Donald Trump has unambiguously positioned himself as a pro-business slasher of red tape. As he prepares to return to the White House for a second term, the financial sector is ready for a new era of more lax regulations and oversight — and the windfall that could come with it.
The former and now future president has long pushed for scaling back regulations across industries. For banks, that will ease what had been growing concerns over antitrust scrutiny and looming capital requirements that have slowed both potential investment banking and lending revenues.
Wells Fargo (WFC) analyst Mike Mayo said in a research note last week that Trump’s win will be a “regulatory game changer” for the banking sector. The new Trump administration could mean “more free markets, less harsh oversight,” and reduced regulatory risk, Mayo wrote.
All that would help drive investment banking revenues, loan growth, and a more pro-business attitude to bolster banks’ bottom lines.
Once Trump takes office again in January, as many as eight regulatory agencies could see “day 1 leadership changes,” analysts at investment bank KBW (SF) said in a research note. That could lead to a “lighter regulatory touch” that would benefit banks, consumer finance firms, brokers, and title insurance companies, they said.
Shakeups on the horizon include potentially replacing Federal Trade Commission chair Lina Khan, the Department of Justice’s antitrust division chief Jonathan Kanter, and Consumer Financial Protection Bureau director Rohit Chopra.
Trump’s victory casts particular doubt on the future of new banking requirements known as Basel III Endgame, which would force big banks to keep more cash on hand. The international rules are designed to strengthen banks’ ability to handle shocks, with regulators aiming for a mid-2025 rollout.
Brian Mulberry, client portfolio manager at Zacks Investment Management, said Trump’s most likely policy change term will be to pare back any additions to capital requirements.
“I think Basel III ends up getting modified to encourage, especially larger institutions, to lend more to try and privatize the growth in this particular cycle,” Mulberry said in an interview.
Big banks are currently required to hold a 4.5% capital ratio — a key store of cash banks keep on hand to cover losses and other hits. The rules have already been diluted from their original form, which initially proposed raising capital requirements by 19% for banks with more than $100 billion in assets. In September, regulators announced a modified proposal that would require just a 9% increase in capital levels, following considerable pushback from top U.S. bankers.
It wouldn’t be the first time Trump has relaxed bank regulations. In 2018, Trump signed legislation that raised the threshold for banks to be deemed too important to the financial system to fail, from $50 billion in assets to $250 billion.
That meant that more small- and medium-sized institutions no longer had to undergo stress tests or submit “living wills” — contingency plans outlining how financial institutions would manage a bankruptcy or other failures. Those safeguards had originally been put into place to protect both consumers and banks in the aftermath of the 2008 financial crisis.
The Trump-era rollbacks were thrust into the spotlight last year, after a review by the Federal Reserve partially blamed them for the collapse of Silicon Valley Bank and the subsequent regional banking crisis.
A bump for bank stocks
Trump’s return to the White House is, on the whole, a “significant positive for the financial sector,” according to KBW.
“While the coming weeks and months could be volatile as the dust settles,” KBW analysts said, “our prior detailed analysis highlights that a Trump administration could be a significant positive for both financial stocks and for the regulatory framework of the overall sector.”
Bank stocks quickly surged on the heels of Trump’s election victory, but fell back to earth once the initial excitement waned.
If Trump’s first term is any indication, bank stocks will benefit from his second. The banking sector returned almost 30% in 2017, the first year of Trump’s first presidency. That beat out the S&P 500 by several percentage points, with most big bank stocks doing even better.
When it comes to banks’ bottom line, Lawrence Kaplan, chair of the bank regulatory group at law firm Paul Hastings, said more selective regulations under Trump will help lower banks’ expenses.
“I think you’re going to start to see regulations when absolutely necessary,” Kaplan said. “There’s still a need for compliance, and there was a real focus under the Biden administration that I don’t think this is wrong, per se. But it’s almost overregulation of compliance.”
“So you’re going to see more transactions that are occurring, letting market forces dictate pricing,” he added.
Bank stocks have already fared exceedingly well this year. Major banks are easily outperforming the S&P 500’s 23% return, thanks to continued strong net interest income (NII) from higher-for-longer interest rates that has fueled a series of strong earnings beats. NII is the key way banks make money.
