As Joe Biden’s slate of financial regulators prepare to wield US securities laws that for four years have been invoked only sparingly, Wall Street executives are eyeing tougher enforcement as a threat — but also as a chance to neutralise a new generation of high-tech competitors.
Bank lobbyists and executives say a priority will be persuading the incoming administration that tech giants such as Facebook and Google, as well as upstart fintechs, should not be allowed to provide services that compete with banks without being subject to full bank regulation.
“Businesses that want to be in the banking business without the heavy regulation that banks have — that are playing the arbitrage game — are a concern for all of us [in the industry],” said Bill Daley, vice-chairman of public affairs at Wells Fargo and a former White House chief of staff under president Barack Obama.
The new president has pleased progressive Democrats with his choices for agencies that have the power to probe financial misconduct and set leverage ratios and other rules that set the bounds of the industry’s profitability.
Biden’s choice for the Office of the Comptroller of the Currency has yet to be announced, but lobbyists have been following plans by the body — one of the three main US banking regulators — to create a streamlined “fintech” or “payments” charter for financial institutions that do not take traditional deposits.
The charter-lite concept, which amounts to a form of banking licence, was proposed during the Obama administration, and recently departed OCC commissioner Brian Brooks revived the idea in the final months of Donald Trump’s presidency. Brooks’ proposal was immediately challenged by other regulators and is now working its way through the courts. Several states are promoting low-regulation bank charters as well.
“These new ersatz bank charters lack protections for US consumers and are a risk to financial stability,” said Greg Baer, president of the Bank Policy Institute, a bank lobbying group. “They would enable tech companies to operate without the consumer and safety and soundness protections designed for a full-fledged bank.”
Jamie Dimon, chief executive of JPMorgan Chase, the biggest of the US banks, has long raised alarms about the competitive threat from tech companies — and the risk of regulatory arbitrage by non-bank finance companies. In a January call with analysts, he highlighted “examples of unfair competition” in payments, where some fintechs can charge higher exchange fees on debit card transactions than banks are allowed, while skimping on “know your customer” and anti-money laundering checks.
The sense that tougher regulation — if universally applied — could provide established financial institutions with an edge over new competitors extends beyond tech.
Banks may also find their competitive position bolstered by a regulatory crackdown on non-bank lending, which could pit banks’ lobbyists against those for large alternative asset management firms.
“The whole unregulated banking sector will be looked at and will be under a cloud,” said an executive at a large private equity firm that controls billions of dollars in direct lending funds that have replaced banks as the lenders of choice for many midsized businesses.
“Shadow banking sounds terrible, unregulated, dark, mysterious. It sounds like everything you don’t like,” the executive added. “And I think those views will prevail.”
Another senior executive at a large Wall Street bank agreed that politicians and regulators would conclude “banks are not the problem right now, no one believes banks are undercapitalised [or] have misbehaved”.
Given that banks actually increased their capital levels through the pandemic recession, one lobbyist said that “it is impossible to make principled argument that banks didn’t have enough capital going into this crisis, so banks are in a much better position there”. He did say, however, “that it will be interesting to see who tries to make an unprincipled argument”.
“I really believe that [banks] are putting an imperative on partnering with government right now,” said Kevin Fromer, president of the Financial Services Forum, a lobby group, pointing to the industry’s big role in the Paycheck Protection Program, which funnelled federal aid to US small businesses.
The focus on how regulators might deal with financial vulnerabilities outside the banking system illustrates how the finance industry’s policy agenda has shifted away from recent concerns such as taxation and capital requirements.
Progressives celebrated when Biden began naming fierce critics of the financial industry to important positions. Among them was Rohit Chopra, a longtime ally of firebrand Democratic senator Elizabeth Warren, who was placed in charge of the Consumer Financial Protection Bureau.
“Maybe the most alarming is Gary [Gensler],” said one senior financier, referring to Biden’s choice to run the Securities and Exchange Commission. Gensler gained a reputation as an assertive financial regulator when he oversaw the derivatives markets during Obama’s presidency.
Still, many large banks and investment groups believe their experience after 2008 has left them better prepared for any coming regulatory onslaught.
“This guy [Gensler] knows the inner workings, he’s seen the dirty tricks, and he’s very energetic,” the financier said. “But when Trump came in and rolled some of [the Obama-era enforcement] back, nobody concluded that was anything but a temporary lull. And we didn’t want to have to go through that again,” he added, referring to the unexpected punishments doled out for practices that industry leaders had considered commonplace and above board.
The same recognition may be true of tax rates.
“Remember we were at 35 per cent and we are at 18 per cent,” said one senior banker, referring to the headline corporate tax rate. Banks tend to play closer to the full rate than other businesses because their businesses are heavily focused in the US and they make relatively few large capital investments, which create tax-shielding depreciation.
“There is a general recognition that the rate will drift back up, but it won’t be the industry leading the charge [against that],” the banker said.
And financial executives express pleasure that the tech industry has largely replaced banking as the prime villain in politicians’ anti-business rhetoric. “Compare [our political position] to the tech industry,” said one. “They have supplanted the evil bankers.”