As the beginning of the Biden presidency approaches, the banking industry faces more question marks than certainties. The pandemic, and handling the economic fallout from it, are expected to be a continuing major concern for the new administration. Something that sets the current COVID-19 recession apart from many past economic crises is that unlike the Great Recession, for example, no one can lay this one at the banking industry’s feet. However, history has shown that Washington has no aversion against sticking some sectors with more of the bill for solving this or that problem, regardless of fault, especially one with less popularity overall than many others.
Many societal troubles have been blamed on the banking industry, to one degree or another, and those issues will have more of a hearing in Washington than under the Trump Administration. In addition, efforts from the past that were muted or stalled may see a resurgence — a key one is aggressive pursuit of fair-lending actions by the Justice Department using the controversial “disparate impact” theory.
The Georgia Senate races’ outcome will influence how easily Biden Administration legislation dealing with the industry will fare on Capitol Hill. Now that Democrats have taken both of the seats they will control the Senate, with Vice President Kamala Harris as the tie-breaker in any vote that’s 50-50 along party lines, removing a potential check to banking legislation seen as unfavorable. Banking matters aren’t always legislated along party lines, but the Democratic majority means that a new party will be setting committee-level agendas and hearings in the Senate. This makes a difference, even though a senator of either party has powers that a minority party member of the House lacks. The Democrats now control both sides of Capitol Hill.
It can’t be forgotten that in many ways the financial services business is far different than just four years ago. The idea of a fintech bank, for example, was merely a theory then, and few entities that weren’t traditional banks or credit unions had charters.
Today, more are obtaining charters and still more are effectively getting access to the system through banking as a service arrangements. And the Google Plex bigtech-banking hybrid stretches definitions. Much of the federal regulatory apparatus doesn’t neatly fit the new shape of banking.
There will be a strong temptation for the new administration to make a major mark on the business. In an op-ed in American Banker written to the Biden team, Thomas Vartanian, a longtime Washington banking attorney, wrote that “Financial services in America will only thrive if you appreciate that new delivery systems and new financial products require an overhaul of our obsolete concepts of oversight.” Vartanian currently is Executive Director and Professor of Law at George Mason University’s Scalia Law School’s Program on Financial Regulation and Technology.)
Where certain agencies go in terms of policy direction will bear watching as President Biden fills out industry-related regulatory posts.
Here’s a brief recap of how key agencies and issues will fare in the new administration.
People at the Top of the Treasury Department and the Federal Reserve
One of the early nomination intentions announced — they aren’t technically nominations until a sworn-in President Biden sends them to Capitol Hill — is Janet Yellen to be Treasury Secretary. This announcement has been greeted as a governmental triple crown, with Yellen heading Treasury, and being the first woman in the post, after having served as the first woman to chair the Federal Reserve Board (2014-2018) under an Obama appointment and the chair of the Council of Economic Advisers during the Clinton years.
She’ll be working closely with the person who President Trump nominated to replace her. Traditionally a Fed chair serves at least two terms, even if originally nominated by the party opposite the President’s. President Trump broke the tradition, however, by declining to renominate Yellen.
“Yellen will be working closely with the person who President Trump nominated to replace her at the Federal Reserve.”
Politico, however, suggests in an analysis that the two might work well together on recession responses, as both have indicated that they believe that the nation’s greater risk lies in taking too little action to keep the economy going, rather than in doing too much to stimulate it. Powell, an attorney, disagreed with Trump Treasury Secretary Steve Mnuchin’s decision to let many CARES Act aid programs lapse on expiration.
Yellen has had a knack of holding key economic roles at watershed moments, according to an Associated Press account. She succeeded Fed Chairman Ben Bernanke while the economy was still coming back from the Great Recession, for example. Now, AP wrote, “she would inherit an economy with still-high unemployment, escalating threats to small businesses, and signs that consumers are retrenching as the worsening pandemic restricts or discourages spending.” AP noted that Yellen has a reputation for sympathy for disadvantaged groups such as the long-term unemployed.
In the past Yellen, an economist, was accused of being soft on inflation, but Powell has already announced that the Fed will keep rates low for the foreseeable future even if inflation exceeds the Fed’s current target range.
Barring the departure of any current members of the Fed board, only one seat remains open. (The nominee for that post, Judy Shelton, had seen her appointment stalled in the Senate. In early January President Trump renominated her in a last-ditch effort to put her in that seat, prior to the Georgia votes.) In a mid-December 2020 speech, Randal Quarles, Vice Chair for Supervision, made it clear he wasn’t going anywhere, outlining ambitious ideas for improving private risk ratings put on banking companies, among other ideas. His time on the board runs to 2032, his term as Vice Chair until late 2021.
Meanwhile, Wally Adeyemo, Biden’s choice for Deputy Secretary of the Treasury, served in high economic and security posts in the Obama administration and currently serves as the head of the Obama Foundation.
