The Intersection: Jul 2014

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Washington Still Sees Banking as Risky Business

After years of perceived economic unrest, increased regulations and multi-billion dollar settlements, the financial services industry is beginning to see some daylight at the end of the tunnel. However, the threat is far from over, as President Obama, regulators and certain members of Congress have signaled that the industry may be in for another round of review and increased scrutiny as we enter the 2014 general election season.

In a recent public radio interview, the President stated that there is some “unfinished business” when it comes to the implementation of regulations involving the nation’s major commercial banks. Obama remains concerned that banks are doing more to make money rather than investing to build products or create jobs – what he calls “the real economy.”

In the same week, Fed chair Janet Yellen delivered remarks noting the need to continue tracking and reducing risks from “shadow banking,” defined as investment activity just outside of regulatory purview. Both the President’s comments and Yellen’s intimations conjure up a possible re-emphasis on “too big to fail” for the commercial banks.

It appears that the Administration’s answer to guarding against a future economic meltdown is even more action by industry regulators.

Additionally, while trading and shadow banking are not immediately relevant to everyday Americans, the CFPB is using its post to register and monitor consumer complaints – stories and issues that are more readily appreciated by policy makers and the media – that can generate reputational risk. In the bureau’s semi-annual report delivered in May, the largest section by far details the more than 330,000 consumer complaints submitted to the agency’s database since its inception. Keeping within the agency’s charter, the complaints focus on a wide variety of financial products including mortgages, credit cards and student loans, with mortgages and debt collection registering as the largest categories.

The CFPB’s database provides government officials with the means to track any emerging issues among consumers and the justification to take additional regulatory action. This database also provides additional ammunition for the likes of Sen. Elizabeth Warren (D-MA) and others who have made consumer protection the cornerstone of their political personas.

While gridlock is one certainty on Capitol Hill, change in committee leadership when the next Congress convenes in January is another. With Republicans likely to retain control of the House, the Financial Services Committee leadership should remain steady with Rep. Jeb Hensarling (R-TX) as chairman and Rep. Maxine Waters (D-CA) as ranking member. The ideological position of the committee is likely to remain consistent, with a strong focus on reforms for Fannie Mae and Freddie Mac and changes to Dodd-Frank rather than new regulations for commercial banks.

In the Senate, should Republicans succeed in taking the majority, the Banking Committee chairmanship would likely pass to Sen. Richard Shelby (R-AL), a former committee chairman who is focused on GSE reform and no friend of the commercial banks. However, should Democrats hold on to the Senate, Sen. Sherrod Brown (D-OH) would take on the chairmanship. Brown has been very vocal in his opinions on the need for additional regulations on commercial banks, including more consumer protections and support for homeowners threatened with foreclosure. Brown has also taken an aggressive position on “too big to fail” and advocated breaking up the nation’s largest commercial banks.

Finally, as the 2014 election cycle winds down, the 2016 presidential election cycle will get underway in earnest with the possibility of several candidates announcing before the winter holiday season. While Warren has declared that she will not be a candidate, Democratic candidates may feel the need to voice their positions on banking policy in order to placate the base. Likewise, Republican candidates may feel the need to voice populist opinions in order to appeal to the tea party base. There is a real threat the banks could be hit from both sides with harsh rhetoric and new proposals for action in 2015-2016.

With the high likelihood of financial institutions becoming political footballs during the next two and a half years, the regulatory and reputational risks are very real. Just as we thought the clouds were beginning to part, thunder begins to rumble on the horizon.

Corey Ealons


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