Gridlock for Financial Services Policy in Future after Elections Leave Congress Divided

The midterm elections Tuesday night upended the power dynamic in the nation's capital, with Democrats seizing control of the House. But the net result of that for financial institutions will likely be very little change in regulatory or legislative policy.

With Republicans still controlling the Senate, regulators and banks are in for two years of even more divided government. Rather than tangible reforms, the biggest impact will be a change in rhetoric in the House, and perhaps mixed messaging from two chambers often in conflict.

If the GOP had held on to power in the House, the industry could have hoped for more momentum on the reg relief front. But the recent Senate law making targeted changes to the Dodd-Frank Act, which President Trump signed in May, may be the last major piece of financial services legislation for the foreseeable future.

Although the divided government is likely to produce legislative gridlock, there are still several key regulatory posts that haven’t been filled by the Trump administration that need Senate confirmation. The Federal Reserve Board of Governors still has three empty seats, although a vote on the Senate floor has been scheduled for one nominee, Michelle Bowman. The Senate has not yet voted to confirm Kathy Kraninger to head the Consumer Financial Protection Bureau. And Mel Watt’s term as Federal Housing Finance Agency director is up in early 2019.

With Republicans poised to expand their majority in the Senate while votes continued to be counted, the Trump administration could have a slightly easier time to pushing through regulatory nominees that reflect the administration’s overall view that financial services firms need relief.

While a big bipartisan legislative package affecting financial services is unlikely, some observers say the divided-government reality could motivate Republicans and Democrats in the House and Senate to compromise on smaller reforms, particularly in areas relating to the current anti-money laundering laws and the fintech regulatory landscape.

Marijuana banking may be another issue that lawmakers of both parties could try to come together on, as more states push to legalize the substance — for medicinal or recreational purposes — but the Justice Department is still enforcing a federal ban. Credit unions and banks are often cautious in providing services to cannabis-related businesses given potential legal ramifications and conflicts between federal and state law.

But there will be a tight window for Congress to pass any smaller bipartisan reforms as the conclusion of the midterms will inevitably give way to more attention on the 2020 presidential contest, making it even harder to pass financial services legislation.