Biden victory ushers in tougher environment for US banks

With Democrat Joe Biden set to become US president on January 20 following elections on November 3, banks could face significant regulatory and tax changes as the new administration shifts the US government’s priorities.

While President Donald Trump was primarily focused on economic growth, his successor in the White House will prioritise environmental, healthcare and social issues over the longer term.

Mr Biden’s first priorities, however, will be to re-boot the country’s pandemic-battered economy.

The Democratic Party also has a strong cadre of progressives who are not particularly well inclined towards financial firms. And despite Mr Trump never doing “a big number” on Dodd-Frank, many Democrats nonetheless feel that the administration has been lax towards banks.

Not least they benefited handsomely from the cut in corporate taxes to 21% from 35% under the Republicans. Mr Biden would like to hike the tax rate to 28%, which would be costly for the banks.

The good news for the banks is that more financial regulation is not a top priority for the Democrats – they didn’t even provide a detailed plan in their election manifesto. And they may be too busy with their highly ambitious agenda to pay much attention to banks.

“With a split Congress and divergent interests, it is unlikely that any major financial services related legislation will be passed,” said law firm Arnold & Porter in a note.

What is known about the Democrats is that they want tougher regulation and greater taxation for the biggest banks, more on climate transition risk management and disclosure, structural changes to retail banking with a greater government role, a social justice package and the implementation of Basel III/IV and changes to capital requirements.

Slow burn

Any changes are likely to be rolled out relatively slowly as agency heads need to be appointed, though the terms of many of them run beyond 2021, but there’s always a chance some will step down early.

One individual to watch is Lael Brainard, a Democrat, who is on the board of governors at the Federal Reserve. She is widely expected to land a key role either as treasury secretary or Fed chair or Fed vice chair for supervision. Her views on regulation are similar to former Fed governor Daniel Tarullo who favoured tougher rules, and she has opposed most of the changes to capital requirements in recent years. She also advocated for a positive countercyclical capital buffer before the pandemic struck.

The scope of Democrat regulatory ambitions could be curtailed if they don’t secure a majority in the Senate where they are anyway restricted because even if they did get a majority they still wouldn’t have enough seats to enact fundamental changes.

That likely means that most of the changes will happen at an agency level and these bodies have significant freedom to interpret regulatory frameworks. And some of the tweaks they pursue could prove expensive for banks.

Consultancy Oliver Wyman lists capital and liquidity requirements, resolution and recovery planning, risk management procedures and disclosure requirements as all areas where agency interpretations could be meaningful for banks

“Democrats are not predisposed generally to releasing or relieving capital requirements at a time when there could be stress,” said Kara Ward, a partner at law firm Holland & Knight in a webinar.

Some areas where change could happen according to Oliver Wyman’s report is around the Fed’s approach to regulation, which at the moment focuses on greater transparency and the ‘rule of law’. However, some Democrats think the approach makes it easier for banks to game the system and they may opt for a more ‘authoritarian’ approach.

Stress tests

Then there is the conduct of the Comprehensive Capital Analysis and Review and stress tests, which could make substantial impact. These tests give the Fed considerable flexibility to push capital buffers higher by asking banks to position for certain scenarios. It also sets the calibration of the various capital buffers.

Oliver Wyman sees the possibility of some changes around leverage ratios. The enhanced supplementary leverage ratio for the big banks used to be 6% for depository institutions and 5% for the banking group as a whole, now it is 5% for both – a move Ms Brainard opposed.

In response to the pandemic’s impact on the economy, the Fed temporarily allowed the exclusion of bank reserves at the Fed and US Treasury holdings from calculations to the supplementary leverage ratio. Some industry sources thought that could become permanent, but that is now unlikely.

Shadow banks are also likely to face more scrutiny and regulation: “I think the lights are starting to be turned on for regulating non-bank servicers and non-bank lenders. I think we are going to start to see more oversight in the mortgage markets for the people who are vendors or at least counterparties to the GSEs (government sponsored enterprises),” says Ms Ward.

There are also likely to be some changes in regulatory philosophy which may benefit The Financial Stability Oversight Council: “With FSOC I think we are going to see another pendulum shift here. Lately in the Trump administration there was a plan to look at activities as the basis for examining … I think we are going to go back to an entity level review,” says Ms Ward.

Climate change impact

Under Mr Biden banks are likely to face more reporting obligations around climate change and to have to assess climate impacts on assets, such as in stress tests similar to what is happening in Europe.

These aims, which Europe is likely to support, could see the ‘greening’ of global regulatory frameworks from the Basel Committee on Banking Supervision and the Financial Stability Board.

As part of social justice aims, banks may be forced to make more products available to low income and minority households. There are likely to be more consumer protection measures as well. The Consumer Financial Protection Bureau, marginalised under the Trump administration, is likely to be revitalised, meaning greater powers to fine abuse of consumers by financial institutions. Indeed, Mr Biden will have the power to appoint a new CFPB head very quickly.

For the fintechs, a Biden administration might be a big positive given their ability to drive financial inclusion.

“We will continue to feel the tension between the fintechs and the established banks, but I do think the fintechs will have a couple of golden years here under Biden as there is an effort to democratise and make more services available to folks who have been under served in the past,” said Ms Ward.

This article first appeared in The Banker's sister publication Global Risk Regulator.