The prospect of a Joe Biden presidency — or, more to the point, a Democratic sweep of the presidency, the House and the Senate — should worry executives who run banks and anyone who invests in them. If Joe and the Dems get their way, banks will be taxed more heavily and regulated more strictly than they are now.
The question is how hard that political squeeze will be, and how it will compare to the pressures the banking industry is already facing.
Start with taxes. The Trump administration’s biggest boost to the banking sector, by far, was the cut in the federal corporate tax rate. This is because banks are among a small handful of US industries that actually pays the full rate. As Ed Mills of Raymond James’ policy research team points out, the standard tax offsets are for capital expenditures and for research and development, where banks are relatively inactive. Most banks’ businesses are heavily domestic, too.
In 2017, for example, JPMorgan Chase’s reported tax rate (which includes state and foreign taxes, along with assorted deferrals and offsets) was 32 per cent. In 2019, it was 18 per cent. The biggest contributor to the fall was the cut in the statutory federal rate from 35 to 21 per cent. Mr Biden has proposed moving the rate back up to 28 per cent. A seven percentage-point hike would have cost JPMorgan investors $3.1bn in earnings last year or, at the bank’s current earnings multiple, some $30bn in market value.
That will not be the only tax change on the table. Both Mr Biden and his running mate Kamala Harris have expressed support for a financial transaction tax, which would shave a fraction of a penny from each stock, bond, or derivative trade. There will be a nasty fight about this (“It’s a tax on pensioners!” and so on) but it may well happen. It could raise a lot of money — $777bn over a decade, according to the Congressional Budget Office — and the amount taken from each trade “seems so small,” as Mr Mills says.
Turning to regulation, bear in mind that personnel is policy or, to put it slightly differently, that Elizabeth Warren did not disappear when she lost the Democratic nomination to Mr Biden. The senior Senator from Massachusetts — and banking’s bête noire — will, at the very least, have a strong say in key regulatory appointments. She could also serve as Treasury Secretary, which would give her a big platform to repeat her calls for the separation of investment banking and deposit-taking.
If that prospect is not enough to spook bank executives, imagine the following regulatory trifecta: Ms Warren at Treasury, Lael Brainard as chair of the Federal Reserve, and California representative Katie Porter at the helm of a reanimated Consumer Financial Protection Bureau.
Ms Brainard, a current Fed governor and chair of the central bank’s financial stability committee, was the dissenting voice as Trump appointees (primarily Joseph Otting at the Office of the Comptroller of the Currency and Randy Quarles, as the Fed’s vice-chair for supervision) filed the sharp edges off the Dodd-Frank rules and the Community Reinvestment Act.
As for Ms Porter, anyone who missed her performances when bank executives were dragged before the House Financial Services Committee should find them on YouTube. The former law professor has written textbooks about consumer protection law. She worked for Ms Harris in bank supervision when the latter was California’s attorney-general. At the CFPB, she (or another Democrat) could make life very difficult for segments of the banking industry such as payday lending, while making it easier for start-ups to compete with incumbents in basic services.
A Biden administration would provide some offsetting benefits to the big banks. If he strengthens the social safety net, as he proposes to do, that could help subprime card and auto lenders. Mr Biden also hails from Delaware, which has become the credit-card capital of America because of its lender-friendly laws. That makes it unlikely that he would support moves such as a cap on interest rates, which has been floated by Democrats to his left.
Remember, too, that the banking industry has more to worry about than rules and their enforcement. For all the warmth toward Wall Street of the Trump administration, bank stocks are down about 17 per cent since he was inaugurated. Policy matters — but the path of economic growth and interest rates matter more.
Mr Trump’s critics will argue that Mr Biden represents a return to sane governance. Business in general, and banking in particular, rely on predictable policies that breed global stability. To his supporters, Mr Biden represents a step in that direction.
Investing, however, requires a degree of myopia. In the shorter-term at least, a Democratic sweep would bring pain for bank investors.