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How the 2020 election will affect the banking industry

In this episode, Waller's Kevin Tran - a former Financial Policy Analyst with the Federal Reserve Board in Washington, D.C. - discusses the implications of the 2020 Presidential election. He discusses regulatory reforms, departmental leadership and other outcomes that could arise from either a Trump or Biden presidency.

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Here is a transcript of the conversation:

Morgan Ribeiro

Welcome to PointByPoint. This is Waller's Chief Business Development Officer and the host of the podcast, Morgan Ribeiro. On today's episode, I am joined by Kevin Tran, an attorney in Waller's corporate practice group who advises financial institutions on bank regulatory matters. I've asked you to join me on today's episode to discuss the upcoming presidential election and the impact that could have on our clients and the banking industry. So to kick things off course, let's talk about our favorite topic du jour - the presidential election and the uncertainty. What's to come of all this?

Kevin Tran 

At the most basic level, there's an expectation that if President Trump wins re-election, regulators will continue rolling back post-financial crisis Dodd-Frank reforms. If you recall, the Dodd-Frank Act was pretty much the largest overhaul of financial regulations coming out of the 2008 financial crisis. Meanwhile, a Biden victory probably means a reinstituting or a strengthening of certain Dodd-Frank reforms. Again, he was Vice President when Dodd-Frank was passed, so it wouldn't come as a surprise if some of the rules he championed back then he continues to champion. But in all honesty, that's a pretty basic view of the regulatory landscape. I think there's a lot of nuance, especially under a Biden presidency, given that he would be coming into an environment where really the option is - do you maintain the status quo in light of all the economic stresses caused by COVID-19? Or do you start implementing your bank regulatory platform, which for the most part, likely means increasing regulation? That's the tension that, again, if Biden wins, he's going to have to navigate.

Morgan

So looking at this more granularly for a moment, can you speak more to those rollbacks? And what those would look like under Trump? And conversely, what would the increase regulation look like under a Biden victory?

Kevin

To talk about President Trump first. Back in 2018, this is 10 years after the financial crisis, and about seven or eight years after Dodd-Frank gets passed, he signed into law, Economic Growth, Regulatory Relief and Consumer Protection Act, which began the very large rollback of a lot of Dodd-Frank reforms for pretty much all but the largest banks in the United States. So essentially, banks under $250 billion got quite a bit of relief, whether it took the form of Volcker Rule relaxations, less frequent bank exams, or no longer the need to do company-run stress tests. So you have a lot of regulatory relief. And really, regulatory relief is just loosening of restrictions, and which means less cost and less compliance matters that the banks have to deal with. So it would not be a surprise that if Trump remains in office that that type of deregulation continues. From the Trump administration's eyes, there are still a lot of rollbacks that can happen to help community banks.

Morgan

I imagine, in addition to the actual policies, we would need to think about political appointments. Can you speak more to what those considerations would look like under each option?

Kevin

When Trump came to office, he had appointed leadership in the CFPB that took a turn from President Obama's administration. What you saw with a lot of President Trump's appointees was a pretty drastic decline in enforcement actions done by the CFPB. And more recently, under Kathy Kraninger's leadership, they continue to scale back on several consumer protection provisions. Most notably, they've relaxed the underwriting requirements for payday lenders, which made a lot of consumer advocacy groups very angry. Because, again, I think the big fear among advocacy groups is the 2008 financial crisis was only 12 years ago. So I mean, it shouldn't be forgotten in a lot of folk's memories. So as you roll back a lot of these protections that came out of it, there's a fear that you're essentially creating an environment where another financial crisis could happen. And from the bank perspective, they've certainly been appreciation for deregulation. I mean, it naturally lowers their costs and affords them a lot of opportunities to do a broader scope of activities. That being said, coming on an election is, I don't want to say scary, but there's a lot of hand-wringing involved, especially in an election where you have two candidates who I don't want to say they're diametrically opposed positions but their platforms are on opposite ends of the spectrum enough such that it's hard to predict.

Morgan 

Definitely difficult to predict. Any changes we can expect to come from Fannie (Mae) and Freddie (Mac).

Kevin 

Right now, Mark Calabria, the director of the FHFA and essentially the person who controls Fannie and Freddie Freddie under the federal conservatorship, there has been a very large push under his leadership and through the Trump administration that we're going to privatized Fannie and Freddie. We're going to remove them out of conservatorship where they've been for almost, I think, probably more than a decade. And that sounds well and good. But for the past 10 years, banks have gotten used to Fannie and Freddie being there for them buying mortgage loans. And so what we have taken for granted that as a very recent homebuyer, I didn't really think of getting any type of mortgage loan other than a 30-year fixed. That's, in our experience, a pretty typical mortgage loan for any person in any family. One of the reasons why banks feel comfortable extending a 30-year loan to a borrower is the kind of the backstop of Fannie and Freddie with government funding to buy these loans. To the extent, that Fannie and Freddie becomes private, you don't have that safety net anymore. So the question is, will Fannie and Freddie still be amenable to buying a 30-year fixed? And if they are, what type of 30-year fixed loans will they interested in buying? And the banks - who are the ones actually issuing those loans - have to be cognizant and understand the temperature of Fannie and Freddie because if they issue loans that ultimately Fannie and Freddie won't take on their books, and that exposes them to risk? So there's a cascading effect that could happen if (they) go private.