Of course, the post-pandemic economy looks entirely different than it did eight years ago when Trump first came to Washington: Interest rates are close to the highest they’ve been since the Great Recession. And inflation, while trending downwards, still poses a major risk to the economy. Banks are also bracing for less NII next year as the Fed continues cutting interest rates.
The stock market more broadly may be heading into an era of muted returns. Goldman Sachs (GS) estimates that the S&P 500 will deliver an annualized return of 3% over the next decade — well below the 13% returns of the last 10 years and the long-term average of 11%.
Much of the downward revision is thanks to a high starting point going into the next decade. Because total returns have been so strong, it’s typical for future return growth to appear smaller in comparison. Goldman is also accounting for slightly more GDP contraction over the next decade.
More corporate tax cuts
During his first term, Trump’s Tax Cuts and Jobs Act slashed the corporate tax rate from 35% to 21% — a massive reduction that was praised by CEOs across the board, including JPMorgan Chase CEO Jamie Dimon. The cuts are set to expire in 2025, but extending them is widely seen as one of the top and most immediate priorities for Trump and his Republican allies in Congress.
Read more: All the ways Donald Trump is promising to cut taxes
At a meeting in June with top U.S. CEOs — including Dimon, Citigroup’s (C) Jane Fraser, and Bank of America’s (BAC) Brian Moynihan — Trump vowed to lower the corporate tax rate again to 20%, and to make existing cuts permanent. For corporations raking in billions of dollars each year, even a single percentage point decrease in tax rates means millions more in company coffers.
The ups and downs of interest rates
While the president doesn’t directly control interest rates, banks will have to adjust to both a new administration’s economic policies and a lower interest rate environment.
In September, the Fed began its interest rate cutting campaign, which is expected to continue through 2025. On Thursday, the Federal Open Market Committee voted once again to lower interest rates, this time by a smaller 25 basis points, to between 4.50% and 4.75%. It’s expected to carry out another quarter-point cut in December.
Goldman Sachs expects four more consecutive cuts in the first half of 2025, to a terminal rate of 3.25%-3.50%. Throughout all of the 2010s, the federal funds rate was below 3% — and for most of the decade, it was below 1%.
Greg McBride, chief financial analyst at Bankrate, warned that people shouldn’t equate “falling interest rates” to “low interest rates.”
“Quite the opposite, as interest rates are high and will only decline to ‘not as high’ as 2024 comes to a close and we move into 2025,” he said.
While banks have benefitted from high rates in their lending and investing practices, they also stand to benefit from lower rates in the long run, according to Allen Tischler, senior vice president at Moody’s Ratings (MCO).
“Initially, the rate cuts will be credit negative for most U.S. banks,” Tischler said. “We expect their deposit costs to reprice downward more slowly than their loan yields, constraining net interest income, which is most banks’ largest revenue source.”
“Longer-term, reductions in deposit costs will catch-up and strengthen net interest income,” he added.
Investment banking — and an M&A boom
Similarly, lower interest rates and more tolerance for risks could drive initial public offerings (IPOs) and mergers and acquisitions, which would also be a boon for banks’ investment banking units.
“If we do have easier financial conditions and there is more activity as rates go down, I think those are the right recipes for banks under any administration to flourish, and that’s what we would expect,” Mulberry said.
Chris Stanley, head of Moody’s Banking Industry Practice, said the return of loan demand and dealmaking will boost banks’ bottom lines.
Goldman Sachs estimates a 20% rebound in M&A activity next year, following a 15% decline this year, the investment bank said in a research note. Goldman also expects a “solid macro environment for new issuance” of IPOs.
Under the Biden administration, the FTC has blocked or sought to block a handful of major mergers and acquisitions, including between low-cost airlines JetBlue (JBLU) and Spirit (SAVE), and between grocery chains Kroger (KR) and Albertsons (ACI).
Executives are already hopeful that a more deal-friendly government will help spur movement across industries. Warner Bros. Discovery (WBD) CEO David Zaslav believes the media industry could stand to benefit.
“We have an upcoming new administration, and it’s too early to tell,” Zaslav said in a call with analysts last week. “But it may offer a pace of change, and an opportunity for consolidation that may be quite different, that would provide a real positive and accelerated impact on this industry that’s needed.”
And all these deals, of course, need bankers.
