Regulations at the Crossroads: Quieter Week in Washington Gives Way to High-Stakes Decisions

It wasn’t quite a manic Monday this week. But don’t bet on that relative calm to continue. While the past week in Washington lacked the frenetic pace of recent months, the coming days could set the tone for financial regulation well into 2025. Three pivotal developments loom: a Senate hearing Thursday with prospective Consumer Financial Protection Bureau director Jonathan McKernan, simmering debates over post-Silicon Valley Bank (SVB) bank supervision and bipartisan momentum for stablecoin legislation. Behind the scenes, policymakers are grappling with existential questions about the role of federal oversight in an era of rapid technological change and lingering financial instability.

The relative calm surrounding the CFPB as the courts started their day with federal government layoffs and firings will no doubt be broken at Thursday’s (Feb. 27) Senate Banking Committee hearing for CFPB nominee Jonathan McKernan. It will serve as a referendum on the agency itself, according to QED Investors’ Amias Gerety. “The first question should be simple: Does Mr. McKernan believe the CFPB should exist?” Gerety told PYMNTS CEO Karen Webster.

This cuts to the heart of criticisms that the agency oversteps its mandate, particularly after McKernan’s past remarks about regulatory redundancy. In one recent speech, he stated that regulators “should avoid the temptation to pile on yet more prescriptive regulation or otherwise push responsible risk taking out of the banking system.”

Gerety argued the hearing must address whether “50 state rules [are] better than one federal rule” for consumer protection, noting that pre-CFPB fragmentation created compliance chaos. He highlights the agency’s complaint resolution function — where consumers report issues directly — as “the most popular” and “most frustrating” elements for the industry. “If I feel like my bank is cheating me, who can I go to?” Gerety posed, emphasizing that, unlike the Federal Trade Commission’s enforcement-focused approach, the CFPB enables “quick resolution” through supervision.

The nominee’s stance on Section 1071 — requiring lenders to collect demographic data — will also face scrutiny. Gerety countered claims that such rules hinder innovation. With states like New York and California aggressively pursuing their own regulations, McKernan’s ability to articulate a coherent vision for federal primacy could make or break his confirmation, according to Gerety.

SVB’s Ghost Haunts Bank Supervision Debates

As Federal Reserve Governor Michelle Bowman criticizes regulators for focusing on “non-financial risks” like climate and DEI, Gerety pushed back: “SVB failed because nobody was paying attention to financial issues.” He contended that former Federal Reserve vice chair for supervision,  Michael Barr’s emphasis on capital requirements — however unpopular with banks — directly addresses the liquidity mismanagement that sank the lender.

The real fault line, per Gerety, lies in reconciling crisis preparedness with day-to-day oversight regulation. “Government exists because bad things happen,” he noted, recalling his Treasury Department experience during the 2008 crisis. While acknowledging regulatory inefficiencies, he dismissed calls to dismantle supervision frameworks: “You wouldn’t solve SVB’s collapse by firing compliance officers.”

Bowman’s critique highlights tensions over Basel III reforms, and Gerety suspects political theater: “If your primary goal is lowering capital standards, just say so.” Meanwhile, lingering questions about uninsured deposit guarantees during SVB’s collapse remain unresolved. “Do we protect depositors or let contagion spread? That’s the crisis no one wants to test,” he added.

Stablecoins and the “Narrow Banking” Conundrum

Bipartisan stablecoin legislation gains steam, but Gerety warned the real battle involves “narrow banking” — where institutions hold deposits without lending. “The Fed is nervous this could starve the economy of credit,” he told Webster. While backing private blockchain innovations like tokenized mortgages (“an awesome use case”), he cautioned that dollar-pegged stablecoins effectively create “a 24/7 global payment rail” beyond traditional banking.

This poses geopolitical dilemmas: “Do we want Nigerian businesses dollarizing via USDC?” Gerety asked, noting such access could strengthen the dollar but destabilize foreign economies. The legislation’s success hinges on reconciling banks’ risk appetite with crypto’s borderless nature. “Stablecoins succeed where KYC is minimal,” he said, suggesting regulated players might still avoid emerging markets.

For Gerety, the unanswered question is whether stablecoins will complement or cannibalize banks: “If deposits flow to narrow banks, where does lending come from?”

As Washington gets ready for a big week of hearings, basic questions like that — and the answers put forward by the principals — will determine next week’s Monday conversation.