Republicans have grand ambitions for what they plan to accomplish if they, as expected, win control of the House in Tuesday's election, but their victory is more likely to lead to gridlock than action.
Though the House GOP is certain to hold numerous hearings and conduct rigorous oversight of implementation of the Dodd-Frank law, their ability to change or overturn it is muted so long as the Democrats control the White House (and possibly the Senate).
Likewise, though many top conservatives want to eliminate any government role in the mortgage market, their chances of success are slim to none for at least the next two years.
"What can happen in the next two years? Not a whole lot. There is stasis or deadlock," said Lawrence White, an economics professor at New York University's Stern School of Business.
Kip Weissman, a partner in Luse Gorman, said Republican lawmakers will hope to make their points in a series of hearings rather than trying to pass legislation.
"Hearings is what I hear," he said. "Hearings, hearings and hearings. That seems to be the strategy. It's part of a larger political and ideological strategy for the [Republican] party, so it's way beyond banking."
Hearings alone still could have a large impact.
"The work will focus on the hundreds of regulations pending," said William Longbrake, the executive in residence at the University of Maryland's Smith School of Business and a former vice chairman of Washington Mutual Inc. "The focus of activity will really be on shaping on regulations. What the Senate and House can do is hold hearings and try to influence how the regulations get shaped."
To be sure, Republican chances to pass legislation would be greatly enhanced if the GOP also seized control of the Senate. Though a change in control of the House is all but assured, analysts are split on whether the GOP can retake the Senate. If it does, then at least some limited legislation could be enacted.
"The Senate is the game changer," said Jaret Seiberg a financial services policy analyst at MF Global's Washington Research Group. "If the Senate goes Republican, then there is hope to start the deregulatory process in the new Congress. It means getting some relief from some of the most onerous parts of Dodd-Frank."
Seiberg said any bill could not be too extreme if Republicans wanted it signed by the president.
"There is a window to get a modest bill done that will win the president's signature," Seiberg said.
But other observers disagreed, saying the Senate could not have much impact and arguing that, even if the Republicans take both chambers, they would not have enough seats to overturn a presidential veto and would be unlikely to find any common ground with Obama or the Democrats.
"It's unlikely you are going to get any significant tinkering with the Dodd-Frank Act because you are going to have a Senate that is Republican or Democrat by a seat or two and you are going to have Obama with the veto pen," said Longbrake. "It's at most one vote, maybe two, if all the leaning seats go to the Republicans. I don't think that's likely. One way or another, the Republicans' taking the Senate isn't going to make much difference, other than agenda-setting."
Brian Gardner, an analyst at KBW Inc., agreed that, even if the GOP won the Senate, their majority would be too narrow to achieve a dramatic repeal of Dodd-Frank.
"Republicans are just not going to be in a position to get a lot through the Senate without compromise, and any kind of compromise is going to lead to very narrow changes, nothing broad and structural," he said.
"People throw the term 'gridlock' out from time to time. We haven't seen gridlock compared to what we are going to see over the next two years. It's going to be very, very different."
Still, even if Congress cannot pass much new legislation, limited changes in Dodd-Frank could be achieved, some said.
For example, regulatory relief legislation could seek to limit the power of the Consumer Financial Protection Bureau, define certain derivatives terms to moderate the law's restrictions on swaps activity and limit the effect of the Volcker Rule.
"You have a lot of parts of the financial reform bill that are controversial," said Kevin Jacques, Boynton D. Murch Chair in Finance at Baldwin-Wallace College.
"If anything is overturned or if Republicans manage to unwind any of this, my guess is, they would first go to the Volcker Rule. That's where they would have the most success. Where they would like to go most is the Consumer Financial Protection Bureau."
Gardner said Republicans may also try to roll back some of the interchange fee limitations in the Dodd-Frank Act, which were included under pressure from Sen. Richard Durbin, D-Ill.
"You could modify or soften the language of the Durbin amendment," he said. "You can't get rid of it. Durbin is here to stay. The question is, can you tighten up the language? Can you modify it?"
Some observers said they could foresee minor changes to restrict the CFPB's power, such as changing its structure to a commission rather than a single director or subordinating it to safety and soundness regulators.
"On the CFPB, there were a lot of feelings among Republicans that it should be a board and not a single director; there was a lot of feelings that its powers were overly broad, and there were some feelings that its powers should be more of a balance with the safety and soundness regulators," said Ed Yingling, the president of the American Bankers Association. "So I would think all of those would be under consideration by Republicans."
Others said they expected the GOP to target the agency's funding.
"The other area is the budget of the CFPB," said Weissman. "That's probably the biggest item on the agenda. … If you can reduce the budget, maybe you can reduce its impact and focus its job. The concern is, the budget is so large it can go very broad."
Other analysts said lawmakers may revisit the derivatives section of the reform law, which was settled at the 11th hour in the conference committee and has prompted concerns about ambiguous terms.
"One area that there'll be some pushback on is to exempt all nonfinancial derivatives from the clearing and settlement requirements," said Seiberg. "The theory here is that it's the financial derivatives such as credit default swaps that were at the center of the crisis so it's better to focus on them than on your commodity-based swaps."
Besides Dodd-Frank implementation, the obvious issue for Congress is reforming the housing finance model; some conservative Republican leaders have called for eliminating any government guarantee, a position unlikely to win the support of Democrats or the administration.
Most observers said that issue was unlikely to be resolved next year.
"It will be very difficult for anything controversial to get through the Senate," said Camden Fine, the president of the Independent Community Bankers of America.
The expected gridlock is a mixed blessing for the banking industry, Fine said. On the one hand, Congress is unlikely to add new, onerous regulatory requirements. But a failure to resolve the government-sponsored enterprises could fuel continued uncertainty in the mortgage market.
"Housing policy does need to get addressed," said Fine.
"Certainly for the banking industry, gridlock on the GSEs isn't good."
This story has been reprinted with permission from American Banker.
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