Wall Street braces for tougher rules under new Democratic majority

The Democratic takeover of the Senate means the financial services industry can expect stricter rules and tougher oversight once President-elect Joe Biden takes office.

Victories by Sens.-elect Jon Ossoff (D) and Raphael Warnock (D) in Georgia last week will split the chamber 50-50 and give Democrats control on Jan. 20 with Vice President-elect Kamala Harris casting any tie breaking votes.

Narrow Democratic majorities in both chambers will likely prevent the party from passing the most ambitious parts of its agenda, but flipping the Senate still allows Democrats to install tougher financial regulators and give them more powerful tools to accomplish long-standing goals.

Biden will no longer need GOP support for his nominees to be confirmed, so long as Democrats remain united, and he can count on the Democratic Senate to expediently replace Trump-appointed regulators.

The Democratic victories in Georgia have also closed off Judy Shelton’s path to the Federal Reserve board, leaving Biden a vacancy he can fill with a Democrat. And Sen. Sherrod Brown (D-Ohio), one of the chamber’s fiercest critics of big banks and the financial sector, will soon become chairman of the Senate committee that oversees them.

“There was practically no window with Republicans holding the Senate to push any positive change legislatively. There now is a window,” said Gregg Gelzinis, senior policy analyst at liberal Center for American Progress.

“To ensure that we have a safer, more stable financial system, to make our financial system less predatory, to protect consumers and investors, help homeowners and renters — that’s all possible now.”

Democrats are eager to beef up financial regulations and bolster the power of federal watchdogs after four years of rollbacks under President Trump. Though Trump fell well short of his 2016 campaign pledge to “dismantle” the 2010 Dodd-Frank Act, he succeeded in weakening or loosening many of post-financial crisis reforms enacted by former President Obama.

Trump officials have reined in the powerful Consumer Financial Protection Bureau (CFPB), exempted three major financial companies from stricter government oversight, and relaxed several Dodd-Frank measures intended to prevent major banks from causing another financial crisis. Some of those moves were made with bipartisan support.

Even though another landmark financial reform bill is off the table, Biden will take office with immediate opportunities to put three regulatory agencies under Democratic control and further the goals of Dodd-Frank.

Biden is expected to fire and replace CFPB Director Kathy Kraninger and Acting Comptroller of the Currency Brian Brooks with more hawkish acting chiefs soon after taking office, actions he can take without Senate approval.

Doing so will also put Democrats in charge of the Federal Deposit Insurance Corp. The bank overseer is chaired by Trump appointee Jelena McWilliams, but she will contend with a Democratic majority because the CFPB director and Comptroller of the Currency are members of the FDIC board.

With a Democratic Senate, Biden will also be able to designate new chairs of the top Wall Street watchdogs — the Securities and Exchange Commission and Commodity Futures Trading Commission — and create Democratic majorities.

“It’s not just who gets nominated, but how quickly they’re actually able to get through the confirmation process and start playing the leadership role in setting a new agenda,” said Columbia University law professor Kathryn Judge.

“The process of having to kind of deal with foot-dragging by the Senate can result in significant vacancies and that’s been a real problem in recent administrations.”

Even so, D.C. financial policy experts and Capitol Hill veterans don’t expect Biden to gamble on aggressively progressive picks with such a small majority.

“You never want to cut it close,” said J.W. Verret, a former Republican senior counsel to the House Financial Services Committee who supported Biden’s candidacy for president. “There’s always a possibility of defections, so I just don’t think that general strategy or confirmation will change.”

Verret said he expected Biden to choose financial regulators in line with his previously announced economic nominees like Treasury Secretary-designate Janet Yellen, a liberal with strong credentials who is respected across the political spectrum.

Yellen, unlike many Democrats, has not called for breaking up big banks and has recently come under fire for a series of paid speeches to major financial sector players. But Yellen and Deputy Treasury Secretary-designate Wally Adeyemo have also prioritized bolstering financial regulations and huddled Tuesday with Americans for Financial Reform, an advocacy group that supports much tougher regulations.

Progressives have been largely satisfied with Biden’s economic team so far and are eager to seize any opportunity to push his administration to the left. Those efforts will get an immediate boost from Brown once he takes the gavel of the Senate Banking, Housing and Urban Affairs Committee.

Brown’s legislative ambitions will be limited by the size of the Democratic majority and newly empowered moderates. Yet he can still advance his agenda and push regulators with hearings, aggressive oversight and control over vetting nominees.

“For too long, the Senate Banking and Housing Committee has only delivered for Wall Street,” Brown said in a Thursday statement. “Under new Democratic leadership, we’re going to get to work for everyone else, and put workers, and their families, and what matters to their lives at the center of everything we do.”

Brown is likely to hold the financial sector’s feet to the fire with an intense focus on big bank business practices, the housing finance system, and how the financial industry can use its power to fight climate change, said Ian Katz, director at policy consultancy Capital Alpha Partners.

“They get to pick the majority of the witnesses that testify and you’re going to get topics that probably wouldn’t get much airtime if it was [Sen.] Pat Toomey (R-Pa.) up there,” Katz said, referring to the Banking panel’s top Republican.

Katz added that testy hearings, some featuring powerful CEOs, may cause intermittent headaches for the financial sector, if not enduring change.

Brown’s supporters, however, say his ascension clears the way toward a stricter regulatory regime and drives momentum toward their priorities.

“He’s been a very consistent and powerful voice, or the need to think more about the way. economic policy and financial regulation really affects ordinary Americans,” Judge said.

“That shift in power could have an ongoing effect through hearings and other mechanisms of really pushing a set of priorities.”

“Chairman Brown will be setting the agenda,” Gelzinis echoed. “That itself is a quite powerful tool.”