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Don’t expect to see much in terms of federal banking legislation over the next two years, after contentious midterm elections saw Democrats take a majority in the House of Representatives, while Republicans increased their advantage in the Senate.
Experts expect Congress to be muted when it comes to further discussions on regulatory relief, but say there might be opportunities to do some work around housing, marijuana banking policy and reform on the Bank Secrecy Act and Anti-Money Laundering rules, among other initiatives.
Markets also signaled their expectation of legislative gridlock in the coming years. The Dow Jones Industrial Average rose 514 points and the S&P 500 gained 2 percent on Wednesday following the midterms, primarily driven by the idea that if very little legislation can pass, very little can be done to disrupt markets.
“The appetite between now and 2020 to make any major changes won’t be there,” Christopher Currier, a partner at the Boston law firm Partridge Snow & Hahn, told Banker & Tradesman. “Congress may nibble around the edges and focus on things like housing and that nature, which would be a win-win for both parties.”
With the Democrats taking over the house, Rep. Maxine Waters (D-CA) is expected to become chairwoman of the House Financial Service Committee. Waters would be a stark contrast to Republican leadership over the past two years, as she has been a fierce critic of Wall Street and President Donald Trump’s deregulation agenda.
Additionally, Massachusetts financial institutions lost a close ally and senior member of the House Financial Services Committee when longtime incumbent Michael Capuano was defeated by former Boston City Councilor Ayanna Pressley.
In the Senate, three members – Heidi Heitkamp, Joe Donnelly and Dean Heller – lost their reelection bids. Perhaps most significantly, Heitkamp and Donnelly were moderate Democrats who supported the Dodd-Frank relief bill passed earlier this year – and their replacements are at this time unknown.
Although Waters may not have supported Dodd-Frank relief, the bill is likely to hold up because it had bipartisan support and going after it would put a lot of Democrats in difficult situations, said Jon Skarin, executive vice president at the Massachusetts Bankers Association.
The House could attempt to bring down the thresholds for stress testing and for which institutions are considered systemically important financial institutions, Skarin said, but that is unlikely in his opinion.
Instead, said Currier, expect to see a lot of “political theater” from both sides over the next two years.
Bram Berkowitz
What Action, If Any?
While regulatory relief may now be a long way off, there is still potential for incremental changes.
Waters will likely take a look at the Community Reinvestment Act, on which the U.S. Office of the Comptroller of the Currency has requested public comment.
Most in the industry have suggested a CRA overhaul is inevitable, although Waters may have different ideas on what that looks like.
“Historically, she has been adamantly opposed to doing anything that would either literally or potentially give the impression of weakening CRA requirements,” Skarin said. “Not that she has said anything specific; in theory she has been in favor of expanding the scope of CRA.”
Waters may also move on banking and marijuana policy. Her home state of California has legalized medicinal and recreational marijuana and, like Massachusetts, has had difficulties figuring out how to bank marijuana businesses. The recent resignation of U.S. Attorney General Jeff Sessions, who indicated that he was opposed to marijuana legalization, could be another boon to these efforts.
Additionally, Skarin said there is potential for some incremental reforms to the Bank Secrecy Act and Anti-Money Laundering laws. This could involve streamlining reporting or raising the thresholds for requirements such as currency transaction reports, which banks must submit to federal regulators on every transaction over $10,000.
The Consumer Financial Protection Bureau will be another one to watch.
Since Acting Director Mick Mulvaney began his tenure, the agency has gone a significantly different way than its first director and Obama appointee Richard Cordray, much to the displeasure of Waters and other Democrats.
“The president still sets policy on what agencies are tasked to do,” Currier said. The House Financial Services Committee “can’t do anything against the president’s policy. However, [Waters] can certainly shine a spotlight on what the agency is doing through hearings and a lot of attention.”
Reformation of the government-sponsored entities Fannie Mae and Freddie Mac may also be on the table, continuing a conversation that has been going on for almost a decade.
Former Chairman of the House Financial Services Committee Jeb Hensarling previously took a very free market approach, something not all lawmakers had been on board with, Skarin said. It will be interesting to see if Waters can change the direction of this topic, he said.
