What happened?

At its most basic: Joe Biden and Kamala Harris won the election and will take office on January 20, 2021. They won by a very narrow margin in the electoral college, and a wider margin in the popular vote. The election displayed sharp, raw emotions on both sides, a culture war in which neither side could understand what the other was saying, and Donald Trump was still claiming victory as of this writing.

Nevertheless, the Biden-Harris victory will hold, after all the lawsuits and recounts. And significantly, the American people seem to have accepted the results and are ready to move on. It is noteworthy that the predictions of violence did not prove accurate.

Equally significant, and contrary to most predictions, Republicans generally “won” the congressional elections. They added five to 10 Republicans in the House, leaving a smaller Democratic majority. And the GOP now holds 50 Senate seats to the Democrats’ 48, with two additional seats to be decided in runoff elections in January. Remember the Vice President breaks a tie, so if the Democrats win both January runoffs, they have the majority.

State legislatures continue to be majority Republican

Key Takeaways: The Big Picture

First, a divided government with narrow margins means one of two things: gridlock or bipartisan legislation. Since President-elect Biden campaigned on a platform of governing, and he has done so successfully for 40 years, I predict a far less contentious law-making style, generally, with a lot of compromise and legislative progress on the major issues. Further, President Biden, Senate Leader Mitch McConnell, and a majority of Senators have a good working relationship, while there is some goodwill toward Biden in the House.

To be sure, there are 20 to 30 Senators and 50 to 70 House members who will aggressively resist working across the aisle, but that view is the minority view. Further, the American people want an end to the anger and gridlock.

Second, the deregulation trend in the Trump Administration will no doubt come to a halt, and new regulations will be imposed. The trend will be toward heavier regulation, though not as heavy as in the Obama Administration.

Third, the new Administration will govern with a collaborative style, predictably, and generally at a lower temperature. Plenty of disagreements will surface no doubt, but they will be resolved with a great deal more compromise and less name-calling. It’s called “regular order.”

Fourth, both the progressive wing of the Democratic Party and the Trump Wing of the Republican Party will try to aggressively assert party primacy in the next four years. They will win some battles, but by and large will be in the minority.

Major Policy Areas

Banking issues will of course continue to be with us, but they are not generally a high priority of the Biden White House, or Congress. Don’t relax, though, because what seems like a small issue could loom large if it begins to gain traction.

The President and Congress will tackle four big issues first:

  • COVID-19 and the pandemic
  • The economy
  • International relations: securing our allies and resetting our relationship with China
  • Social justice

Equally important, but next in line:

  • Relations with Congress
  • Healthcare and a public option
  • Alternative energy
  • A revised tax plan, increasing high-income, corporate, and capital gains tax rates

Of course, there will be a lot more issues, but these eight will consume most of the energy in Washington.

Financial Regulatory Directions

The Trump Administration’s three major prudential regulatory agencies—the Federal Reserve, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC)—made some progress in achieving oversight that is more effective, efficient, and better tailored to the size and risk profile of banks. That progress, imbedded in hundreds of regulatory and enforcement actions, will not be reversed, but nor will it be advanced.

Expect a trend toward greater regulatory intensity, but surely not a return to the harsh “blame the banks” days of 2008 to 2010.

Since “personnel is policy,” this shift in attitude will be driven by appointees:

  • The Treasury Secretary is likely to be Lael Brainard, currently a Fed governor.
  • The OCC Chair is predicted to be either Grovetta Gardineer or Amy Friend, both longtime OCC senior staff and well-liked on Capitol Hill
  • The Consumer Financial Protection Bureau (CFPB) will see a change immediately (like day one). Kathy Kraninger will be replaced with a hard-line enforcement advocate. Congresswoman Katie Porter is one name often mentioned. Alternatively, it could be a state attorney general, a plaintiff’s attorney, or an income inequality advocate like Heather Boushey. Whoever is Director, expect an “enforce first” approach.
  • The FDIC Chair could stay in place awhile, with Jelena McWilliams serving her third year of a six-year term.
  • Federal Reserve Board: For the 2 vacancies, expect some combination of Obama and Biden confidants such as Austan Goolsbee, Jared Bernstein, Boushey, Ben Harris, and/or Gary Gensler.  Chairman Powell’s term as Chair expires in February 2022; Randy Quarles term as Vice Chair expires in October 2021.  Both will be replaced by Biden nominees.
  • SEC: It could be a powerful game changer if Biden chooses an activist, “enforce first” attorney as Chairman
  • A new Secretary of Labor could do some mischief in pension law, especially involving the Employee Retirement Income Security Act (ERISA).

Overall, Gensler has been tasked with guiding financial institution policy and personnel for the transition. He had a similar role for the Hillary Clinton transition that didn’t happen.

Policy Initiatives for Banks

Here are some to watch for:

  • Equitable access to banking. As a major priority for progressives, this will be framed as universal entitlement to an affordable bank account. Progressives like Elizabeth Warren advocate creating a bank owned and operated by the U.S. Postal Service. President Biden did not propose this, so it’s unclear what is position will be, but a Postal Bank is not likely to pass the House or the Senate.
  • Stronger enforcement of the Dodd-Frank Act. Again, this is neither a Biden nor a Harris priority, but they will not oppose it. Included could be criminal penalties for “reckless executives.”
  • Racial inequality. This issue has the most resonance with a Biden White House, although there are few specifics for how to address it.
  • Community Reinvestment Act reform. This one has some traction, since Brainard is a forceful advocate. If it starts to move, there could be stronger punitive measures such as fines and cease-and-desist orders for less-than-satisfactory performance.
  • Money laundering enforcement. Anticipate tougher enforcement requiring more artificial intelligence and other technology.
  • Banking cannabis companies. No doubt there will be much debate over the issues of decriminalizing marijuana, particularly since five more states have adopted various liberalizing referendums. The outcome of the broad debate is uncertain. But what is certain is that legislation will pass allowing banks to provide banking services to legal cannabis companies.
  • Return to the Glass-Steagall Act. There will be a lot of noise about separating commercial banking from investment banking, but it’s not likely. Actually, a return to Glass-Steagall separations is opposed by a not insignificant number of Democrats in the House and Senate.

What Should You Do as a Bank?

  • Get to know your congressional representative. Identify a Democratic and a Republican on the House Financial Services Committee and a Senator on the Senate Banking Committee in your bank’s footprint. Establish a relationship. This at least gives you a seat at the table.
  • Understand and manage your risk in all areas, including reputation risk.
  • Emphasize treating your customers right at all levels of the bank. You call them customers; Congressmen and Senators call them constituents and voters.
  • Have early, proactive conversations with your primary regulators. Anticipate what’s coming.
  • Tell your story. Share with your community, the public, congressional representatives, media—anyone who will listen and even those that won’t—the ways in which you finance the American way of life.

The next four years will be different: worse in some ways, better in others. But one truth is constant, as some in Washington say: if you are not at the table when decisions are made, you are on the menu.

With appreciation for collaboration by Gregory P. Wilson, a financial services expert, former congressional staff director, and ex-Treasury official.