WASHINGTON — Bankers should brace for tighter scrutiny from Congress, tax hikes and more progressive regulators after Democrats gain control of the Senate, according to industry analysts.
With Democrat victories in both Georgia runoffs, the chamber will be split 50-50 between Democrats and Republicans, with Kamala Harris holding the tiebreaker once she’s sworn in as vice president. The Democrats will also retain a majority in the House of Representatives.
While The coronavirus pandemic is expected to draw much of the attention of lawmakerstheir agenda will likely include legislation to promote financial inclusion, ensure the financial system is protected from climate change risks and reform the credit reporting industry.
Banks are also expected to face tighter oversight from Congress, with Rep. Maxine Waters, D-Calif., and Sen. Sherrod Brown, D-Ohio, setting banking committee priorities.
Additionally, President-elect Joe Biden is expected to have a much easier time confirming candidates for regulator offices as his party will control the Senate.
“Banks have been one of the key beneficiaries of the Trump administration given the corporate tax cuts and deregulation agenda,” Isaac Boltansky, an analyst at Compass Point Research & Trading, said in a research note on Wednesday. “In a democratic sweep scenario, banks would face higher corporate taxes and a less hospitable regulatory environment, but the timing, prioritization and magnitude of these changes are relatively nuanced.”
Banks can expect more aggressive enforcement from the Consumer Financial Protection Bureau, as well as other regulators, as Biden will have more freedom to choose liberal policymakers to run the agencies.
“Biden should have an easier time validating his choices for top jobs,” Jaret Seiberg, an analyst at Cowen Washington Research Group, said in a note Wednesday. “It also means that a progressive crusade should be in charge of the CFPB, which means greater enforcement and regulatory risk for auto lenders, service providers, mortgage lenders, credit card lenders, payday lenders and debt collectors.”
Biden also proposed raising corporate taxes and possibly a fee for bank accountability for financial crises in wide-ranging policy documents released over the summer.
James Lucier, managing director at Capital Alpha Partners, said banks are likely to see a tax hike, but that it may not be significant given Democrats are unlikely to hold the Senate majority.
“We would expect that under the Biden administration, Congress would vote to increase corporate taxes to partially offset the cost of an infrastructure bill passed under the reconciliation rules,” Lucier said in a note Wednesday. “We would not expect Biden’s entire corporate tax proposal to pass.”
But the blue wave isn’t just bad news for banks. Legislation passed by the House that would make it easier for banks to service state-legalized cannabis businesses may finally make it to the Senate.
Seiberg said Democrats will likely push for passage of the Tenth Amendment by Entrusting States or STATES legislation, which would allow states to set their own cannabis laws and lift the federal ban on pot. This legislation goes further than a bill the House of Representatives passed in 2019 to prevent federal financial regulators from penalizing financial institutions that provide services to federally legalized marijuana businesses.
“If the filibuster continues, we see the STATES Act as a highlight,” Seiberg said. “This law would shift the issue of legalization to the states. Sen. Elizabeth Warren is an original co-sponsor, although the bill aims to garner conservative support by allowing each state to decide the fate of cannabis.”
And Democrats have also signaled they plan to roll out additional economic stimulus in response to the pandemic.
“A Democratic Senate means Joe Biden should be able to push additional stimulus and an infrastructure package,” Seiberg said. “That should boost the economy, which will benefit financial stocks.”