Election 2020: How will community banks fare?

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Illustration by Ben Fearnley

After a rollercoaster year, the 2020 election will offer its own twists and turns as it relates to power in the White House and on Capitol Hill. But what do all the potential election outcomes mean for community banks? Here, ICBA’s political experts prognosticate what the regulatory environment could look like depending on who is in power after Election Day.

By Elizabeth Judd

The year 2020 has already held more ups and downs than a typical decade—and that’s before Americans elect a president and policymakers on Election Day.

Who lands in the White House and who gains control of the Senate and the House of Representatives will, as always, have some major implications for community banks. Karen Thomas, ICBA’s senior executive vice president of government relations and public policy, believes 2020 is an outlier among election years, political drama aside. That’s because policy direction may be determined as much by COVID-19 as by who is actually elected.

“Much will depend on where we are in terms of the pandemic,” Thomas says. “Further impact to the economy or the banking industry itself will depend on the state of the pandemic and the effectiveness of the policy response.”

Even with the unknowns of the coronavirus, the fate of issues that matter most to community bankers will be influenced by who’s in the White House and whether Congress is controlled by Republicans or Democrats. Paul Merski, ICBA’s group executive vice president of congressional relations and strategy, emphasizes that the high-level issues of importance to community bankers do not change dramatically from election to election, given that “what we’re pressing for is largely regulatory relief.”

While the exact makeup of the legislative and executive branches remains very much in play, one thing that’s almost certain is that the Democratic Party will retain control of the House next year. This means that, while the Democrats could wind up with control of both the White House and Congress, the best-case scenario for Republicans is probably the status quo: two more years of a divided Congress and a Republican president.

Here, ICBA experts forecast how the four most likely outcomes of the November election would affect the most pressing issues for community bankers.

Scenario 1: Democrats win the White House and Congress

The scenario that would bring most dramatic change is the clean sweep: former Vice President Joe Biden beats President Donald Trump on Nov. 3 and the Senate flips to the Democrats.

Merski notes that “in general, Republican administrations have been more focused on reducing regulatory burden.” So, with a Democratic administration and a unified Congress, community banks could expect to face stiffer regulations and heavier reporting requirements.

“If Biden wins and the Senate turns Democratic, then we could expect a move to increase the corporate tax rate back up above 21%.”
—Karen Thomas, ICBA

If Democrats assume control, one issue almost certain to be revisited is the corporate tax rate. The Tax Cuts and Jobs Act of 2017 lowered the corporate income tax to a flat 21% for tax years beginning after Dec. 31, 2017. Prior to that, the corporate rate was 35% at the highest income bracket and as high as 39% for some.

“If Biden wins and the Senate turns Democratic, then we could expect a move to increase the corporate tax rate back up above 21%,” Thomas says. A higher corporate tax rate would be a headache for community bankers because their small business customers tend to suffer under more burdensome tax regimes.

The corporate tax rate is one concrete change, but arguably more important still is a new “tone from the top,” says Ron Haynie, ICBA’s senior vice president of mortgage finance policy. Just as “we saw a very distinct change when the current administration took power,” he says, a Democrat in the White House would usher in new priorities.

“While the president may not have direct control over a banking agency or a regulator, [they set] the tone,” Haynie says. “It becomes very clear the direction that that administration wants to go. So, if it’s one of tightening regulation—rather than loosening regulation—that will be felt down through the ranks.”

New presidents also appoint new agency heads, and community banks are keenly interested in who would run the Consumer Financial Protection Bureau (CFPB) in a Biden presidency. Haynie says that from 2012 to 2017, when Richard Cordray led the CFPB, banks were “absolutely terrified of making a mistake. That put a damper on mortgage volumes and lending. Bankers didn’t want to take any chances.”

“While the president may not have direct control over a banking agency
or a regulator, [they set] the tone.”
—Ron Haynie, ICBA

While the CFPB is important to community banks, so is whoever heads the FDIC, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve, Merski says.

Historically, presidents waited until a director’s term expired to put their own pick in place, but a recent Supreme Court decision allows the president to fire the director of the CFPB and make their own selection. Merski suggests that Biden would not necessarily have to wait before putting his choice of director at the helm of the CFPB.

Finally, one issue that Thomas would especially like to see garner more attention in this and any scenario is the tax-exempt status of credit unions. “We have had success on Capitol Hill in preventing the credit unions from getting new powers through legislation, but despite strong attempts for years, we have not been able to roll back any of their tax exemptions,” she says. “Credit unions act like banks, have the power of banks and the customer reach of banks. So, how does it make sense to have one part of an industry pay taxes and the other not?”

That said, Thomas says she has little illusion that a clean sweep would make a difference to this issue. “This is not an issue that swings on who’s in the White House or who controls the Senate,” she adds. “We don’t see a changing of the guard making it easier for us on the credit union issue.”

Scenario 2: Democrats win the White House, but Republicans keep the Senate

A divided federal government would almost certainly make for more adversarial relationships between Congress and directors of agencies that oversee community banks.

Haynie points out that in such a scenario, Biden’s pick for CFPB director may be called in to testify before hostile senators. “I’d imagine,” he says, a Republican Senate “would really grill [Biden’s pick] when they testify before Senate for creating bottlenecks to lending and putting companies out of business.”

A Biden administration might also mean more federal involvement within the banking sector and even a few challenges to current notions of what types of institutions can provide banking services, Merski says. He notes, for instance, that proposals to allow the U.S. Postal Service to provide “bank-like services” to unbanked individuals might gain traction in a Democratic administration. In fact, Sen. Kirsten Gillibrand (D-N.Y.) has proposed the Postal Banking Act as a way of serving the one in four Americans who are currently unbanked or underbanked.

