With the long vote count hopefully drawing to a close, it still looks as though Joe Biden will occupy the White House.
Questions now can turn to the likely policy directions of this new administration. Such forecasts are always problematic. The present case presents a particularly difficult forecasting problem, because candidate Biden presented two faces to the public. During the primaries and at times during the election proper, he characterized himself as a centrist who would reach across the aisle. At other times, he presented a more exclusively left-leaning, progressive agenda. The difference may come down to the “details” that his “team will flesh out,” to use his words from the campaign trail, but then, the devil is always in the details.
In one area, however, direction seems clearer, and that is in financial regulation. Here the Biden team has made clear its promise to regulate banks and other financial institutions more strictly than the Trump administration has. To underscore that intent, he has recently appointed as head of his transition team Ted Kaufman, long an advocate of strict new rules for the financial services industry. Doubtless, fintech will feel the weight of this effort.
Primary among Mr. Kaufman’s policy preferences is a limit on the size of banks.
During Kaufman’s brief time in the Senate, 2009-10, when he substituted for Biden after that man left the Senate to serve as Barack Obama’s vice president, Kaufman pressed an amendment to the Dodd-Frank financial reform legislation that would have forbidden any bank from holding more than 10 percent of the nation’s deposits. Had the amendment passed, it would have forced the breakup or downsizing of some of the most well-known banking names in the country, in the world. In the Senate and afterwards on a number of advisory posts, Kaufman has also pressed variously for greater transparency among brokers in how they handle stock orders, strictures on automated trading, and limits on how much Washington can tap Wall Street veterans for high level government posts. Strengthening the Kaufman agenda are remarks Biden made during the campaign about establishing a post office bank, creating a government-run credit reporting company, increasing access to capital in historically underserved communities, and extending mortgage lending to lower-income people.
Of course, campaigning, making recommendations as an advisor, even pushing legislation in the Senate are all very different from setting an administration’s policy agenda.
It is nonetheless worth considering how things would play out if the Biden administration moved in these directions. The 10 percent rule on deposits would inevitably force the downsizing and breakups of larger banks and perhaps also some of the country’s largest investment advisors, who, though they do not take deposits, do control a hefty proportion of the nation’s investable funds. The rest of the agenda – greater transparency, circumscribing trading opportunities, and pressure for community lending would touch every aspect of financial services.
Except for bank breakups most of the financial services industry would see this as largely a return to the past. After all, the Obama administration engaged in some heavy regulation, and many can still remember Washington’s intense pressure to lend to lesser credits that, under both Republican and Democratic administrations, led up to the financial crisis of 2008-09. Fintech might feel the regulatory imposition especially, not because a Biden administration would single out these firms, but rather because they are less accustomed to severe regulatory constriants than the rest of the industry.
At the beginning of the last great regulatory push, when Washington was framing the Dodd-Frank legislation, fintech was such a small feature on the financial landscape that it captured little or no official interest.
hat is no longer the case. There is then every reason to expect that enhanced transparency demands would inevitably go beyond brokers to other financial firms including fintech. If the push for greater lending in underserved communities were to gain momentum, it could force an examination of many of the algorithms at the base of much fintech success, especially if those routines seemed to have a disparate impact on different demographic groups. Apart from regulatory burdens, fintech might find opportunities and competition in the breakup of large banks. Since small banks have already begun to team up with fintech companies, the creation of a new raft of smaller banks could bring fintech partners new business. At the same time, however, the dissolution of larger banks could, instead of creating a lot of new smaller banks, result in the creation of a number of specialized entities with the technical expertise and capital to challenge several existing fintech ventures.
Of course, this sort of policy agenda is by no means guaranteed. Though at this writing, voting power in the Senate remains undecided, probabilities still suggest a Republican majority. That could block any legislation needed to accomplish many of these objectives. Even in the absence of a Republican majority, not every Democrat in the Senate is necessarily enthusiastic about these kinds of rules. Those same doubts could also be evident in the House, where the Democrats now have a slimmer majority than in the outgoing Congress. It is worth considering that even Dodd-Frank, passed in a feverish effort to control financial risks, rejected the idea of breaking up the big banks and instead enshrined a too-big-to-fail designation for these institutions.
Nor should anyone discount the impact of lobbying by financial firms and their allies in for instance the U.S. Chamber of Commerce and the Business Roundtable.
The kinds of pressures could bring could water down new regulations considerably, even those that do not require legislation. In this regard, it is worth considering that Joe Biden has at least 40 current and former lobbyists on his transition team. What is more, during Biden’s more than 40 years in the Senate, he worked closely and amicably with many now serving as lobbyists. Indeed, many current lobbyists are former Biden aids. Perhaps more telling is that Biden, unlike Trump and Obama before him, has so far refused to exclude lobbyists from consideration for government positions. To be sure, there is zero evidence that Biden ever did favors for former associates when they acted as lobbyists, but that does not entirely discount their power to affect the actions of this incoming administration.
This moment at the end of 2020 is a long way from regulatory staffing much less rule making. It is further from legislation. Even were the Biden team initially enthusiastic about an intense financial regulatory agenda, it might well dilute it in light of future political considerations or the persuasiveness of lobbyists. But for those who wonder what good or bad (for them) might be coming down the pike, this picture painted from staffing announcements and rhetoric might provide an early glimpse.