Some presidential campaign promises are guaranteed to affect the lives and finances of everyday Americans. Banking industry reforms may not seem like one of them.
After all, banking regulations can appear to be pretty remote from your day-to-day financial transactions. You may be surprised to learn that bank reforms implemented by past presidents and their cabinets have had material impacts on regular folks, and there’s no reason to believe that any regulatory changes brought about by a second Trump term or a Biden presidency would be any different.
Here’s what you need to know about how presidential politics have affected your bank accounts in the past, and how the outcome of the 2020 election could affect your banking experience in the future.
Historical Banking Changes That Continue to Affect Consumers
Presidential administrations of the past have implemented a number of different banking regulations and rule changes that continue to impact the consumer experience in 2020. It’s important to remember that the following banking changes were decided, in part, by the voters’ choosing the president who implemented the changes.
Creation of the Federal Reserve
Inaugurated in 1913, President Woodrow Wilson signed The Federal Reserve Act into law later that same year. Prior to the creation of the Federal Reserve, banks could not count on any emergency reserves if customers all withdrew their funds at once.
Such panic withdrawals were relatively common in response to widespread financial crises. The country plunged into a depression in 1907 after a big panic run on the banks led to the failure of several institutions.
The Federal Reserve Act established the Federal Reserve System as the U.S. central bank, which not only serves as a lender of last resort to commercial banks that would otherwise go under during an economic crisis, but also supervises and regulates banks to provide a level of safety and soundness. The Fed also sets monetary policy to help ensure full employment and price stability.
We’re still feeling the effects of Wilson’s policy every day. Due to the stability offered by the Federal Reserve, only two banks have failed in 2020, despite this year’s pandemic-related economic troubles. Compare this to the more than 600 bank failures per year between 1921 and 1929, prior to the Great Depression.
Even more importantly, the Fed sets the federal funds rate, which is the benchmark interest rate for the entire U.S. economy. (It’s also the amount of interest banks charge each other for loaning money overnight to maintain their reserve requirements.) The federal funds rate is currently set at 0% to 0.25%.
Financial institutions use the federal funds rate to set the interest rates they offer on interest-bearing accounts, such as savings accounts, CDs and money market accounts. When rates on these accounts are raised or lowered, it’s in part because of how the Fed has set the federal funds rate.
The federal funds rate also may affect the rates financial institutions charge on loans, such as mortgages, auto loans, credit cards and the like. However, individual credit history and other factors also can affect these rates.
Federal Deposit Insurance Corporation (FDIC)
Franklin D. Roosevelt signed the Banking Act of 1933 into law within his first 100 days of taking office. This legislation, which is often referred to as the Glass-Steagall Act after its sponsors, Senator Carter Glass (D-Va.) and Representative Henry B. Steagall (D-Al.), set up the Federal Deposit Insurance Corporation (FDIC), among other provisions.
The FDIC insures deposits at an individual bank for up to $250,000 per depositor, for each account ownership category. If your bank were to fail, the FDIC ensures that you would not lose your deposits, up to the applicable limits. As the FDIC proudly states on its website, “No depositor has ever lost a penny of insured deposits since the FDIC was created in 1933.”
Few people spend much time thinking about FDIC deposit insurance, but it has had a stabilizing effect on consumer behavior. Prior to the passage of Glass-Steagall, banking customers did not feel confident that their money was safe in the bank, and so they would withdraw their deposits when concerned about an economic downturn.
In fact, a rumor that Roosevelt would devalue the dollar caused panic and mass withdrawals in January and February of 1933, leading to the failure of 4,000 banks by the time his March inauguration arrived. Such panicked withdrawals feel unthinkable in 2020 because of the assurance provided by the FDIC coverage.
Federal (and many state-chartered) credit unions enjoy similar protection through the National Credit Union Administration, or NCUA.
Regulation CC
In 1987, under Ronald Reagan’s administration, Congress passed the Expedited Funds Availability Act to establish the maximum length of holds that banking institutions can place on deposits by their customers.
This federal law established Regulation CC, which sets specific rules as to when various types of deposits will be made available to banking customers and provides guidelines to financial institutions for how to disclose their funds availability policies to their customers.
Regulation CC specifies that banks can hold their customers’ deposits for a “reasonable” amount of time. The definition of reasonable depends partially on the size of the deposit and the origin of the funds. Still, checks written from an account within the same bank may be held up to two business days, while checks drawn on other banks may be held up to five business days.
Banks also may impose longer holds, but they have the burden of proving that the longer hold is necessary and reasonable.
Prior to the implementation of Regulation CC, there was concern about the length of time that banks held onto their customers’ deposits before the money appeared in their accounts. With these regulations in place, customers know what to expect from their deposits, making it far easier to handle their cash flow.
Proposed Banking Policies in the 2020 Election
Both President Donald Trump and Democratic presidential candidate Joe Biden have proposed policies that could alter your banking habits. Here’s what to expect from each candidate’s proposed banking policies.
Continued Deregulation Under Donald Trump
Throughout his first term, the incumbent has made bank deregulation a major part of his legislative agenda, with the rollback of some Dodd-Frank regulations in 2018 being his signature achievement in banking. Among other loosened rules, the Dodd-Frank rollback also raised the threshold under which banks are considered “too big to fail” from $50 billion to $250 billion.
While the president has not made his proposed banking policies a significant part of his reelection platform, he did propose major changes to the 1977 Community Reinvestment Act (CRA) as of January 2020. The CRA is legislation that prevents banks from discriminating against low-income or under-represented borrowers.
As of June 2020, the Office of the Comptroller of the Currency (OCC) put the Trump administration’s proposals into effect. These proposals broaden the definition of what constitutes a bank and expand what types of loans offered to low-income borrowers qualify for improved CRA ratings.
Specifically, it now includes credit cards and personal loans. In addition, the new rules give financial institutions credit for community reinvestment for loans for things like stadiums and hospitals. Should the president win his reelection bid, we can expect these new rules to take effect. (However, even if he wins and there is a change in leadership in the Senate, it is possible Democrats will work to reverse these rule changes.)
The average bank customer may not notice the changes to the CRA on a day-to-day basis. However, lower-income borrowers may find it more difficult to qualify for a mortgage once these rules take effect.
Updates to Older Legislation Under Joe Biden
The former vice president has plans to spruce up several pieces of old banking legislation. The specific items on his agenda include actions to:
- “Strengthen and enforce” the Dodd-Frank Act to help ensure equal access to banking. He specifically plans to back criminal penalties for reckless actions by bank executives.
- Protect consumers from predatory lending practices. Biden plans to strengthen consumer lending oversight, enforce remedies for abusive lending practices and pursue legislation to prevent predatory lending.
- Expand the CRA to include mortgage and insurance companies.
Presuming it can enact all the plans it promises, a Biden presidency may provide banking customers with more reassurance that banks will handle their finances with care. Consumers may pay less for their personal loans, credit cards and mortgages if Biden is successful in ending predatory lending practices and if he is able to expand the CRA, thereby improving access to credit for under-represented communities.
These rule changes also may place more of a regulatory burden on financial institutions, which could have ripple effects on banking customers. For instance, some consumers with a poor credit history may find that they cannot qualify for loans under a Biden-led crackdown on usurious interest rates, although they did previously qualify for loans that are now considered predatory.
Election Costs and Consequences
Policy changes from our government’s executive branch can have enormous consequences for the banking industry and the consumers who rely on that industry. Although it may feel as if voting in a presidential election has little to do with how you bank, your vote can help to set policies that will affect banking consumers like yourself for decades to come.
Protecting your own and your fellow Americans’ financial health is yet another reason why voting is so important.