Morgan

Kevin, what about the Supreme Court decision that's floating around out there as to whether or not you can essentially terminate a current director without cause and appoint their own appointee. There's been some, some conversation around that.

Kevin

With a Biden presidency, there's still a Supreme Court decision floating out there, as to whether or not Biden can essentially terminate a director without cause and appoint his own appointee. It's very similar to the Supreme Court decision that ruled the CFPB structure was unconstitutional. So if we assume that Biden could appoint a new head to the FHFA, then the question of privatization, probably, I don't want to say it goes away altogether, but the pressure on that certainly is reduced. Because Biden has talked about maybe turning into a public utility, maybe we extend the conservatorship for several more years just to get a better understanding of how things shake out. So I think in that very narrow example, you can see that there is a potential of going, there's a fork in the road there, depending on who is sitting in the presidency. And I think that example is very similar to plenty of other examples, especially in situations where the President does have the power to appoint directors. That power is somewhat muted when you have an agency led by a board like the Fed or the FDIC. But in the case of the CFPB, it's one director. In the case of the FHFA, it's one director, and in the case of the Office of the Comptroller of Currency, the third Federal Bank agency, it's one comptroller. So having that appointment power is very important because it can shape how an entire institution regulates.

Morgan 

Fintech. That's a space right now, obviously, you know, we look at people being able to access things online that they used to go in, you know, in-person to the bank, for instance, and make a deposit. Many banks are now having to innovate rather rapidly and in the time of stay-at-home orders and more people wanting to socially distance. So I'm curious to get your perspective on what's to come in the FinTech space.

Kevin

This space in particular, is very ripe for innovation, both on the bank side and on the regulatory side. Just to point to a couple of examples, either June or July, the State of Wyoming issued a special charter for essentially a bank to be created that would serve as a custodian for virtual currencies. So this essentially is what to say the first crypto bank, if you will, that has been granted a charter. And this was something that the OCC championed under former comptroller (Joseph) Otting, who stepped down in May. The OCC has proposed a special FinTech charter, if you will, that's currently under litigation. The person who succeeded him was the (fomer chief legal officer at) Coinbase, which is an enormous player in the crypto space. I think at the OCC, before he was the comptroller, he chaired the technology subcommittee. So you have someone in power at the OCC who is very close to and very much understands the technology industry, so it'll be interesting to see, again, if Trump wins the election and makes the current director no longer the acting but the permanent director, what direction he'll take respect to FinTech and whether or not the OCC may lead the charge and bring along the Fed and the FDIC in terms of how they regulate FinTech and that might open a lot more opportunities for banks to engage in this space. And vice versa. If Biden wins the election, I don't think there's going to be a movement away from FinTech, especially considering what COVID has forced a lot of banks to develop the terms of their digital banking platform. But again, we don't know any specifics as to how he would approach this. Is it more/slightly more/less/slightly less regulating? There's enough uncertainty that banks can't plant their flag and say, we're going to head in this direction no matter what, because the last thing you want to do is, again, as you figure out your strengths and weaknesses, plant your flag going in a direction only to have regulation tell you can't go in that direction anymore. And that generally results in a lot of wasted effort, wasted time and wasted costs. So I think that's just a sampling of how regulation fits shipped out under either administration.

Morgan

Kevin, just to wrap this conversation up, I always like to leave our listeners with some practical advice and tips. You are a former regulator. From your perspective, what can banks do with this information? And where do they go from here?

Kevin

I think again, it's a much more interesting proposition under a Biden presidency, because he would be coming into an economically uncertain environment due to COVID that no one can control. On top of having a bank regulatory platform that is more regulation-heavy than Trump's. And that's not surprising that he would be more in favor of strengthening certain regulations. But again, the practical reality is, are you going to go put your head down and go gung ho to realize your platform in the face of something like COVID? Or are you going to maintain the status quo until the environment is such that it would be more palatable for you to pursue your platform?

Morgan

Thanks for joining me today, Kevin, I've enjoyed the conversation. I want to encourage our listeners and remind them that we do have an upcoming webinar where we're hosting with Artisan Advisors. That will be on December 5, of course, after the election, and at that point, I think we'll know a lot more about what the future looks like, at least hopefully, we will. So I encourage everyone to go to Artisan Advisor's website.

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