EDITOR NOTE: An article we curated yesterday advanced the idea that in the finance sector, regulatory policy in the banking industry holds more weight than the presidential office. Whether Biden or Trump wins, their positions remain largely unclear. Why does this matter? It matters not only to investors but more importantly to everyone who deposits money at a bank. And if you own a small business, it will affect your capacity to secure a loan once the second stimulus gets passed. It also affects everything from the fees you’re charged to the financial stability of the very institutions that hold your savings. That last part is critical, as the financial health of our largest banks are not as robust it should be. Should we undergo another pandemic-driven decline, not all banks will survive the plunge.
Given the importance of government oversight in the US banking industry, financial institutions (FIs) will be heavily affected by the outcome of today's presidential and Congressional elections. An administration helmed by former Vice President Joe Biden would emphasize consumer protections, while President Donald Trump would continue deregulation efforts in a second term. Here's what the election could mean for banks in three key areas:
- A new administration could shake up the leadership and role of the Consumer Financial Protection Bureau (CFPB). The president wields considerable influence over the financial sector watchdog. Current CFPB director Kathy Kraninger was appointed by Trump, and though her term doesn't technically end until 2023, a June 2020 Supreme Court ruling granted the president power to remove the director of the bureau at will. A Biden administration would thus likely replace Kraninger with a director whose vision includes greater regulatory oversight of FIs. This would stand in stark contrast to the current administration, under which the CFPB has scaled back enforcement efforts and rolled back select Obama-era regulations, like those related to payday loans. For banks, a change could mean heavier regulatory burdens and higher costs of enforcement.
- A revamped CFPB could also tighten the reins on overdraft fees, which are a major source of income for banks. Overdraft fees are the most complained-about bank practice at the CFPB, averaging $33.47 per overdraft transaction. But they're a significant revenue stream for banks: Overdraft fees brought in $11 billion annually in 2019 for banks with over $1 billion in assets, a $130 million increase from the year before, FDIC data shows. This represented 5% of noninterest income at banks. Though neither candidate has commented explicitly on the topic, Democrats have proposed changes to overdraft policies in recent years—including capping fee amounts or giving customers the option to pay them over time—and it would likely be a focus of a Biden CFPB. But if President Trump is re-elected, there would likely be no change to current fee structures. Either way, banks should brace for continued scrutiny of their practices.
- Banks could be expected to step up for additional government-backed stimulus programs, though the details and timelines will vary depending on the administration and Congressional races. Banks were key in disseminating emergency relief loans to businesses and stimulus checks to consumers in the first few months of the coronavirus pandemic—despite initially struggling to satisfy loan demand and decide what to do with deposits of consumers' stimulus funds (cover negative account balances, or give temporary overdraft relief). This fall, as virus outbreaks began to surge again, differing agendas and poor coordination between the Senate and White House have stretched out negotiations for a follow-up $2 trillion stimulus package. If both houses of Congress and the presidency end up in the hands of a single party, agreement on a stimulus should be swift. Regardless of the legislative timeline, banks must be prepared to address consumers' increasingly dire financial situations and stand ready to ramp up government-backed lending.
Originally posted on Business Insider