Special Washington Update: Outlook on Financial Policy in 2021-22

With former Vice President Joe Biden set to become President next year, this report provides an overview of what we might expect on financial policy issues from a potential Biden administration and a likely divided Congress. 

While Biden will become President and Democrats will retain narrow control over the House of Representatives (despite losing seats), control of the Senate will be determined by the outcome of two special elections in Georgia on January 5^th. Democrats will need to win both seats to have a narrow control of the Senate. In an election cycle in which they mostly missed opportunities to flip Republican-controlled Senate seats, that will be tough to do. Republicans will need to win just one of those seats, meaning that President-Elect Biden probably will need to contend with a Senate led by Majority Leader Mitch McConnell (R-KY). 

Even if Democrats manage to win both seats in Georgia, they will have the narrowest of majorities (50 to 50 seats, with Democrats having Vice President-Elect Kamala Harris as a tie-breaker) and will be clearly well short of the 60 votes that are needed to advance most legislation in the upper chamber. This generally means that major policy changes will need to go through the regulatory process rather than through Congress. 

Republican control over the Senate would have important implications for personnel and policy decisions by a Biden administration. First, any talk of changing Senate filibuster rules are completely taken off the table. Indeed, Majority Leader McConnell will be able to set the agenda of the Senate and any legislative accomplishments a Biden administration might have in its first two years will need to be won through agreements with McConnell and Senate Republicans. That dynamic will significantly narrow the scope of legislative priorities to ones that could get bipartisan support. Second, it gives McConnell and Republican committee chairs greater influence over Biden administration appointments requiring Senate approval, which will further reinforce the need for the Biden administration to nominate mainstream candidates. Third, potential Democratic efforts to overturn Trump administration regulatory requirements through the Congressional Review Act are off the table. Instead, a Biden administration will need to make regulatory changes through the formal and lengthy process involving notice and comment.

There's an old adage in Washington that "personnel is policy," and a lot will depend on the views and outlook of the particular appointees. There are deep divisions on financial policy between the more progressive and moderate wings of the Democratic party. Likely Republican control of the Senate means that Biden administration nominees generally will need to hue more towards the moderate side, meaning, for example, that a staunch progressive like Senator Elizabeth Warren (D-MA) is unlikely now to get serious consideration to be Treasury Secretary. 

A Biden administration would have latitude to replace the leadership at most financial regulatory agencies. A Supreme Court case from earlier this year invalidated a key statutory limitation on the President’s ability to dismiss the head of the Consumer Financial Protection Bureau (CFPB). Another pending Supreme Court case would provide greater flexibility to remove the head of the Federal Housing Finance Agency (FHFA) though that case won’t be decided until next spring. Other regulatory posts have greater insularity from political change. FDIC Chairwoman Jelena McWilliams could stay on through the end of her term, which expires in 2023, but she may leave before then given that she would end up heading a board where she is outnumbered by Democratic appointees. A potential Biden administration could have a longer period of time in reshaping the Federal Reserve Board given that the board could be completely filled by the time he takes office. Chairman Powell's term as Chairman doesn't expire until February 2022. Given the respect that he has on both sides of the aisle, it is certainly possible that Powell could be re-nominated by a Biden administration.

While progressive Democrats – led by House Financial Services Committee Chairwoman Maxine Waters (D-CA) and Senate Banking Committee Ranking Member Sherrod Brown (D-OH) – will have influence over Biden administration financial policies, they will have difficulty getting traction on major legislative proposals in a Republican-controlled Senate. Republican control of the Senate would mean that Brown, a frequent critic of the financial industry, will not become Chairman of the Banking Committee. 

The following discusses what could happen in some key issue areas. Given the likely divided Congress, the most meaningful activity will happen in the regulatory sphere, although Congress also will have influence on regulatory processes.

Fiduciary.

There will be interest in revising the SEC’s Regulation Best Interest (Reg BI) and the DOL’s parallel proposal on fiduciary standards (expected to be finalized by the current DOL before the end of the year). The potential disruptive impact of completely overhauling the existing best interest framework and instead opting for something akin to the Obama administration’s fiduciary rule may give regulators pause and lead them to focus instead reviewing how the existing Reg BI framework is working with an eye towards tightening certain regulatory requirements under the rule. 

Bank Regulation. 

Major legislative changes like re-imposition of Glass-Steagall separation of retail and investment banking clearly would be nonstarters. Instead, banking institutions, particularly larger ones, eventually could face more stringent regulatory and supervisory requirements and enforcement as Biden appointees take the reins. The likely ongoing presence of many Trump appointees on the Federal Reserve Board may function at least temporarily as a brake on more aggressive regulatory actions. 

Bank Tax/Financial Transaction Tax.

Financial institutions may need to push back against proposals for a tax on bank liabilities and a tax on financial transactions, but these are less of a threat in a Republican Senate.

Shadow Banking.

Products and activities, including money market funds, exchange traded funds, hedge funds and leveraged lending, also will face greater scrutiny by a Biden administration. A Biden administration could try to use the Financial Stability Oversight Council (FSOC) to once again designate nonbank financial companies, such as large insurers and asset managers.

ESG.

There are few areas where a Biden win would represent a more dramatic policy shift than climate issues, although a Republican Senate would dim the ambitions for major legislative changes. In the financial sphere, regulators would join international fora on sustainable finance and climate issues. The SEC would require increased corporate disclosure on environmental, social, and governance (ESG) matters. Banking regulators would integrate climate risk into their regulatory and supervisory processes. A Biden administration also likely will overturn a rule recently finalized by the DOL that will subject ESG investments to greater scrutiny.

Payments/Fintech.

Progressives have fixed upon Federal Reserve accounts for individuals and postal banking as two solutions to address the problem of access to banking in the US. However, these proposals would face major pushback from the banking industry and there are concerns about the feasibility and efficacy of these proposals even among many Democrats, never mind in a Republican-controlled Senate. As such, they are unlikely to get much traction for the foreseeable future. Democrats in Congress will continue to push the Federal Reserve on the development of its real time payments system FedNow, though this is a major technical undertaking that will take multiple years. A Biden administration also is likely to halt approvals of banking charters for fintech companies. 

Housing Finance.

The FHFA currently is engaged in a multi-step process to eventually remove Fannie Mae and Freddie Mac from conservatorship as private companies. One important step in that process has been determining the GSEs capital requirements and the FHFA is expected to finalize a rule in this area by the end of the year. The potential for a fairly quick removal of the current FHFA Director in a Biden administration likely would derail current plans.

Consumer Finance.

Strengthening of consumer financial protection regulation and enforcement will be a major thrust of a Biden administration’s financial regulatory agenda. The CFPB will toughen regulatory requirements for entities like payday lenders and debt collectors and will toughen supervision and enforcement of a much wider range of consumer financial entities, particularly nonbank ones.