactive," said one bank lobbyist. "If you send 25 or 30 bills over to the Senate, I don't think Hensarling wants to be in a position where he's embarrassing his counterpart in the Senate, because they're in the same party. It's not something either of them would want, for fear of looking like they're uncoordinated in the process."

The lawmakers' priorities may also be aligned around the goal of getting things done, albeit for different reasons. Shelby, who previously served as chairman of the Banking Committee from 2003 to 2007, is likely to move quickly so that he can make the most of his remaining two years with the gavel. Hensarling, on the other hand, may be motivated to win some legislative achievements after a tough first term as chairman of the banking panel, especially as he considers his future in the chamber and a potential bid for GOP leadership down the line. And both lawmakers will be working with the knowledge that the Senate is favored to flip back to Democrats in 2016 — at least according to early projections.

"Shelby realizes his time is finite, and Hensarling is looking at the long game and wants to get some points on the board — these views and reasonably similar ideologies set them up to be able to meet in the middle," said Brandon Barford, a partner at Beacon Policy Advisors, another former Shelby staffer.

Beyond legislative action, the two chairmen are also expected to push for policy changes by pressuring regulators directly. Both have raised concerns about the broad mandate of the CFPB, along with a lack of transparency at the Fed and the Financial Stability Oversight Council. Regulators are likely to appear before both committees frequently, and may face tougher scrutiny than under Johnson's leadership in the Senate.

"There are many ways to run a committee — there are legislative accomplishments, but also hearings, oversight and investigations," said Lendell Porterfield, a partner at Porterfield, Lowenthal, Fettig & Sears and a former Shelby staffer. "There are a lot of tools at your disposal, and I think Shelby is very attuned to how he can be effective using all of those tools."