BPInsights: Nov. 9, 2024

5 Questions: What's Ahead for Banks in Washington?

Former President Donald Trump won the U.S. presidential election this week, defeating Vice President Kamala Harris. It remains to be seen exactly how Trump's second term will shape banking regulation. On the legislative side, Sen. Sherrod Brown (D-OH), chair of the Senate Banking Committee, lost his bid for reelection, and Republicans regained control of the Senate. Sen. Tim Scott (R-SC), the current Banking Committee ranking member, appears poised to lead the panel in the next Congress. Here are five questions for what's ahead in banking policy after the election.

1. Who will replace Sherrod Brown as ranking member of the Banking Committee? It's not yet clear who will take the top Democratic position on the panel after Brown departs. Sen. Jon Tester (D-MT), another senior Democrat on the Committee, also lost his reelection campaign. Sen. Jack Reed (D-RI) is another seasoned Democrat on the panel but his role leading the Democratic members of the Senate Armed Services Committee might preclude him from taking the helm on the Banking Committee; Sen. Mark Warner (D-VA) is another possibility, though, like Reed, leads Democrats on another committee - Senate Intelligence.
2. Who will win the GOP leadership race on the House Financial Services Committee? As Chair Patrick McHenry (R-NC) heads to retirement, several lawmakers are vying to fill his role: Reps. Andy Barr (R-KY), French Hill (R-AR), Bill Huizenga (R-MI) and Frank Lucas (R-OK). The outcome could shape the priorities of the panel, from oversight of regulators to small businesses to bank capital regulations.
3. What's ahead for bank supervision? Supervision, and the question of whether it is regulation conducted in secret, has become a flash point, and though it isn't a strictly partisan issue, it can certainly be influenced by the tone at the top of the banking agencies. If or when agency principals change, those changes could come with new approaches to supervision.
4. What's the upshot for Basel Endgame? Changes in leadership at the OCC and FDIC are likely to bring different perspectives to the issue, and almost certainly produce delay as potential leaders are nominated and confirmed, and take time to get up to speed.
5. What will be the federal government's role in fintech oversight? Officials in the current administration have floated the idea of a federal payments charter or oversight regime. Will this idea gain steam, or will "novel charters" reemerge as they did at the OCC during the last Trump Administration? It's also an open question how the issue of payments fraud will be handled by policymakers.

Five Key Things

1. BPI, Trades to 2nd Circuit: State Law at Issue in Cantero is Preempted by the National Bank Act

The New York interest on mortgage escrow account law at the heart of the landmark SCOTUS decision in Cantero v. Bank of America is clearly preempted by the National Bank Act, BPI, the American Bankers Association, Consumer Bankers Association, the Mortgage Bankers Association and the U.S. Chamber of Commerce wrote in a recent amicus brief to the U.S. Court of Appeals for the Second Circuit. The trades urged the Second Circuit to reaffirm its earlier conclusion that the state law is preempted by the National Bank Act as it "significantly interferes" with the defendant bank's exercise of its lending and deposit-taking powers.

• Background: The question at the center of Cantero was whether the National Bank Act, a cornerstone federal statute for national banks, preempts a longstanding New York state law requiring interest payments on mortgage escrow accounts. Earlier this year, the Supreme Court remanded the case back to the Second Circuit, which had previously held that the New York law was preempted as to national banks.
• Legal question: The Supreme Court decision requires courts to take a closer look when determining if a state banking law is preempted by the NBA, undertaking a "nuanced comparative analysis" comparing the state law in question to Supreme Court precedents cited in the Court's 1996 Barnett Bank v. Nelson decision. In light of the Supreme Court ruling, the Second Circuit must reexamine its earlier conclusion through a different lens and assess whether the "significantly interferes" standard has been met based on the text and structure of the New York law in question (i.e., rather than the magnitude of impact on the business of the particular bank, in this case Bank of America).
• Why it matters: National bank preemption is an important principle underpinned by federalism and the Constitution. Consistency in legal requirements for national banks allows banking services to flow more freely across state lines rather than subjecting banks to a patchwork of 50 different state requirements.

2. BPI, Group of Trades Urge 1st Circuit to Affirm Federal Preemption of Rhode Island Interest on Mortgage Escrow Account Law in Conti Amicus Brief

BPI and a coalition of trades argued in a recent amicus brief in the Conti v. Citizens Bank case that a Rhode Island law was preempted by the National Bank Act because it amounts to a state-level price control on a national bank product.

