A Period of Uncertainty
From our post-election perspective, it's easy to see that many local and global predictions in 2016 were rubbish. With that in mind, we hesitate to make any bold predictions ourselves — especially because Donald Trump has been all over the map on a wide range of issues.
That said, there are a few things that have already shifted since Trump won, and there are also a few things we can expect from having a Republican majority in Congress.
Friends In High Places?
The Trump win will shake things up in terms of regulatory personnel. Fortune reports that possible Trump Treasury Secretary appointments could include JPMorgan Chase Chief Executive Officer Jamie Dimon, former Goldman Sachs banker Steven Mnuchin, and House Financial Services Committee Chair Rep. Jeb Hensarling. If this list has any credence, it demonstrates that the new administration will most likely move away from strict bank regulation.
The Republican-led House has been aiming sights on Dodd-Frank reform in particular. Rep. Hensarling as Financial Services Chair has spent much of his tenure trying to roll back many of the Dodd-Frank reforms and with an emboldened Senate and President, they may get their wishes. Jamie Dimon has openly criticized regulatory reforms since the financial crisis as well. While doubtful that he would accept the Treasury role, Trump’s outreach sent a clear signal to the markets and sector – D.C. and Wall Street may be united again.
Regardless of individual promotions or appointments, the Chairs of the Senate Banking and House Financial Services Committees will now have two years (or more) to enact sweeping bank regulatory reforms. The Consumer Financial Protection Bureau (CFPB) will be weakened and vocal proponents for financial reforms such as Senator Elizabeth Warren will have a much harder time finding traction for proposals.
Small Banks Will Likely Benefit from Regulatory Easing
Over the past few years, small banks have struggled to bear the increased regulatory compliance burdens. Higher capital requirements and increased compliance and reporting cost have hamstrung small bank’s abilities to focus on customer service, lending and growth. It is likely that any banking regulatory reform will first be aimed at removing regulatory burden for small banks so they can reallocate compliance dollars and staff to customer service and lending initiatives.
Regional Banks, Fintech, Traders, and Volatility
Small banks may not be the only beneficiaries of regulatory reductions. Tom Michaud chief executive of Keefe, Bruyette & Woods says, “the most obvious regulatory rollback should be to raise the $50 billion threshold in which lenders are deemed a systemically important financial institution and subject to greater oversight from the Federal Reserve. Some lawmakers have proposed raising SiFi designations to $250 billion in assets, giving mid-size banks new breathing room to compete with America’s largest lenders.”
Fintech regulation may still be on the docket in some form, however reduced oversight may afford fintech firms time to grow and adapt under a less restrictive regulatory regime. This is good news for banks of all sizes as the sector needs time to adapt fintech innovation into a regulated banking (and technology) environment. However, Silicon Valley has some strong antipathy for Trump, indicating a Trump presidency might not bode well for tech circles going forward.
Finally, with increasing uncertainty comes increasing volatility. Volatility spikes may lead to increased trading activity in particular sectors and revive stagnating trading revenue as investors decide winners and losers. Banks with internal trading and investment arms should benefit here.
Image Credit: Guillaume Flament