WASHINGTON – Neither President Donald Trump nor Democratic candidate Joe Biden have made banking policy a cornerstone of their presidential campaigns. However, whoever wins in November faces a task that is of paramount importance for financial institutions: the selection of new heads of financial regulators.
The president's new term could begin with a vacancy as a currency auditor if Trump doesn't name a candidate, who will be confirmed by the Senate through January. The government would also be faced with an early decision to reappoint US Federal Reserve chairman Jerome Powell, whose term ends in February 2022, or choose a new head of the central bank.
"In a way, it's like wars and everything else: the winner can make history," said Greg Lyons, partner at Debevoise & Plimpton.
But if Biden wins, he could be more aggressive in changing the leadership of the Consumer Financial Protection Bureau after the Supreme Court ruled that the president can fire CFPB head, currently Kathy Kraninger, at his own discretion. An upcoming Supreme Court case involving the Federal Housing Finance Agency could give a Biden government a similar position to remove director Mark Calabria.
"One of the most important things we've seen in the past five years is how influential the political candidates are," said Kathryn Judge, a professor at Columbia Law School. "There are the rules as they appear in the books, and then there are the rules as they are put into practice, and there is necessarily always some space there."
How the economy recovers from the COVID-19 crisis is likely to affect fiscal policy decisions regardless of who is elected.
If Trump is re-elected, most industry observers expect his regulatory officials to continue on their path of deregulation and possibly loosen banks' capital and liquidity needs to boost lending.
In a Biden government, the new president would have to decide whether to diverge from Trump's economic recovery efforts or stay on course, much like decisions that former President Barack Obama faced when he took office in the middle of the financial crisis in 2009.
"Although Obama came in and chose Tim Geithner as his Treasury Secretary, who ran the New York Fed and therefore played a key role in the general crisis response, he wanted to signal continuity," said Judge. "This is one of the big questions Biden is facing: does he want to signal continuity or signal an interruption to the previous government?"
Rename Powell or choose a new Fed leadership?
Two Trump candidates for the Fed Board – conservative economist Judy Shelton and Christopher Waller, research director at the Federal Reserve Bank of St. Louis – are still awaiting Senate approval. Meanwhile, the Fed's vice chair for Randal Quarles will expire in 2021.
Some have speculated that the president could nominate her if Shelton is confirmed and Trump wins the reelection once Powell's term ends in 2022. Shelton has questioned whether the Fed should remain apolitical and has suggested that the central bank work more closely with the White House.
"I believe in the maxim" staff is politics "and I think some of these questions will be easier to answer if we know who the key people are," said David Portilla, partner at Debevoise & Plimpton and former Treasury official.
At the beginning of the Trump presidency, it was hard to imagine that Powell would stay for a second term. The president berated the Fed chair via Twitter for the central bank's interest rate policy and suggested that the White House could fire him.
But Powell, a Republican, has gotten good grades in running the Fed as the country has grappled with the economic realities of COVID-19. It would be difficult to replace him, said the judge.
"Despite previous tweets, I don't see Trump now wanting to get away from Powell," she said. "The other thing is that Powell has only done a really remarkable job during his tenure, which I think will also help explain why the Fed was given such a central role in dealing with this crisis."
Mike Krimminger, former General Counsel of Federal Deposit Insurance Corp., also said it was possible that Biden Powell would be renamed after his term as Chairman.
"Although I don't know anything about their internal views, I think Powell can be kept in a biden administration," he said. "I think President Biden would tend to have a moderate election for the Federal Reserve Chairman because it is such an important position, and frankly it is a position that I think must be moderate."
Powell has also worked to build relationships with Democrats and Republicans in Congress, Judge said, an effort that has led to widespread praise from both sides of the aisle. In May alone, Powell phoned the legislator for around seven hours according to his public schedule.
These interactions could have helped bring the lawmaker to Powell's side, stressing the importance of a strong fiscal response from Congress. MP Denny Heck, D-Wash., Even joked at a recent Congress hearing that he would support a lifelong appointment for Powell.
The other agencies
But appointment decisions for agencies other than the Fed could be much earlier before a Trump or Biden presidency in the president's new term.
The comptroller of the currency has a term of five years. However, since acting comptroller Brian Brooks is only temporarily in this position, a Biden or Trump administration could try to quickly replace him with a permanent candidate.
The CFPB's Kraninger was confirmed in December 2018 for a term of five years. However, the decision of the Supreme Court in Seila Law v CFPB stated that the president can fire the director at will, a decision that some speculation could also apply to Calabria's reputation at the FHFA.
FDIC Chair Jelena McWilliams was sworn in for a five-year term in June 2018, "which she wants to serve," said an FDIC spokeswoman.
The term of office of the National Credit Union Executive Board Chairman, Rodney Hood, expires in August 2023. (The Senate only confirms NCUA members in their board seats, while the presidents designate a chair.)
Nevertheless, Krimminger expects that many regulators appointed under Trump would resign in a Biden government.
If Republicans remained in control of the Senate, it would probably be more difficult for Biden to get nominations, and vice versa, for Trump if the Democrats got a majority in the Senate.
Fintech integration, audit guidelines, CRA
Lyons said that whoever will head the agencies in the new presidency will help determine the future of technology in banking, regulatory and other important matters.
"Who is there will really play a big role," he said. "We know what kind of people Trump appoints. You would think that this would lead to a continuous integration of banks and fintech, more adaptation to certain types of banks, perhaps more flexibility in audits and fewer enforcement measures and so on. "
However, the profile of the regulatory authorities appointed by Biden is less clear.
While Biden has consistently held moderate positions for some of his previous democratic rivals for the nomination, it remains to be seen what impact more progressive figures like Sens. Elizabeth Warren, D-Mass. And Bernie Sanders, I-Vt. to have financial regulation policy.
While both governments would focus on the impact of the pandemic, a biden government could take measures to reduce inequality, the judge said, especially given the disproportionate impact of the pandemic on minorities.
"One of the things we could see under a Biden government would be efforts to think more about diversity and financial inclusion," she said. "We may make more efforts to accelerate efforts to further develop the payment system or possibly provide a public option, whether by mail or something more modest."
The OCC's efforts to revise the Community Reinvestment Act could also be withdrawn if Biden is elected, Lyons said. The agency's rule, which the agency passed in May without the support of another banking regulator, was unpopular among Democrats who say it would undermine the decades-old CRA anti-redlining law.
"I certainly think that the OCC's CRA proposal is likely to be under threat," said Lyons. "It will only take effect in a few years, but neither the Fed nor the FDIC have participated."
Overall, however, Krimminger does not expect a "very significant change" in banking regulation from a biden administration.
"I think you would probably see increased capital and liquidity needs," he said. “You may see some changes to the swap standards, etc. Finally, most of the Dodd Frank law standards are still there, although some components have been cut away. You could try to enforce the previous standards again. "
With both election results, there is likely to be a continuing discussion of adequate capital and liquidity rules, said Portilla.
"If the banks do well, some will say that this was an indication that the post-2008 financial crisis reforms provided the protection they were supposed to offer, and others will say that the level of capital was too strict and economic growth limited and limited markets were distorted, ”he said.
However, many of these measures could also be based on how banks are doing between now and the day they take office and how the economic recovery is developing.
"There is always tension between letting (banks) try to boost the economy or regulate it more because you are afraid that it will fail," said Lyons.