• Key question: "This appeal presents a federal question with far-reaching consequences: whether the National Bank Act of 1864 … preempts a state from imposing price controls on the products and services of national banks," BPI, the American Bankers Association, the Mortgage Bankers Association, the Consumer Bankers Association and the U.S. Chamber of Commerce said in the brief.
• Post-Cantero: The Supreme Court ruled in Cantero v. Bank of America that courts must conduct a "nuanced comparative analysis," comparing the interference caused by the state law in question to prior Supreme Court preemption decisions to determine whether the law is preempted. If the state law "prevents or significantly interferes with the national bank's exercise of its powers" in a manner akin to the interference in cases where the Supreme Court found preemption, then it too is preempted, the brief explained. Based on the Cantero case, the court should find that this Rhode Island state law is preempted, according to the brief. "Applied properly, Cantero leads to a clear conclusion: by dictating the interest rates for escrow accounts, the Rhode Island pricing scheme sets terms on fundamental banking operations and is thus preempted under the NBA as to national banks," the brief said.

3. SEC Should Prepare for More Lawsuits, Inspector General Says

The SEC should prepare for more legal challenges to its regulations, according to a warning from the agency's Inspector General on Monday. With heightened scrutiny from the courts, the SEC must "continue to develop a thorough administrative record," including allowing the public opportunities to comment on proposed rules, the IG said in a report. The agency should ensure that its rules can weather court scrutiny, the report said.

• Legal firestorm: The report observed that legal challenges to SEC rules have become more frequent, naming the climate disclosure rule, private fund adviser rule and share repurchase rule as examples of policies facing litigation.
• Opening the floodgates: The Supreme Court's overturning of so-called Chevron deference has opened up the possibility of further litigation, according to the report.

4. One of the Biggest Players in Banking Isn't a Bank

"Citadel Securities is at the forefront of a new breed of trading firms that have eaten away at the traditional dominance of big banks," the Financial Times wrote in a recent article. "In just two decades it has become the world's biggest buyer and seller of stocks in the United States; in August, more equity trading was conducted within its electronic ecosystem than on the New York Stock Exchange's main market. Last year it generated profits of $2.8bn on net revenues of $6.3bn. In the first six months of this year alone, it made $4.9bn in net revenue."

• Treasury market dominance: Citadel is a key market maker in the Treasury market - a role that used to be dominated by banks. One of the reasons banks have retreated from this line of business is regulation: the supplementary leverage ratio discourages market-making in low-risk assets like Treasuries.
• Other players: Citadel is big, but it isn't alone - Jane Street, another nonbank, is a major competitor.
• Uneven regulation: The FT article questions whether regulation needs to catch up to firms like Citadel, which is not regulated like a bank.

5. Chair Powell is Staying Put, Politico Reports

Federal Reserve Chair Powell said he will not step down if President-elect Donald Trump asks him to resign, according to Politico. President Trump stated in July that he would let Chair Powell finish his term, which expires in 2026. However, Politico reported that President-elect Trump's advisers have suggested that Chair Powell should "simply resign." Chair Powell was asked twice about his future as Fed Chair at this week's news conference.

Key Exchange:

Victoria Guida: Some of the president-elect's advisers have suggested that you should resign. If he asked you to leave, would you go?

Chair Powell: No.

Victoria Guida: Can you follow up on it? Do you think that legally you're not required to leave?

Chair Powell: No.

Follow-up:

Andrew Ackerman: To follow up on Victoria's question, do you believe the president has the power to fire or demote you, and has the Fed determined the legality of a president demoting at will any of the other governors with leadership positions?

Chair Powell: Not permitted under the law.

In Case You Missed It

The Crypto Ledger

Here's the latest in crypto.

• Crypto on Capitol Hill: The victory of Ohio Senate candidate Bernie Moreno, a Republican, marked a win for the crypto industry, according to Bloomberg this week. Moreno has posted online about how he plans to "lead the fight to defend crypto in the US Senate."
• Binance vs. SEC: Crypto exchange Binance asked a New York federal judge to scrap a lawsuit accusing the firm of fostering terrorist activity. Binance argued that the lawsuit fails to connect the firm to terrorist activities. The lawsuit was filed after the crypto platform's settlement with the Department of Justice over alleged anti-money-laundering violations.

Ally Executive Diane Morais Reflects on 30+ Years in Banking

Diane Morais, former president of consumer and commercial banking at Ally who retired this year, shared lessons learned from her 37-year career in banking in a recent American Banker profile. Read more here.

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