10 minute read 12 Mar 2021
Vital businessman jumping under solar panels

What FIs should expect from Biden’s accelerated 100-day agenda

Authors
Michael Beaty

Partner, Financial Services, Ernst & Young LLP

EY US FSO tax partner serving the insurance industry. Interested in US tax policy and legislative developments. US tax reform thought leader. SSAP No. 101 publication coauthor.

Marc Saidenberg

EY Financial Services Global Regulatory Network Co-Lead, Principal US Financial Services Consulting, Ernst & Young LLP

Financial services advisor. Facilitating active dialogue between industry and the public sector. Public speaker and thought leader. Husband and father.

Jamila Abston

FSO Americas Financial Services Risk Management Partner with Ernst & Young LLP (US)

Ernst & Young LLP Partner in the FSO Consulting Financial Services Risk Management practice. Provides risk and compliance coverage on wealth & asset management accounts.

John D. Hallmark

Ernst & Young LLP Principal, Public Policy, and US Political and Legislative Leader

Public policy professional with a deep understanding of the Washington legislative and political arenas. Works with key stakeholders to formulate and execute on the firm’s policy initiatives.

10 minute read 12 Mar 2021

Financial services may not lead the new president’s agenda but embedding his priorities in governmental decision-making will be felt.

In brief
  • Financial institutions will be asked to make the climate a bigger part of risk management and disclosures.
  • The new administration will concentrate on mitigating COVID-19’s health impacts and on providing relief and economic support.
  • Social justice and racial equity also will be emphasized, with consumer protection and financial inclusion efforts taking a higher profile.

President Joe Biden took office with pressing policy priorities to address and the potential to enact much of his agenda, but it won’t be easy. His first 100 days, expected to be dominated by vaccines and another COVID-19 relief package, are providing an early test. The new president also will be looking to incorporate climate change and social justice considerations more deeply into policy- and rule-making processes across the federal government — a so-called whole-of-government approach — while attempting to restore a sense of unity into a partisan political environment. 

Financial services may not be at the top of Biden’s policy agenda — at least not directly — but embedding his priorities in governmental decision-making processes will be felt. We expect a general reversal of the regulatory easing of the last four years, with greater scrutiny in areas like consumer and investor protection, housing finance and financial inclusion. Financial institutions (FIs) also will be asked to make the climate a bigger part of risk management and disclosures. Agency appointments and the regulatory and supervisory priorities rule-making that follow will reflect those themes.

In the months ahead, we will be monitoring the new administration’s progress on achieving its priorities and how they will impact FIs. We also will be watching how the debate on tax policy evolves and what it might mean to the industry.

Biden’s priorities

The new president is employing a whole-of-government approach that makes each priority central to decision-making.  His four overarching priorities across departments and divisions are:

  • Mitigating COVID-19’s health impacts. This includes expanded free testing, accelerated vaccine production and distribution, and financial support for local efforts to combat the pandemic.
  • COVID-19 relief and economic support. Biden’s $1.9 trillion American Rescue Plan (ARP) calls for additional $1,400 direct payments to individuals, expanded unemployment benefits, aid to state and local governments and schools, rental assistance and other measures to help families and communities endure the pandemic’s financial impact. The administration aims to have the bill signed by March 14, when existing pandemic unemployment programs are scheduled to expire.
  • Climate change and clean energy. Expect regulatory tightening around emissions and incentives for green energy programs. Biden has already ordered a "climate review" of more than 100 orders and regulations across the government. The president hopes to use climate’s threat as a catalyst for a new clean economy.
  • Social justice and racial equity. Biden’s policies will include a focus on consumer protection. For FIs, racial equity and financial inclusion efforts will take a higher profile.

Biden’s agenda also includes his "Build Back Better" plan, which calls for funding job creation, infrastructure spending and green energy initiatives. The proposal, which includes new or expanded incentives for retirement savings and affordable housing, and other Democratic priorities, is expected to dominate the legislative agenda in the second half of the year. With a price tag into the trillions of dollars, it will likely be accompanied by a push to raise taxes.

