The banking industry is facing a prospect this year it would have preferred to avoid: a Democratic majority in the Senate after the party's victory in two runoff elections in Georgia.
The news is unlikely to lead to a monumental shift in banking policy on Capitol Hill, given the handful of moderate Democrats in the Senate who are more friendly to the industry. But it does open the door for President-elect Joe Biden to appoint more liberal nominees to head regulatory agencies, as well as more hearings that put bank CEOs on the hot seat.
Other financial executives should also expect to get an invite to testify at the Senate Banking Committee, which will likely be chaired by one of the industry's biggest critics: Sen. Sherrod Brown, D-Ohio.
"Brown has demonstrated a broad scope of interest that covers the entirety of the financial markets," said Isaac Boltansky, director of policy research at Compass Point Research & Trading. "My bet is you're going to see a few private equity CEOs and asset management CEOs before the committee."
The victories from Democrats Raphael Warnock and Jon Ossoff will lead to the exit of two Republican senators who are key industry allies: Kelly Loeffler and David Perdue. Loeffler joined the Senate in 2020 and previously was the CEO of BAKKT LLC, a unit of Intercontinental Exchange Inc.; her husband, Jeffrey Sprecher, is ICE's CEO. Perdue, meanwhile, was a major voice pressing bank regulators to quickly implement a 2018 bipartisan package that eased regulations for community and regional banks.
Bankers had been hoping the Senate would stay under Republican control, given that it would offer a counterweight to Biden and the narrow Democratic majority in the House.
But the results will mean the Senate will be split 50-50 between both parties, giving a tiebreaking vote to Vice President-elect Kamala Harris. Brown is set to become the new chair of the Senate Banking Committee, with Sen. Pat Toomey, R-Pa., expected to become the top Republican on the committee.
Brown previewed some of his priorities as chairman at a Better Markets event in September 2020, where he credited the advocacy group for a list of Trump administration rules it hopes Democratic appointees will reverse.
But restoring the Obama-era financial regulatory framework should be the "bare minimum," Brown added. He called for the creation of bank accounts for Americans through the U.S. Postal Service and Federal Reserve, as well as a strengthening of worker protections and requiring companies to pay workers a dividend whenever they engage in share buybacks.
"The goal has to be to reorient our economy from Wall Street wealth to the dignity of work," he said.
But with slim majorities for Democrats, the prospects are tough for passing some of the most progressive items on their policy agenda. That includes those postal banking proposals or efforts to break up the biggest banks in the U.S., an idea backed by the likes of Brown and Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt.
"In both houses, you've got a very narrow divide," said bank consultant Bert Ely. "That's going to have a huge tempering effect on the Democratic agenda."
The 2018 bipartisan package that rolled back some post-financial-crisis rules offers a useful look at the dynamics on Capitol Hill. Two moderate Democrats, Virginia Sen. Mark Warner and Montana Sen. Jon Tester, were among those that negotiated the package. Analysts note they could be among the lawmakers who could dash their more liberal colleagues' hopes on some of the most progressive proposals, as could Sen. Joe Manchin, D-W.V., and Kyrsten Sinema, D-Ariz.
Still, a Democratic-controlled Senate gives Biden more flexibility as he chooses his nominees to key financial regulatory agencies. Boltansky said Biden's more centrist tendencies, along with the slate of moderate Democrats, could mean that he may opt for more "middle-of-the-road" agency heads rather than ardent progressives.
Some open spots include the leadership positions of the Office of the Comptroller of the Currency, the Securities and Exchange Commission and the Commodity Futures Trading Commission. Biden will also have the chance to appoint two members to the Federal Deposit Insurance Commission's board, although FDIC Chair Jelena McWilliams' term as the agency's leader does not expire until 2023.
At the CFPB — Warren's brainchild and a key avenue for quickly toughening regulations — Biden is likely to pick a nominee who would be aggressive on the industry, Boltansky said. That person is expected to crack down on bank overdraft fees and reverse actions taken by Director Kathleen Kraninger, such as overhauls to rules for payday lenders and debt collectors.
Lawmakers could also look to overturn recently approved rules at the CFPB and other agencies through the Congressional Review Act. But the immediate repeal of some rules could fall lower on the priority list on what could be a packed legislative calendar, paving the way for the new agency heads to begin new rulemaking processes to undo their predecessors' work.