Beyond the Fed, Mostly Question Marks So Far
Looking at other federal banking posts:
• Comptroller of the Currency (OCC): When Brian Brooks stepped into the role of Acting Comptroller in May 2020, he tackled it with extreme enthusiasm, and in the weeks after the election President Trump nominated him for a full five-year term. While a nomination hearing was promised, it has not been scheduled and is now pretty much a moot point. Sherrod Brown, ranking Democratic member of the Senate Banking Committee, and expected to be the committee chairman in the new Senate now that the party flip is certain, made no secret of his feelings at the time of the nomination: “President Trump continues to ignore the results of the election and nominate unqualified financial appointees who will interfere with a new administration’s attempts to save the economy. Brian Brooks is not on the side of working people, and his nomination must be rejected immediately.”
“Because Trump appointees are expected to continue running FDIC and the Fed for a time, OCC is seen as a key position to begin implementing Biden’s banking agenda.”
If Brooks had received Senate confirmation before President-Elect Biden is sworn in, that would have created an odd but interesting situation. OCC, while part of the Treasury Department and not independent like the Fed or FDIC, has many aspects of an independent regulator. According to a 2017 paper by the Congressional Research Service, the Comptroller can be removed by the President on notice to the Senate. On the other hand, the paper states, “Tradition may also influence a President to allow a full term where there is no statutory for cause protection, as seems to typically be the case for the OCC.”
Given the tenor of these times politically, that is hard to imagine this time. “Because Trump appointees are expected to continue running the other two agencies [FDIC and the Federal Reserve] for a time, the OCC is thought to be in a key position to begin implementing Biden’s agenda for banks,” as stated in a Bloomberg Law article.
Two matters currently under consideration at the OCC bear watching during the transition and beyond. First is a massive rewrite of Community Reinvestment Act regulations that OCC implemented solo — highly unusual. House Democrats pushed hard for a time to unwind the revised regs and still want them out. Biden criticized CRA enforcement during the campaign. Second is a proposed rule on “fair banking” that Brooks has been pushing to finalize before the new administration comes in.
In the wake of mob violence on Capitol, some Trump officials were resigning in protests. Brooks issued an Jan. 7 statement to OCC staff that said, in part: “In the midst of the current unrest, OCC leadership and staff remain on the job. We do so not because we condone the events of the past 24 hours but because our agency’s mission is an apolitical one on which millions of Americans depend. We continue to focus on ensuring the federal banking system operates in a safe, sound, and fair manner, uninterrupted by election results, natural disasters, or global conflict. … For months, we have participated in the Presidential transition planning process to ensure that work proceeds, and I know the country can count on you to ensure we continue to fulfill our important responsibilities.”
UPDATE: Late Jan. 13, 2021, OCC announced that Brooks would step down as of close of business Jan. 14. He was to be succeeded for the time being by OCC Chief Operating Officer Blake Paulson. On Jan. 22 the Wall Street Journal reported rumors that the Biden administration would nominate Michael Barr, a former Obama administration Treasury official, to the Comptroller post.
• FDIC: FDIC is an independent agency and as such its Chairman serves a set term. Current Chairman Jelena McWilliams has said on multiple occasions that she intends to serve her full time — her designation as chair continues into 2023 and her FDIC board term expires in 2024. (Her predecessor, Martin Gruenberg, served as chairman about 18 months into the Trump administration and continues on the board today.)
Under McWilliams FDIC has not always moved in synch with OCC — it did not move ahead with the CRA revamp nor with the fair banking proposal, for example.
While FDIC does not charter institutions at any level, it controls the granting of deposit insurance not only to national banks and state-chartered banks, but also to industrial banks (also known as industrial loan companies), which have been selected as a way into the traditional banking system by organizations like Square.
FDIC has also been seeking public comment on how it might set up a system of standards and certification to support financial institutions’ efforts to evaluate third-party providers of fintech and other services.
• CFPB: It’s widely expected that the Biden administration will replace CFPB Director Kathy Kraninger.
No names have come forward yet, while the bureau in the Trump years has been criticized by consumerists and politicians as being industry friendly. Reinvigorating CFPB was among Biden campaign pledges.
“Fire Director Kathy Kraninger.”
— CFPB suggestion from House Financial Services Commmittee Chair Maxine Waters
“The statement that this CFPB is in the lap of the industry and is doing nothing to protect consumers is completely inconsistent with the reality of what the bureau’s been doing over the last several years,” said Christopher Willis, Partner at Ballard Spahr LLP during a podcast about post-election outlook. “To say this is a bureau not doing any enforcement is just not so.” There has been an uptick in enforcement cases in the last two years, he says, and CFPB has introduced some innovative techniques. He says the CFPB under Kraninger has tended to solve more matters through supervision than litigation.