Impact on financial services

Financial services legislation is unlikely — the industry appears to have weathered the pandemic’s disruption relatively well. Even so, and with many other issues requiring immediate attention, the president’s agenda will have a significant impact on FIs.

COVID-19’s health risks touch FIs as employers and service providers. Institutions also will likely be expected to play a significant role helping to facilitate the next relief package, with the conduct and operational challenges that entails.

Impact on financial services

89%

More than 89% of the 2,554 participants in our recent Financial Services Presidential Update webcast said that, among Biden’s four priorities, those related to COVID-19 — split almost evenly between the health response and economic stimulus — would have the largest impact on their businesses.

Climate was viewed as the most impactful priority by 8.1% of participants, while 3.7% said it was social justice.

Industry-related policy changes will most likely be driven by agency appointees shaping regulatory, supervisory and enforcement priorities. As Biden appoints new agency leaders, expect to see a reversal in the regulatory easing experienced during the last four years and a greater emphasis placed on FIs’ role in promoting social equality.

While Secretary of Treasury Janet Yellen is respected on both sides of the aisle, other nominees are viewed as more progressive than what might have been expected before Democratic wins in Georgia’s Senate run-off elections created a 50-50 split in the upper chamber. They include Gary Gensler, former chairman of the Commodity Futures Trading Commission, as head of the Securities and Exchange Commission (SEC), and Federal Trade Commissioner Rohit Chopra as director of the Consumer Financial Protection Bureau (CFPB). 

Biden also is expected to nominate a new Comptroller of the Currency and director of the Federal Housing Finance Agency (FHFA), where key rules around affordable housing are made and the fate of Fannie Mae and Freddie Mac could be determined.

Financial services priorities

These regulatory leaders will be on the frontlines as a well-telegraphed set of six policy priorities for financial services plays out. Those areas, and what to watch for, include:

  • Stronger oversight of G-SIBs: We expect to see closer scrutiny of the largest FIs. To anticipate the direction, watch both the nominees and the confirmation hearings. Democratic Sen. Sherrod Brown of Ohio, a noted Wall Street critic who in the past has called for breaking up large banks, is the new chairman of the Senate Banking Committee.
  • SIFI regulation: We expect to see additional large FIs designated as systemically important financial institutions (SIFIs), with the heightened scrutiny and higher capital requirements that entails. Watch Treasury nomination hearings for signs on how the Financial Stability Oversight Council’s (FSOC) oversight role might change in support of Biden’s priorities.
  • Sustainability and climate risk: We expect market regulators to pay more attention to climate risk — and to expect the same from FIs. The SEC has appointed a new senior advisor for climate and ESG, Satyam Khanna, to set stronger environmental disclosure rules and advise the agency on social and governance matters. In January, Kevin Stiroh, former head of supervision at the New York Federal Reserve Bank, was named chairman of a new Fed committee that is studying the potential impacts of climate change on FIs. Climate, as a focus of regulators, is here to stay.
  • Relief/stimulus implementation and support: We expect significant supervisory scrutiny to confirm that FIs’ are providing and administering their responsibilities under stimulus programs fairly, including forbearance programs and payment holidays. They will likely be expected to duplicate the support they provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act with ARP.
  • Housing finance reform: We expect Biden to crack down on discriminatory lending practices. He also has proposed a "Bill of Rights" that would prevent FIs from granting mortgages above a certain percentage of borrower income and offer consumers greater foreclosure and eviction protections. It also would give homeowners the right to sue FIs for violating those protections.
  • Consumer protection and financial inclusion: We expect an emphasis on financial inclusion, built around five pillars:
    1. Consumer and investor protection. Regulators are performing more inquiries in areas such as trading, liquidity and valuations. Equitable access to loans, forbearance and forgiveness programs will be crucial in the year ahead.
    2. Data and analytics. FIs will be expected to use all the data they collect to provide less-advantaged populations with access to the financial system and educate them on its usage. Regulators will be monitoring those efforts, as well as how data is protected.
    3. Strategy, products and disclosure. Regulators will be pushing for more-accessible disclosures to promote greater customer understanding of products and services. An emphasis will be placed on consumer education.
    4. Digital access. As FIs move to providing more digital products and services, they will be expected to confirm that customers have equal access. Regulators will pay closer attention to digital risk management and controls.
    5. Inclusive recovery. FIs will be expected to help confirm that coronavirus recovery efforts are pursued equitably. Expect to see programs to support minority entrepreneurs, essential workers, the unemployed and other hard-hit groups. One example: the exclusive 2-week window opened in February for businesses with fewer than 20 employees to apply for Paycheck Protection Plan loans.

