The world is still absorbing the news of Donald Trump being re-elected as president of the United States. But on Wall Street and elsewhere, the effect of this news can already be seen. Markets have reacted favourably to the potential for a more business-friendly approach to regulation. But what could this mean for the safety of the sector in the long-term? We take a look at some of the regulatory changes that are likely on the horizon as Trump takes the helm.
Who did bankers vote for?
A survey by Arizent, the company that publishes New York-based trade publication, American Banker, found around half of all respondents from banks with at least US$100bn in assets felt that Trump winning a second term would be best for the industry from a solely regulatory/policy-based perspective.
“This sentiment held true across the rest of those surveyed,” says the report. “69% of those who work at banks with between US$10bn and US$100bn of assets, 76% from community banks with less than US$10bn of assets and 60% at credit unions of all asset classes all followed suit in saying Trump is the better choice.”
The survey also found that although most respondents planned to vote for Trump (44% compared with 38% for Harris), more than half (59%) expected the Democrats to win.
Europe vs the US
Trump’s re-election has impacts globally of course, but in terms of the impact of banking regulation specifically, it will likely increase competition between European banks and their US rivals. “The expectation is simple: deregulation and tax cuts in the US contrast with Europe’s strict oversight and low-interest-rate grind,” David Materazzi, CEO of Italy-based automated trading platform Galileo FX, told Reuters.
“If US banks get the expected policy support, they could ramp up loan volumes and optimise capital in ways that Europe’s banks just can’t match right now,” Materazzi said.
Banking shares in Europe have fallen 10% since the impact of post-crisis regulation in 2010. Conversely, US banking shares have tripled during that time.
Trump “wish lists” being drawn up
According to reports, banking industry bodies are already drawing up regulatory “wish lists” to present to Trump’s transition team. A rolling back of the so-called Basel III Endgame proposals appears to be top of the list for most.
Basel III Endgame is a set of rules designed to ensure large banks have enough capital needed in order to withstand systemic risk events. The rules are due to come into play in July 2025 and would apply to all banks with assets exceeding US$100bn.
The rules include: increased capital requirements for large US banks; standardised capital framework for credit, market, operational, and financial derivative risk; extensive changes to the calculation of risk-weighted assets (RWA); and a securitisation framework that modifies requirements for certain securities.
The Consumer Financial Protection Bureau (CFPB) is also reportedly being targeted by industrial bodies looking to take advantage of a potential opportunity to influence policy. Trump’s administration is expected to pause many of the CFPB’s initiatives designed to protect consumers from things like high fees and aggressive marketing. The body is supposed to be bi-partisan, but has been heavily criticised by Republican representatives in recent years.
Changes at the SEC
During his campaign, Trump vowed to fire Gary Gensler, chair of the US Securities and Exchange Commission (SEC). Trump and many of his allies in the financial industry have clashed with Gensler over his approach to market reforms, especially around areas like high-frequency trading, hedge fund disclosures and ESG reporting.
Firing Gensler would suggest Trump is looking to create a regulatory body with a more “hands-off” approach to financial oversight, which his critics say could be dangerous and even lead to another financial crisis.
March 2023 banking crisis – already forgotten?
Indeed in March last year, we witnessed the collapse of several major US banks – arguably as a result of Trump-era rollbacks on capital restrictions – which meant Silicon Valley Bank, one of the US’s largest financial institutions, did not have sufficient capital required to survive a run on the bank. Restrictions put in place under the Obama administration, and reversed under Trump, would have required SVB to have larger capital reserves, which could potentially have saved the bank from collapse.
Trump on AI
The use of artificial intelligence in banking is already well underway, but how that use is overseen by regulators in order to protect consumers is likely to change.
Joe Biden issued an executive order aimed at ensuring the “safe, secure and trustworthy” use of AI. Trump has already hinted at plans to repeal this order – arguing that to do so would help to unlock innovation and allow the US to compete with China, which is gaining ground in the AI race for arms.