Thomas says a Biden presidency does not necessarily spell trouble on all issues of who can provide banking services to whom. A Biden administration might, for instance, be a boon for community banks by allowing marijuana banking or the ability for banks to provide services to marijuana-related businesses operating in states where it is legal. (Currently, 33 states, the District of Columbia, Puerto Rico and Guam have legalized the use of cannabis to some degree.) ICBA’s efforts to ease restrictions on marijuana banking stalled when the pandemic hit but might gain steam again “if Democrats were in power,” Thomas says.

Finally, she says that a Democratic administration might help community banks forestall efforts by fintechs to enter the banking business through hybrid-type banks. “I think,” she adds, “you could see a little bit more of a go-slow approach on efforts like that if the Democrats are in power.”

What awaits Fannie Mae and Freddie Mac?

One question hovering over the mortgage market has been the fate of the two GSEs, or government-sponsored enterprises.

“Fannie Mae and Freddie Mac are currently in conservatorship, and the current [Federal Housing Finance Agency] director is moving to recapitalize them and exit the conservatorship,” says Karen Thomas, ICBA’s senior executive vice president of government relations and public policy. She adds that there may be differences in approach depending on whether Democrats or Republicans are in power.”

Ron Haynie, ICBA’s senior vice president of mortgage finance policy, agrees, noting that if Trump is reelected, the FHFA’s Mark Calabria is likely to continue as director with no change to current policy. Haynie is eager to see the status quo continue, as community banks are thriving given their success providing forbearances and other accommodations to those affected by the pandemic, as outlined in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

“Banks are working with their customers to help get them through this,” Haynie says. “And community banks are experiencing—like everybody else—record levels of mortgage originations.”

On the other hand, Haynie says, if Joe Biden becomes president, he might try to fire Calabria and select a Democrat to head the FHFA on the grounds that the FHFA is structured like the CFPB. While such a scenario might cause disruption, Haynie believes that current policies would not be overturned. “I don’t see a Democratic administration going in and completely stopping everything that Mark Calabria has started,” Haynie says. “Regardless of who takes the White House, you don’t want to upset the housing market.”

Scenario 3: Trump is reelected, but Democrats flip the Senate

Getting legislation passed with a divided federal government is always a challenge, especially since the Senate must have 60 votes to enact legislation, which is then subject to presidential veto. Thomas says in the past three or more years, a host of deregulatory measures have been adopted. Although Trump has yet to confront reregulation because Congress has either been divided or squarely in Republican hands, she anticipates that “reregulatory efforts are the types of things you might see this president vetoing.”

Should democrats take control of the Senate, they might move to eliminate the current filibuster rule.

Merski says a Democratic Senate would likely be hobbled by the current filibuster rule, especially since even if the Senate were to flip, the Democratic majority would likely be slim (no more than a seat or two). He is, however, convinced that should Democrats take control of the Senate, they might move to eliminate the current filibuster rule to make passing new legislation easier.

With or without a change to the filibuster rule, Democrats would gain greater power simply by determining the majority leader in the Senate and by having all committees chaired by Democrats. “You’d have some radical changes,” Merski says, “just because of the folks who are in charge in a turnover.”

Sen. Mitch McConnell (R-Ky.) would be replaced, and Merski is convinced that the obvious choice—Sen. Chuck Schumer (D-N.Y.)—would become the Senate majority leader.

In addition, Merski expects that Sen. Sherrod Brown (D-Ohio) would chair the Senate Committee on Banking, Housing, and Urban Affairs given he is currently the ranking member.

“We’ve worked with Brown for many years,” Merski says, “and his main concern is the large banks and those too big to fail. That’s a concern of ours, too.”

Scenario 4: Republicans keep the White House and the Senate

Merski says he’s confident that if Trump stays in the White House and the Senate remains under Republican control, then the Economic Growth, Regulatory Relief, and Consumer Protection Act, or S. 2155, which rolled back many community bank regulations in the Dodd-Frank Act, would remain intact. What’s more, he says that community banks might see further regulatory relief, with some of the rules and regulations under the Bank Secrecy Act (BSA) and the anti-money laundering (AML) laws becoming less stringent.

Thomas agrees, adding that if Trump remains president, another welcome possibility for community banks might be that the temporary rule easing capital requirements for community banks could become permanent. Such a move, she says, makes sense, because “it gives banks more flexibility to support their communities and their customers.”

Above all, though, Thomas sees a status quo outcome as an opportunity to consolidate gains. “We spent a number of Congresses pushing for a variety of types of regulatory relief for community banks, and they finally passed in 2018. We had a few moderate Democrats in the Senate willing to work across the aisle to support regulatory relief for community banks. And, of course, we had to have a president willing to sign the bill,” she says. “It took a while to get the stars aligned on Capitol Hill.”

How swiftly will we see change?

While it’s easy for community bankers to focus like a laser beam on their industry issues, these issues might not rise to the top of the agenda come Inauguration Day.

Karen Thomas, ICBA’s senior executive vice president of government relations and public policy, says new rules and regulations typically take time to implement. “Unless you’re in a crisis,” she says, “the legislative process goes pretty darn slowly.” What’s more, she adds, “in this election season, there has not been much focus at all on financial industry issues.”

The real wild card is COVID-19. Thomas says support for small businesses in the pandemic has been bipartisan, and this support has been crucial for community banks.

So, when it comes to reading the tea leaves on how quickly a new administration might enact policy changes that affect community banks, this election is particularly difficult to call.

“If we’re still in pandemic mode after November, the pandemic will be the key issue,” Thomas says. “And the longer it goes on, the larger the potential impact on the economy.”

Elizabeth Judd is a writer in Maryland.