MW How Trump will transform banking regulation - even with Powell at the Fed
By Philip van Doorn
Regulatory change takes time, but Trump can make several moves immediately to gain control of bank supervision and M&A approval
Last week, the KBW Nasdaq Bank Index BKX rose 8%, and it was up another 2.5% on Monday afternoon as investors showed enthusiasm following Donald Trump's election to a second term as president.
The stock market always looks ahead, and there are many levers Trump can pull to maintain investors' enthusiasm for the banking industry.
The Republican Party also captured a majority in the U.S. Senate last Tuesday, and although the House of Representatives was still in play as votes were being counted, the Republicans seemed to be on their way to reaching or exceeding the magic number of 218 - a majority in the 435-seat chamber.
So why did bank stocks rise so quickly?
In an email exchange, Christopher Marinac, director of research at Janney Montgomery Scott, credited "a combination of regulatory relief and prospects for more business activity (i.e., more loans and deposits) which generates greater earnings." He added that even small increases in deposit and loan growth would boost banks' earnings "incrementally." On top of this could be "modestly lower tax rates" if the Republican Party achieves majority control of the House, he wrote.
Bank stocks have clear catalysts. On Thursday, the Federal Open Market Committee made its second recent cut to the federal-funds rate, this time by 25 basis points to a target range of 4.50% to 4.75%. Two months ago, the range was 5.25% to 5.50%.
A bank's net interest margin is the spread between the average interest rate it earnings on loans and investments and the average rate it pays for deposits and borrowings.
An analysis last month of the 24 banks in the KBW Nasdaq Bank Index plus the 50 in the KBW Regional Banking Index XX:KRX placed Charles Schwab & Co. $(SCHW)$ at the top of a list of banks expected to widen their net interest margins the most in 2025.
According to Macrae Sykes, a portfolio manager at Gabelli Funds, large U.S. banks were already in "great shape" before the Federal Reserve began lowering short-term interest rates. During an interview with MarketWatch, Sykes said "the one thing missing over the past year has been loan growth."
"To the extent we get more pro-growth policies" during the second Trump administration, "you need loan demand to keep up with it," he said.
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Another positive factor for banks is the expectation of an easier regulatory environment under Trump. The financial media last week was fixated on the continuing tenure of Federal Reserve Chair Jerome Powell, who said he would not leave office early if Trump were to ask him to resign, and that Trump didn't have the power to fire him. Powell's second term as Fed chair ends in January 2026.
But there is quite a bit that Trump can do to change the regulatory landscape for banks.
Moves Trump will likely make to change bank regulation
Trump is free to make several quick moves to change the regulatory landscape, according to Frank Mayer, senior counsel at Stevens & Lee and a former senior official at the Federal Deposit Insurance Corp.
During an interview with MarketWatch, Mayer said Trump could replace Michael J. Hsu, the acting Comptroller of the Currency, immediately after taking office, with a new acting comptroller "more philosophically attuned to his policy approach." The OCC supervises nationally chartered banks, while the Federal Reserve supervises bank holding companies.
Mayer said that Trump also "has the power, based on a 2020 U.S. Supreme Court case," to remove Rohit Chopra, the director of the Consumer Financial Protection Bureau. Mayer expects this to happen.
He added: "With Republicans having taken the Senate, that should be relatively smooth sailing [replacing both the Comptroller of the Currency and the CFPB director], barring an unqualified candidate that would not pass muster through Senate Banking Committee."
The Comptroller of the Currency and the director of the CFPB both sit on the five-member board of directors of the FDIC. Mayer said the above two moves would give Trump "control over rulemaking" as well as enforcement of mergers and acquisitions.
Merger-related euphoria was evident on Wednesday following Trump's clear victory. Shares of $Capital One Financial Corp(COF-N)$. $(COF)$ and Discover Financial Services $(DFS)$ were up 15% and 20% that day, respectively, with investors expecting the banks now to be on a smoother path toward regulatory approval for their merger.
Marinac wrote that the shift in regulatory policy may not have a great affect on banks' costs. He believes a greater benefit from regulatory changes would be "M&A deals that are more likely to close with less regulation and roadblocks than in the prior few years."
When discussing Trump's influence over the Federal Reserve, Mayer emphasized the importance of cooperation among the Fed, the OCC and the FDIC on various projects, including implementation of higher capital requirements under Basel III and enhancing banks' liquidity.
Sykes said the latest Basell III capital requirements proposed by U.S. regulators would cause large banks to hold an additional 9% of capital. Some of that money could be freed up for additional stock buybacks or dividend increases, if the new capital rules were curtailed under the second Trump administration.
And Trump can have direct influence over the Fed as well by replacing its vice chair of supervision, Michael S. Barr, who was appointed by President Biden in July 2022 for a four-year term. According to Mayer: "There is a tradition that in this particular role, running regulatory policy, appointees tend to resign after election of a president of the opposite party. It would be expected that he would resign and then be replace by someone philosophically attuned to the Trump administration's policy approach."
The 'real work' can slow some changes
"There is a ton of uncertainty on how much change occurs and how quickly," Marinac wrote in the email exchange Monday. He pointed to a note to clients on Thursday, when Timothy Coffey, Janney's associate director of depository research, wrote that regulatory changes would require "patience," with most changes coming late in 2025 or in 2026.
"New appointments at the FDIC, CFPB, U.S. Treasury, and all key government agencies create initial investor euphoria and must be tempered with a dose of reality," Coffey wrote. He added that this is because it is not the leadership, but the "career operators of the FDIC, OCC, and Federal Reserve" that do the "real work."
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-Philip van Doorn
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November 11, 2024 13:11 ET (18:11 GMT)
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