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Banks will face greater regulatory scrutiny under the Biden administration but could also see the playing field leveled with some of their nonbank counterparts.
The U.S. financial regulatory framework is beginning to take shape under the Biden administration. President Joe Biden has selected a number of key positions in the regulatory community — former Fed chair Janet Yellen as Treasury Secretary, Gary Gensler as head of the SEC, Rohit Chopra as the next CFPB director and now reportedly Michael Barr as head of the OCC.
Isaac Boltansky, director of policy research at Compass Point Research & Trading, said in the latest "Street Talk" podcast that once Democrats took control of the Senate through the Georgia runoff elections, it was clear that Biden's selections to run the regulatory agencies would be slightly more progressive. He noted that banks will face greater regulatory scrutiny under the new regime but still expects the new agency heads to direct near-term attention on issues related to nonbanks rather than the traditional banking community.
"There is going to be a conscious and dedicated focus on how the growth of nonbank lending is impacting market stability overall and consumer health," Boltansky said in the episode recorded Jan. 22.
The policy analyst said many officials in Washington D.C. have realized that the landmark Dodd-Frank Act passed in the aftermath of the global financial crisis had a number of merits but also pushed some activities outside of depositories into nonbanks, which do not face the same level of regulatory oversight.
Banks, meanwhile, have improved their standing in Washington D.C. in no small part due to their pandemic response, Boltansky said. He noted that banks played a central role in supporting small businesses through the Paycheck Protection Program, or PPP, and have helped thousands of borrowers by providing forbearance permitted through the CARES Act.
"I think that banks are in a better position now than they were the last time that we saw Democratic control of Washington, which provides them some opportunities to explain some of the market disruptions and overall regulatory arbitrage concerns that they have as it relates to nonbanks, even tech's encroachment into finance," Boltansky said. "And then more broadly, financial services is not a top-tier issue. It is not the focus of the Biden administration right now. Their focus is going to be COVID."
During her confirmation hearing, incoming Treasury Secretary Yellen pushed lawmakers to support Biden's proposed $1.9 trillion pandemic rescue package. Boltansky expects another round of stimulus to pass but will likely take until March and ultimately will be significantly smaller at closer to $750 billion. While that size might disappoint some, he noted that such a package would still be larger than the TARP bailout initiated during the Great Recession.
At the CFPB, Boltansky predicts meaningfully more aggressive supervision, rulemaking and enforcement under Chopra's leadership. He believes the Chopra-led CFPB will initially apply oversight pressure on debt collectors, student loan servicers, mortgage servicers and credit bureaus. He expects the CFPB to then turn its focus on payday lending, reinstalling the ability-to-repay mandate. That mandate required the lender of a covered product to make a "reasonable determination" that the consumer would be able to make the payments on the loan and meet their basic living expenses without needing to reborrow over the ensuing 30 days.
Banks will also face greater scrutiny over overdraft fees because the issue is important to Democrats, Boltansky said.
The OCC, meanwhile, could be less welcoming to fintechs, with Michael Barr serving as the head, Boltansky said. Under previous leaders, the OCC granted banking charters to several fintechs, but Boltansky does not expect Barr to be as interested in expanding chartering capability.
"I think that there will be a slowdown on that push to provide a slew of new charters to fintechs," Boltansky said.
The policy analyst does expect Biden picks to talk more broadly about consumer access to financial services, including postal banking, public credit bureaus and central bank digital currencies, but said those issues likely do not have broad enough support for legislation to pass the Senate.
"And so financial services has an opportunity here to positively react to some of these regulatory changes. I think it is a completely different landscape than we saw the last time Democrats controlled D.C.," Boltansky said.
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