What happens to banking policy if Dems win both chambers of Congress?

The conventional wisdom in Washington is that Republicans are favored to retain control of the Senate in the upcoming midterm elections, and Democrats are favored to take control of the House away from the GOP.

But prognosticators also caution that neither scenario is a sure bet. An outcome where the conventional wisdom is upended, in either chamber, is on the table.

With some Republican strongholds suddenly looking like tossups, there is recent coverage suggesting that the GOP is worried about holding the Senate, in addition to staring down potential defeat in the House. “I hope when the smoke clears, we’ll still have a majority,” Senate Majority Leader Mitch McConnell was quoted saying in the Washington Post.

If such concerns became a reality, it would rewrite the script in Washington on financial policy. The implications of a Democratic sweep of both houses would be far-reaching: Likely nailing the coffin shut on further regulatory relief legislation, the opposition party having more influence in the Trump administration’s remaining picks to run regulatory agencies, and the Democrats having a larger role in housing finance reform and other initiatives.

Just the House flipping itself would have a significant impact on the financial policy debate, but the shift would be more extreme under a scenario of Democrats taking control of both chambers. The Democrats would set the agenda for both banking committees, rather than just the House Financial Services Committee. The Senate Banking Committee would likely be chaired by Sen. Sherrod Brown, D-Ohio, who is running for re-election and has been aligned with Sen. Elizabeth Warren, D-Mass., on key issues. If they held the majority, Democrats could also block any Trump administration nominee for regulatory positions.

Let’s be clear though: Despite predictions of a “blue wave” in November, the cards are still stacked against the Democrats winning the Senate. Twenty-three Democratic incumbents are defending their Senate seats, versus only eight on the Republican side. That includes 10 Democrats running for re-election in states that President Trump won in 2016.

But with races tightening in states like Texas, Arizona and Tennessee, the GOP’s Senate majority looks increasingly fragile. Republicans currently hold a razor-thin 51-to-49 seat majority. On Monday, a CNN poll showed the Democratic candidates in front in both Arizona and Tennessee — seats currently held by Republicans who are both retiring. In Texas, polls still give a slight edge to Republican Sen. Ted Cruz over Democrat Beto O'Rourke, but the race is considered a tossup.

From the industry’s perspective, a Democratic sweep would not be a doomsday scenario with a Republican still in the White House. And recent legislative activity, such as the May enactment of a bill unwinding certain provisions of the Dodd-Frank Act, suggests several Democrats in both chambers would remain sympathetic to the industry’s causes.

Yet such a scenario would still throw a major wrench in banking policy debates. For example, if Democrats beat the odds and won the Senate, they would suddenly have a much bigger say on Trump’s regulatory picks.

The administration will soon have an opportunity to nominate a new director of the Federal Housing Finance Agency, with current chief Mel Watt’s tenure coming to an end. Some potential names discussed include House Financial Services Committee Chairman Jeb Hensarling, who is retiring from Congress, and Ed DeMarco, a former acting director of the FHFA.

But a Democratic majority in the Senate would likely result in a bitter debate over who should run the agency. Absent a legislative breakthrough on reforming the government-sponsored enterprises, the next FHFA director will have substantial influence in crafting administrative GSE reforms. But Democrats would likely balk at a nominee who might attempt to curb Fannie Mae and Freddie Mac’s role in the housing market, particularly their affordable housing initiatives. In the longer run, a Democratic majority in both chambers would give the party a more substantial say in a long-term GSE reform legislative package.

In the current Congress, it is widely expected that Republicans are trying to move pending nominees before the midterm elections, to avoid the risks of a Democratic wave. That appears to be part of the calculus with efforts to confirm Judge Brett Kavanaugh to the Supreme Court. For similar reasons, the GOP likely wants to move quickly to confirm Kathy Kraninger, who has drawn vehement Democratic opposition, as director of the Consumer Financial Protection Bureau.

But perhaps the biggest concern for banks from a potential Democratic sweep is the extent to which Warren and other strong backers of the post-crisis regulatory framework would try to play offense as members of the majority. Not only would additional regulatory relief measures appear less likely, but measures that might worry bankers — a return to Glass-Steagall and other reforms enabling regulators to break apart large banks, for example — could get more of an airing.

Bankshot is American Banker’s column for real-time analysis of today's news.