By Douglas J. Elliott
This article was first published on December 11, 2020.
My overall forecast for changes in financial regulation under Biden’s Administration remains largely unchanged from my pre-election views. However, there are some areas where the new team will have to be less bold than appeared likely pre-election and we have also learned some things from the early nominations to key positions. This paper provides an updated version of my views. Below is the excerpt, for the full PDF version of Financial Regulation Under Biden, please click here.
Significant tax changes for the financial sector are unlikely.
Some Democrats wanted to see special taxes for the largest banks and a Financial Transactions Tax (FTT) to discourage Wall Street speculation. Republican opposition would make this all but impossible unless the Democrats win both of the Georgia Senate seats in the run-off election on January 5, 2020, which is possible, but unlikely. Even if they do, it would be difficult to avoid suffering at least one Democratic defection on a controversial tax vote in the Senate, which would kill the bill. The exception might be if, in a couple of years, there is an effort at deficit reduction that gains some bipartisan support. In that case, a modest bank tax seems possible, given the continued unpopularity of the big banks. An FTT, on the other hand, would remain very difficult to pass.
Bold structural changes to the government’s role in retail banking are unlikely.
Some progressive Democrats were exploring ideas to improve financial inclusion by increasing the role of the government or the Fed in retail banking. One idea was to have the US Postal Service act as a bank, similar to postal banks in Europe. Another was to allow individuals to open accounts directly at the Fed, possibly in concert with the introduction of a digital version of the US dollar. Both ideas were long shots and neither now seems possible.
Former Fed Chair Janet Yellen will be Treasury Secretary.
The new Secretary is in the mainstream of Democratic views on financial regulation, so her appointment does not significantly change the prospects for regulatory changes.
THE BIG PICTURE
Financial regulation is unlikely to be one of the top priorities for President Biden.
Covid-19, the economic recovery, healthcare, social justice, the climate transition, and troubled foreign relations will already more than occupy the new President’s attention.
Major legislation in this area is therefore improbable.
Big legislation almost always takes a major push from the Administration, which appears unlikely unless a large problem develops that creates a bipartisan consensus for action. The relatively strong Republican showing in the elections means that they will retain control of the Senate unless both Georgia seats go to the Democrats on January 5, 2020, which is possible, but unlikely. Even if that happens, it is difficult to pass major legislation starting from the slimmest of all possible majorities in the Senate.
But, regulators can do a great deal without new legislation.
Capital and liquidity requirements, resolution and recovery planning, risk management procedures, disclosure requirements, and many other areas offer regulators and supervisors great leeway to mandate changes.
Who are chosen for the key positions will matter.
Any Democratic appointees will share certain priorities, but there will be important differences on other potential initiatives and in how the key priorities are executed. The shape of the new team is unclear at this point, except for Janet Yellen as Treasury Secretary and Adewale Adeyemo as Deputy Treasury Secretary.
Most changes will take time.
New regulators will not be in place for some time and then need to settle in, have their staffs initiate the analysis required to back up rule changes, put out proposed rules and receive comments, make any refinements, issue the final rules, and then wait for them to take effect.
The Biden team has not issued detailed financial regulatory proposals, but we do have a sense of their priorities.
These are likely to include:
- Tougher regulation of the largest banks
- Climate transition risk management and disclosure requirements
- A social justice package
- Implementation of Basel IV and potential further changes to capital requirements
Biden appointees will also influence global regulatory initiatives.
The US has a strong influence on regulatory standards that come out of the Basel-based bodies. Fed Vice Chair for Supervision Randal K. Quarles, for example, is the current Chair of the Financial Stability Board.
Douglas Elliott is an Oliver Wyman partner focused on the intersection of finance and public policy, particularly financial regulation. Prior to his current position, he was a scholar at the Brookings Institution and a Visiting Scholar at the IMF. He began his career with two decades as an investment banker, primarily at JP Morgan. He has written extensively on capital standards for the IMF, Brookings, and Oliver Wyman.