Our take: financial services regulatory update - November 13, 2020

With the final remaining states of Arizona and Georgia projected for Joe Biden within the last 24 hours, the former Vice President appears likely to win with the largest popular vote total in history and secure 306 electoral votes - the same number won by President Trump in 2016. While President Trump has mounted legal challenges against the election results and White House staff have not formally allocated transition funding, President Biden has nevertheless begun his transition efforts including by releasing a list of the members of his agency review teams. The list includes a number of familiar names in financial services including former Obama Administration CFTC Chair Gary Gensler heading the banking and securities regulators team, Obama Administration CFPB Deputy Director Leandra English heading the consumer financial protection team, and bank executive Don Graves (also former Deputy Assistant Treasury Secretary) leading the Treasury Department team.

Our take

Regardless of whether President Biden finds himself with a split Congress or a narrow 50-50 tie in the Senate, any substantial financial services legislation appears unlikely. As a result, the greatest opportunity for change will come from the referees (i.e., regulators) rather than the rules (i.e., legislation). While Biden’s transition team list contains far more former regulators, consumer advocates and academics than industry insiders, we expect that he will ultimately select moderates largely palatable to both the industry and Senate Republicans.

In light of the ongoing pandemic, calls for further stimulus, and voter focus on issues such as healthcare and racial justice, we do not anticipate the Biden Administration to view financial services as a high priority. As such, Biden will be unlikely to target major financial services legislation such as unwinding the Trump Administration’s Dodd-Frank reforms. Instead, he will be more likely to focus on incrementally strengthening consumer protection as well as environmental, social and governance (ESG) standards through agency action.

See Purple reign: Ten key points from the 2020 election for a more in depth look at what we expect from a Biden Presidency.

This week, Fed Vice Chair for Supervision Randal Quarles, OCC Acting Comptroller Brian Brooks, FDIC Chair Jelena McWilliams and NCUA Chair Rodney Hood testified before the House Financial Services Committee (HFSC) and Senate Banking Committee. In his prepared remarks, Quarles highlighted key points from the Fed’s Supervision and Regulation report released last week, which covered the Fed’s response throughout the crisis and for the first time included the impacts of climate change on financial stability. In addition, McWilliams expressed that she intends to serve out her full term as FDIC Chairman, which ends in June 2023. Other notable topics include:

The pandemic/crisis:

• Quarles reiterated that the Fed will continue to use its full range of tools to support the economy as long as it is needed, but noted that the Board has not come to a decision on whether to extend the lending facilities that are set to expire at the end of the year.
• Brooks expressed that there remains concern around troubled assets in commercial real estate and hospitality.

Climate change risk:

• All of the regulators agreed that climate change risk should be monitored. Quarles indicated that banks should integrate climate risk into their risk management frameworks but explained that the Fed has not concluded that credit allocation is the mechanism to address climate change.
• Quarles noted that the Fed applied to join the Network for the Greening of the Financial System, an organization of central banks focused on the role of the financial system in meeting climate change mitigation goals. In addition, Quarles stated that the Fed is engaging with the Bank of England and monitoring how they are incorporating climate change in their stress tests.

The Community Reinvestment Act (CRA):

• Brooks announced that the OCC would release a Notice of Proposed Rulemaking in the coming days on objective performance standards that were left out of the agency’s final CRA reform rule.

LIBOR transition

• Quarles remarked that a plan to address legacy contracts tied to LIBOR could be publicly announced within the next two months. He also cautioned against a solution based on a so-called “synthetic” LIBOR for the US market, given its “different litigation framework.” He alluded to work on a mechanism that would allow legacy contracts to mature on their existing terms, even beyond 2021, without a significant change. It was not immediately clear what such a mechanism would look like, or how it would interact with existing proposals for a legislative solution. At both the federal and state level (New York), bills are under consideration that would facilitate the statutory replacement of LIBOR upon its cessation in contracts with no or insufficient fallback provisions.

Regulatory reform:

• Quarles indicated that the Fed is unlikely to provide relief on the global systemically important bank (GSIB) surcharge.
• McWilliams noted that the FDIC plans to finalize its brokered deposits rule by the end of the year.
• HFSC Chairwoman Maxine Waters (D-CA) stressed that she would work with the Biden Administration to unwind Trump Administration regulatory reform, including the OCC’s CRA rule.

Our take

The latest Fed Supervision and Regulation Report including climate change risk and all the regulators agreeing climate-related risks should be monitored is a notable evolution from Vice Chair Quarles’ statement last year that he’s “not a meteorologist” when asked about this topic. While the Fed doesn’t appear to be close to incorporating climate risk into stress testing or mandating any mitigation measures, this rapid progression of views indicates that regulatory attention to these issues will only intensify. With regard to more immediate concerns, the regulators appear to be in wait-and-see mode when it comes to the need for further crisis management. If this winter results in a revival of stay-at-home orders, which is already occurring in some areas, we would expect the Fed to extend its lending facilities and to revive calls for fiscal support from Congress.

Going forward, Chairwoman Waters may have meaningful intentions to push for a rollback of Trump Administration regulatory reform, but as we discussed in our prediction for financial regulation under the Biden Administration (see point 1 above), even the most vocal bank critics would likely face strong headwinds against unwinding reforms and instituting significant new capital or liquidity requirements if financial institutions continue to show strength and ability to support hard-hit customers during this crisis. In addition, McWilliams’ confirmation that she intends to serve the remaining two-and-a-half years of her term illustrates the potential for Trump-appointed regulators to stay in place and challenge reversals of their reforms.

These notable developments hit our radar over the past week:

1. Crisis response continues. Over the past week, the federal regulatory agencies continued to take steps to support the economy while Congress remained deadlocked on relief. Specifically:
   • Yesterday, Fed Chair Jerome Powell participated in a panel at the European Central Bank Forum in which he explained that while the economic rebound has been faster and stronger than expected, there could be challenges with further spread over the next several months.
   • On Tuesday, the Kansas City Fed and the Atlanta Fed released a report that describes the impacts of the crisis on small businesses owned by minorities and provides suggestions for supporting them throughout the recovery.
   • On Monday, the New York Fed released a report on consumer expectations, showing a slight decrease in expectations around income growth and household spending. Expectations around the labor market were mixed, with slightly increased expectations for overall employment and prospects of keeping one’s job but decreased expectations for availability of finding new jobs.
   • Last Friday, the Fed released a periodic report on outstanding crisis-related lending facilities.
2. Senate to vote on Shelton. Senate Majority Leader Mitch McConnell (R-KY) filed cloture on Judy Shelton’s nomination to serve out the remainder of a Fed Governor term ending on February 1, 2024. The full Senate could vote on her nomination next week and is also expected to consider the nomination of Christopher Waller shortly after.