WHAT IF BIDEN WINS? Impacts on Financial Regulation Douglas J. Elliott October 27, 2020 What If Biden Wins? November’s election will substantially affect financial regulation. In this paper, I examine the likely impacts if former Vice President Joe Biden wins the election. © Oliver Wyman 2 What If Biden Wins? THE BIG PICTURE Financial regulation is unlikely to be one of the top priorities for a Joe Biden presidency 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. Legislation will be even less likely if the Democrats fail to get a majority in the Senate or have only a vote or two to spare in that body. (Fivethirtyeight.com’s average forecast currently is for 51 Democrats and 49 Republicans in the Senate, with a reasonable probability of being as much as three seats higher or lower for the Democrats.) 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 is 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. 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. © Oliver Wyman 3 What If Biden Wins? 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 • Structural changes to retail banking through a greater government role • A social justice package • Higher taxes for large banks and Wall Street • 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. Federal Reserve, Vice Chair for Supervision, Randal K. Quarles, for example, is the current Chair of the Financial Stability Board (FSB). © Oliver Wyman 4 What If Biden Wins? THE REST OF THE STORY Financial regulation is unlikely to be one of the top priorities for a Joe Biden presidency Realistically, a president can only successfully push a few major initiatives in their first two years, although they always start out believing they can do more at one time. The new president would already face a daunting set of challenges with Covid-19, the economic recovery, healthcare, social justice, the climate transition, and troubled foreign relations. Barring a major financial crisis, financial regulation cannot compete with these issues for the Administration’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. Legislation will be even less likely if Democrats fail to get a majority in the Senate or have only a vote or two to spare in that body. Action is made even less likely by the Senate’s “filibuster” rule, which allows a minority of senators to block most legislation unless there are 60 votes to override the filibuster. Most Senate Democrats favor the elimination of the filibuster rule if they take control, however there is a good chance that one or more Democratic senators would refuse to abolish the rule outright. There might still be a weakening of the rule, which would leave it as an obstacle, but of reduced power. But, regulators can do a great deal without new legislation Congress virtually always grants financial regulators and supervisors considerable freedom to write specific rules and guidance to implement any legislation it passes, in recognition of the complexity of the issues in this area. Capital and liquidity requirements, resolution and recovery planning, risk management procedures, disclosure requirements, and many other areas provide regulators and supervisors great leeway to force changes. Some new priorities, such as dealing with the role of finance in the climate transition, could largely be tackled without new laws. Disclosures, risk management requirements, and potentially capital requirements, could all be used to focus banks on the climate transition. Who is 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. I receive a wide range of answers when I query my best sources on who Biden might appoint. All agree that it is not clear and that no name has even a 50 percent chance of being right. That said, four names come up the most in my discussions. © Oliver Wyman 5 What If Biden Wins? Lael Brainard, currently on the Board of Governors of the Federal Reserve, seems highly likely to move to a more important position over time. She appears to be in contention for Treasury Secretary or Fed Chair. Fed Vice Chair for Supervision could easily be a consolation prize if she is not chosen for one of those two positions. Her views are in the broad mainstream of thinking at the Fed, but substantially more closely aligned with those of former Fed Governor Daniel K. Tarullo than of the current team. She has dissented on most of the changes to capital requirements over the last couple of years, stating that they were too lenient to the largest banks, and had supported moving to a positive counter-cyclical capital buffer prior to the pandemic. Roger Ferguson, current President and CEO of TIAA-CREF and former Vice Chair of the Fed, has been raised by several of my sources as a potential Treasury Secretary or Fed Chair. There would likely be some resistance from progressives to naming a CEO to this position, but TIAA-CREF can be viewed as primarily a pension fund, which might alleviate these concerns. Ferguson’s current views on financial regulation are not clear, so he would be something of a wild card. Elizabeth Warren, senator from Massachusetts and former contender for the Democratic presidential nomination, is frequently raised as a possibility for Treasury Secretary. However, I agree with most of my sources that this is not a likely appointment, although it could happen. First, the Republican Governor of Massachusetts would appoint her temporary replacement to the Senate, which could mean six months or more with one fewer Democratic vote in the Senate. That alone could kill this, unless the Democrats win really big and have a majority of three or four seats. (They currently are in the minority by three seats. Only one-third of the Senate seats are up each election, making it difficult to secure a net gain of six or seven seats.) Second, my guess is that Warren would rather stay out of the Administration in order to keep her options more open for a potential presidential run again in 2024. Cabinet secretaries have to toe the Administration’s line, which could force her to concur with political positions that might hurt her later. Third, her name is also being floated for US Attorney General, which might suit both Biden and her better, were she to take a cabinet post. Warren’s appointment would be viewed with apprehension by at least the largest of the banks, given her advocacy of a “21st-Century, modern Glass-Steagall”, higher capital requirements, a tougher version of the Volcker Rule, etc. Jerome “Jay” Powell could conceivably be reappointed as Fed Chair when his term expires in February 2022, although the probability is that a Biden presidency would choose a Democrat to replace him. In his favor, Powell is generally viewed favorably by members of Congress of both parties and by the markets. The monetary policy he has overseen is popular and fits with approaches favored by Democratic economists. Reappointing him would provide more stability, which markets generally prefer and would allow Biden to demonstrate bipartisanship. He would also be likely confirmed even if the Republicans still controlled the Senate. Working against him are two big factors. First, presidents would rather appoint their own person, both for policy reasons and because it gives them an opportunity to reward one of their own with a highly coveted position. Second, there is much more focus on the Fed’s regulatory role than was true when Paul Volcker, Alan Greenspan, and Ben Bernanke were each reappointed by presidents of the opposite party to theirs. There will be very strong pressure from progressives for someone viewed as tougher on bank regulation to take over. © Oliver Wyman 6 What If Biden Wins? 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 backup rule changes; put out proposed rules and receive comments; make any refinements; issue the final rules; and then wait for them to take effect. As noted, the Fed Chair role turns over in February 2022.