FI financial inclusion efforts will be under scrutiny from both the public and private sectors.

FI financial inclusion

54%

of webcast participants said that it will be driven more by regulators, while 46% believe the market will be the primary force.

The tax agenda

The Build Back Better plan will likely include targeted tax increases for corporations and wealthy individuals to partially offset costs. The question is how much will those taxes rise? 

Biden’s campaign tax plan called for increasing the top corporate tax rate to 28% from 21%, adding a 15% minimum book tax for firms with $100 million or more in net income and raising taxes on US-based multinational businesses through changes to the international tax reforms enacted in 2017. It also suggested raising the top marginal tax rate on wealthy individuals to 39.6% and taxing capital gains and dividends at an ordinary rate for people who earn more than $1 million.

The tax agenda

68.3%

Just over 68.3% of our webcast participants said that returning to 28% corporate rate would have the greatest impact on their institutions.

About a quarter said the higher individual rate would matter more. 

Democrats control thin majorities in both the House and Senate, creating a narrow path for tax increases, but political reality suggests legislation with all the president’s proposed tax changes won’t pass Congress. With the filibuster intact, it will be next to impossible to find 10 Senate Republicans to support big tax increases. 

Even if Democrats turn to the budget reconciliation process to pass legislation without Republican support, their thin majorities in the House and Senate could make passage difficult. It is likely that moderates in the Senate will use their leverage to block progressive proposals, such as wealth taxes and treating capital gains as ordinary income. Some House Democrats, facing mid-term elections next year, also could oppose significant tax increases. 

While uncertainty currently exists, it is easy to envision a compromise that includes more modest tax increases than what Biden proposed during the campaign, with the top corporate rate possibly going no higher than 25%. Those increases are unlikely to take effect before 2022. 

State budgets have been damaged by the pandemic, and unlike the federal government, all but one (Vermont) require balanced budgets. Some states already are looking at tax increases to avoid big spending cuts. Much will depend on how much of the $350 billion that Biden wants states to receive from the ARP is allocated.

FIs should model the tax policy changes Biden proposed during his campaign to gauge their impact and actively engage with lawmakers to let their views be known.

The path ahead

In a divided Washington, it would be unreasonable to think Biden and Democratic leaders in Congress can achieve all that they want. Even so, the new president’s priorities reflect popular angst over multiple crises, and FIs will need to monitor the evolving environment closely.

Summary

With a pandemic, climate change and social justice headlining the agenda, it promises to be a dynamic year.

About this article

Authors
Michael Beaty

Partner, Financial Services, Ernst & Young LLP

EY US FSO tax partner serving the insurance industry. Interested in US tax policy and legislative developments. US tax reform thought leader. SSAP No. 101 publication coauthor.

Marc Saidenberg

EY Financial Services Global Regulatory Network Co-Lead, Principal US Financial Services Consulting, Ernst & Young LLP

Financial services advisor. Facilitating active dialogue between industry and the public sector. Public speaker and thought leader. Husband and father.

Jamila Abston

FSO Americas Financial Services Risk Management Partner with Ernst & Young LLP (US)

Ernst & Young LLP Partner in the FSO Consulting Financial Services Risk Management practice. Provides risk and compliance coverage on wealth & asset management accounts.

John D. Hallmark

Ernst & Young LLP Principal, Public Policy, and US Political and Legislative Leader

Public policy professional with a deep understanding of the Washington legislative and political arenas. Works with key stakeholders to formulate and execute on the firm’s policy initiatives.