Updated Thursday, July 24, 2014 as of 9:32 PM ET
- Bank Channel
5 Post-Election Questions on Bank Policy
by: Rob Blackwell and Joe Adler
Thursday, November 8, 2012
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WASHINGTON After months of handwringing, large political donations and the most aggressive push in history by bankers against an incumbent president, the industry now faces a world almost exactly the same as the one before the election season started.

President Barack Obama will remain president, Republicans still control the House and Democrats against all odds actually added to their Senate majority.

This mostly status quo election is a severe blow to bankers, who had hoped Republican victories would help them revise the Dodd-Frank Act and usher in more bank-friendly regulations.

It also raises a host of questions about what happens next, covering everything from the mortgage interest deduction to a renewed legislative drive to break up the largest banks.

We offer the following critical questions facing banks in the post-election environment:

1. Will the election spur a big bank breakup?

One of the early predictions following Tuesday's election was that it may embolden lawmakers who favor capping the size of banks. Democratic Sen. Sherrod Brown, a key proponent of that idea, won reelection and will be joined by Elizabeth Warren, a longtime bank critic seen as sympathetic to a big bank breakup.

Yet the idea is also popular in some conservative circles, raising questions about whether Democrats and Republicans could actually work together on big-bank downsizing.

"Advocates of big-bank break-ups have gained a new edge," wrote Karen Shaw Petrou, managing partner of Federal Financial Analytics, in an e-mail to reporters. "Progressive Democrats don't agree with populist Republicans on much but their shared belief that big banks remain too big to fail. I think this will be among the most aggressive reform items on Congress' agenda early in the new year, one with considerable political potential."

Camden Fine, the president of the Independent Community Bankers of America, agreed.

"The idea of some sort of downsizing of the too-big-to-fail banks will gain much more traction, and if there is another major scandal then I think there is a real possibility that the Congress would move to make structural changes in the too big to fail banks," he said.

Yet there are signs that President Obama is unlikely to pursue such a plan. For one thing, he has enough on his agenda already including the pending fiscal cliff, tax reform and the future of housing finance that he is unlikely to embrace another major financial reform initiative.

Secondly, in aninterview last month withRolling Stone, Obama suggested he didn't favor a bank breakup by rejecting the idea that repeal of the Glass-Steagall Act caused the crisis.

"The problem in today's financial sector can't be solved simply by re-imposing models that were created in the 1930s," Obama said.

Another key question is who Obama will choose as his next Treasury secretary. Tim Geithner has made it clear he plans to leave, but it's unclear who will succeed him. While Geithner did not favor a big bank breakup, his successor might, and could potentially convince Obama it's an idea worth pursuing.

2. What happens to the mortgage interest deduction?

House Speaker John Boehner wasted no time on Wednesday trying to engage Obama on a possible debt deal, saying he was open to raising government revenues in return for comprehensive tax reform.

One of the top ideas on the table is to eliminate or limit the tax deduction for mortgage interest payments a plan the housing industry opposes.

"It's absolutely on the table and I think there is a better chance now of limiting the mortgage interest deduction than there ever has been," said Isaac Boltansky, an analyst at Compass Point Research and Trading. "We are for the first time in the history at a point where there can be a serious discussion about limiting it."

Most observers said eliminating the deduction was unlikely, but capping it was a distinct possibility.

"I don't think elimination of the mortgage deduction is going to pass," said Richard Hunt, president and chief executive of the Consumer Bankers Association. "There are only so many things you can do while the economy is still in a very tenuous state. I think maybe they'll means test it or put caps on it, but I don't think you'll see its elimination."

3. When will Obama and Congress take up housing finance reform?

A big unresolved issue from 2008 is what to do with Fannie Mae and Freddie Mac, which were put into conservatorship with the idea that policymakers would chart a new future for them.

So far, however, no one has appeared interested in taking up the issue. House Republicans complained about inaction prior to 2010, but once they seized control of the chamber they largely stopped mentioning the issue.

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