On the other hand, in a long letter to Biden, House Financial Services Committee Chairman Maxine Waters (D.-Calif.) included this bullet point: “Fire Director Kathy Kraninger.”
In a roundup on potential regulatory picks Reuters identified several for the bureau directorship, including Patrice Ficklin, the bureau’s longtime fair-lending enforcement director, and U.S. Representative Katie Porter (D.-Calif.), who is called a protégé of Senator Elizabeth Warren, considered the inventor of the bureau.
UPDATE: In mid-January the Wall Street Journal reported that sources indicated that Rohit Chopra, former student loan watchdog at CFPB and currently a commissioner at the Federal Trade Commission, was the incoming administration’s choice for the director’s post. Subsequently the Biden transition team confirmed the appointment and Kraninger tendered her resignation.
NCUA. The National Credit Union Administration board had its third and final member confirmed in December 2020. UPDATE: On Jan. 25 President Biden designated Todd Harper, board member, to be Chairman.
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Fintechs: Darlings or Devils?
There is speculation that fintechs’ day in Washington is coming, but that can be spun two ways. The theme of financial inclusion runs strong through many fintechs and that appeals to Democrats. On the other hand, an increasing amount of financial activity in the U.S. is falling out of traditionally regulated channels. It is hard to see that continuing if the Biden administration digs into the matter, especially as many fintechs move closer to the banking industry through banking as a service and other arrangements.
“There is speculation that fintechs’ day in Washington is coming, but that can be spun two ways.”
On the other hand, an analysis by Pillsbury Winthrop Shaw Pittman LLP points out that many members of the Biden transition teams for financial agencies have fintech expertise and that the Biden campaign enjoyed significant support out of Silicon Valley and other parts of the tech world. (S&P Global Market Intelligence reported in October 2020 that donations to the campaign from people and political funds associated with solely Alphabet, parent of Google, had reached $1.7 million, out of $8.7 million they spent in the 2020 election cycle at that point, mostly on Democrats.)
“The new administration is likely to be supportive of the fintech community and innovation while aiming to ensure that innovative financial products and services serve the unbanked and underbanked communities and increase access to financial services,” the analysis stated. “Fintech companies that are developing products that meet those priorities are likely to gain greater acceptance from legislators and regulators.”
Some potential clues — for both fintechs and traditional institutions — can be gleaned from a set of documents from the Biden-Sanders Unity Task Force, a summer of 2020 effort to bridge the viewpoints of the Democratic Party’s mainstream and its progressive wing. Some bullet points:
- “Efforts to guarantee affordable, transparent, trustworthy banking services for low- and middle-income families, including bank accounts and real-time payment system through the Federal Reserve and easily accessible service locations, including postal banking.”
- Increasing funding for small businesses in low-income and rural areas, including for unbanked and underbanked businesses and minority-owned businesses.
- Creation of a publicly run credit reporting bureau, “to provide a non-discriminatory credit reporting alternative to the private agencies,” with its use mandated in connection with federal lending programs.
- Separation of retail banking from investment banking functions.
- A new social contract that “provides access for all to reliable banking and financial services.’
One point about postal banking: It was one of the early financial tenets of President Bill Clinton, years ago. He had talked at one point of a network of 100 such entities. That was ditched in favor of a massive revamp of Community Reinvestment Act regulations — which happen to be the rules that the Trump OCC devoted so much time revising and updating.
A Pair of Major Issues to Watch
Two other areas to watch are mergers and acquisitions and fair-lending enforcement.
• In the M&A area, several recent deals such as the PNC/BBVA merger and the Huntington/TCF merger could encourage more players to choose partners as consolidation picks up momentum again.
“While Democratic appointees are likely to view large financial institution combinations with greater skepticism, there is unlikely to be a significant practical impact on bank mergers and acquisitions,” said Cleary Gottlieb Steen & Hamilton LLP in a presentation in mid-November. However, the authors of the paper suggested that the Federal Reserve could tighten up acquisition reviews, “including incorporating racial equality considerations.”
• In the area of fair-lending enforcement, it’s expected that the Justice Department will return to using “disparate impact” standards for finding the existence of illegal discrimination in lending.
“Under the Obama administration, many fair-lending enforcement actions were brought or threatened under the “disparate impact” theory, under which claims can be brought based solely on statistical calculations suggesting that an organization’s facially neutral policy disparately affects individuals in protected classes — even if the organization had no intent to discriminate,” according to a paper from Jones Walker LLP.
During the Trump years usage of the controversial legal theory was mostly avoided. In early January a last-moment effort to formalize de-emphasis on use of disparate impact was put in play, but in light of everything else that’s happened that sounds dead on arrival.
And ultimately, “the Biden platform expressly endorsed the use of disparate impact analysis in the enforcement of fair-lending laws,” so lenders can expect a return to it, according to the Jones Walker paper.
This article, originally published in December 2020, has been updated multiple times to add new information as it becomes available.