How much should banks fear a Democratic victory in 2020?

WASHINGTON — The aggressive stances of some Democrats running for president are sure to make bankers worry, but the election of a progressive candidate is unlikely to result in an immediate re-regulation of the financial services sector.

Candidates such as Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt. — both among the top tier of Democratic candidates — would bring long records of favoring regulatory muscle and have pushed hard against Wall Street during the campaign.

While the regulatory atmosphere would surely change with a Democrat in the White House, there would not be an automatic sea change. Substantive reforms would first require new regulatory appointments, and then arduous notice and comment periods for new rules. Legislative reforms would require control of the Senate to flip to the Democrats as well.

"You are going to have slow turnover" at the Federal Reserve and the Federal Deposit Insurance Corp., and "a little quicker turnover" at the Office of the Comptroller of the Currency, said Brian Gardner, a policy analyst at KBW.

To be sure, the agenda for some regulatory bodies could change relatively quickly. A new Treasury secretary would chair the Financial Stability Oversight Council — made up of the heads of the regulatory agencies — potentially redirecting its focus.

A wild card is a Supreme Court case that could give a sitting president greater latitude to fire the head of the Consumer Financial Protection Bureau — currently Kathy Kraninger — before her term expires.

The ability to immediately appoint a new CFPB chief would allow a Democratic administration to get right to work reversing deregulatory initiatives by the agency under the Trump administration. But if the case is decided differently, a new president would likely have to wait until Kraninger's term expires in 2023.

“In determining what policies could be changed, timing is important,” said Gardner. “Director Kraninger’s term … goes on for a while. If she can’t be fired and she doesn’t resign, then a Democratic president would be slowed down in changes in consumer financial regulation.”

A new party controlling the White House could shift the financial policy narrative in other ways. Warren, whom some Washington pundits view as the front-runner in the Democratic race, is arguably the industry's greatest threat with a long paper trail supporting strong financial regulation.

“Elizabeth Warren is essentially setting the standards for Democratic financial services policy,” said Dan Crowley, a partner at K&L Gates.

A Democratic president could advance themes such as forcing regulators to contain the financial impacts of climate change, calling for more diverse company boards and expanding financial services access to the underbanked. A new administration might also try to reverse the financial deregulatory actions most criticized by progressives, such as the recent overhaul of the Volcker Rule.

“I think there are three big areas of focus: one is diversity and inclusion, two is the regulation of private equity, and the third is sustainability with an emphasis on climate change,” Crowley said.

Gardner added that Sanders would likely push policies similar to Warren, yet things become less certain with more moderate candidates such as former Vice President Joe Biden and South Bend, Ind., Mayor Pete Buttigieg.

“I think you can use Warren as a proxy for Bernie Sanders,” Gardner said. “I could see a Sanders presidency lining very much like a Warren presidency. For other candidates in the top tier, it’s less clear.”

The Democratic candidates for president will likely float a variety of progressive proposals related to hot topics like health care, climate change and taxes at the next debate on Wednesday. But those as well as their financial policy proposals would face obstacles to enactment.

For one, a Democratic president could still be checked by a Republican Senate. In that case, a new administration's focus would likely be on rule changes.

“Certainly legislation is always difficult,” Crowley said.

President Trump has appointed regulatory agency heads who broadly support providing the industry with relief, and they largely could keep their jobs beyond when a Democratic president took office.

Fed Chairman Jerome Powell and Comptroller of the Currency Joseph Otting can stay in their posts at least until 2022. Like Kraninger, FDIC Chairman Jelena McWilliams can hold her seat until 2023. And Federal Housing Finance Agency Director Mark Calabria has said that he plans to remain at the agency until his term ends in 2024. Those agencies would potentially have a check on the White House if a Democrat wins in 2020.

But the Supreme Court case on the constitutionality of the CFPB leadership structure could change that equation. If the court rules that a president can unseat a CFPB director without a finding of cause, that would allow the new administration, for example, to stiffen underwriting standards for payday lenders that Kraninger has sought to weaken, revive the agency's Obama-era focus on enforcement and strengthen other rules such as debt collector standards.

"Some of the changes that a Democratic president might seek would involve the CFPB, such as new rules on payday lending and debt collection,” said Jeff Naimon, a partner at Buckley. “The speed with which a Democratic president could press for those changes is tied somewhat to the pending case before the Supreme Court related to whether the president can fire the CFPB director without cause. That case should be resolved before the 2020 election.”

But even if the new administration could move quickly to appoint new regulatory leaders, Gardner noted that the rulemaking rewrite process takes time.

“They would have to study, draft a proposal, put it out for notice and comment, incorporate the public comment, finalize,” Gardner said. “Depending on the complexity of the rule, that’s a one-year process, easily.”

Yet if Democrats appoint a new CFPB director, observers expect the agency would more immediately shift back to an enforcement-heavy regime, which has been scaled back under the Trump administration.

“Everybody that gets appointed … is going to have a different mindset than the current regulators with respect to enforcement,” Crowley said.

With FSOC, Gardner said the administration "determines the tone of" the council, but it could be difficult to designate nonbanks as "systemically important" if they were previously de-designated, and the prior court challenges of the Obama administration's designation process will have a lasting effect.

“I think the net litigation in which the government was found to have acted arbitrarily and capriciously is going to really constrain FSOC’s designations of nonbanks as SIFIs,” Gardner said.

Once a Democratic administration appointed new leaders for the Fed, the central bank could attempt to implement stricter stress testing requirements.

The Comprehensive Capital Analysis and Review "will become materially more onerous,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading.

But Gardner added that changes the Trump-appointed Fed has implemented to ease stress testing requirements were actually begun during the Obama era. He said many of the reg relief provisions mandated last year by the Senate bill known as S 2155 likely won't be reversed.

"With CCAR, they’ve eliminated the qualitative aspect. Is it possible to reverse that? Yes,” Gardner said. But he added that some of those changes were already “started under Obama-appointed officials.”

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