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Financial Services

Republicans' retention of the House and Senate majorities means that President-elect Trump will have partners in both banking committees to help implement an agenda heavy on deregulation. The new Senate Banking Committee chairman will be Mike Crapo (R-ID), who has a solid working relationship with returning Ranking Member Sherrod Brown (D-OH) and could work productively with him in a handful of areas. On the House side, Rep. Jeb Hensarling (R-TX) returns as chairman of the Financial Services Committee. A fierce opponent of the 2010 Dodd-Frank Act, Hensarling will have Trump's support in renewing his effort to repeal and replace the Dodd-Frank Act and continuing the panel's aggressive oversight of financial regulators. Given Republicans' narrow majority in the Senate, Democrats' ability to filibuster controversial bills in that chamber will make it difficult for House and Senate GOP leaders to push through a broad dismantling of major elements of Dodd-Frank, something the President-elect called for during the campaign. But given that Republicans will have full control of the executive and legislative branches for the first time since 2006, the GOP base will be dismayed if they don't try anyway. Short of that broader effort, bipartisan compromises in the areas of bank capital and regulatory relief for smaller banks seem achievable.

Senate Banking Committee. Crapo is widely seen as working constructively with Sen. Brown –a stark contrast to Brown's relationship with current Chairman Richard Shelby (R-AL), who has been unable to agree with Democrats on much legislatively. In a July interview, Crapo called Brown "straightforward and honorable" and said that while they were far apart in terms of their political views, "the fact is we have been able to find significant areas of consensus where we can agree to move forward on good policy, so I expect that we would be able to do that." The leading options for an early bipartisan effort include a bill providing regulatory relief from some Dodd-Frank provisions to community banks, a high priority for both Crapo and Brown. Such a bill might include language raising Dodd-Frank's $50 billion asset threshold, above which banks must submit to more rigorous prudential supervision by the Fed. Crapo and Brown also could agree on modest structural changes to the Federal Reserve, unless pressure from the Trump White House for a more ambitious Fed reform bill –like the package of changes passed by the House in November 2015 –derails that effort. Crapo and Brown could also conceivably agree on more stringent capital standards for the largest banks, a theme that Brown hammers at every opportunity.

As Shelby did, Crapo is expected to maintain the committee's focus on rules and bodies created by the Dodd-Frank Act, such as the Financial Stability Oversight Council (FSOC) and the Consumer Financial Protection Bureau (CFPB), which suffered a judicial setback when a federal appeals court on October 11 ruled that its structure was unconstitutional. Crapo has also been skeptical of the new supervisory authorities the 2010 law gave the Fed to oversee larger banks and insurers that are designated as systemically important by the FSOC. Crapo could work collaboratively with Ranking Member Brown on a legislative follow-up to the Fed's recent report criticizing banks' trading of physical commodities; one obvious possibility is to repeal the merchant banking exemption given to the holding companies for Goldman Sachs and Morgan Stanley, as the Fed recommended. Finally, a post-crisis system for housing finance – i.e., the future of Fannie Mae and Freddie Mac – still looms as the biggest area left unaddressed by the 2010 financial reforms, but a bipartisan effort to establish a new system drafted by Crapo and then-Chairman Tim Johnson (R-SD) in 2013–14 foundered when the Banking Committee's liberal Democrats (and some Republicans) declined to support the centrist proposal. Since then, few signs have emerged about how to structure a new housing finance system in a way that could survive a Senate filibuster, and President-elect Trump did not address the issue during his campaign.

House Financial Services Committee. After years of confrontation with a Democratic White House and Democratic appointees to financial regulators, Chairman Hensarling will shift strategies now that the executive branch is in more friendly hands. Hensarling is not likely to improve his contentious relationship with Rep. Maxine Waters (D-CA), however, who will return as ranking member and is certain to push back on Hensarling's efforts to replace the 2010 reforms with more conservative approaches. While Hensarling has regularly done battle with officials at the FSOC, Treasury, SEC and the Fed, new leadership is expected at those agencies – though even Republican appointees will be constrained by the existing statutory mandates in Dodd-Frank, unless the new Congress is able to alter the law with legislation. At the Fed, Chairman Janet Yellen's term does not expire until January 2018. President-elect Trump frequently criticized Yellen as being overly "political" during the campaign.

EY

21 | Election 2016

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