Trump’s day-one vow of deregulation delights bankers, but legal constraints and crypto changes loom large.
Donald Trump hates government regulation of private businesses. During his successful re-election campaign, he promised to repeal 10 U.S. federal regulations for every new one imposed, adding, “We’ll be able to do that pretty easily.” He recruited billionaires Elon Musk and Vivek Ramaswamy to lead a new Department of Government Effectiveness (DOGE).
Banks and the financial sector as a whole hope to be the first beneficiaries. “A lot of bankers are dancing in the streets” at the promise of deregulation, commented Jamie Dimon, CEO of industry giant JPMorgan Chase, a few days after the elections.
U.S. banking laws tend to be written in broad terms, leaving individual regulators free rein to interpret and apply the details. So it might seem easy for a new president like Trump to reshuffle the rules of the game.
“A lot can happen on day one,” says Max Bonici, a partner advising financial institutions at the law firm Davis Wright Tremaine. “They can very quickly begin to reverse the regulatory ecosystem that the Biden administration has built.”
But as the clock ticks toward Trump’s Jan. 20 inauguration, details remain elusive.
“Is anything clear yet?” Christopher Wolfe, who oversees U.S. banks for Fitch Ratings, asks rhetorically. “No is the short answer.”
And it may not be so easy to get rid of the existing ecosystem.
President Joe Biden has effectively accelerated the “regulatory supercycle” that began with the 2008 financial crisis and the subsequent passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. An example is Gene Ludwig, who served as Comptroller of the Currency, one of the Treasury Department’s top regulatory positions, in the 1990s. He now consults with the industry.
For President Bill Clinton, Ludwig wrote an 11-page regulation for a fair lending law, the Community Reinvestment Act. The Biden administration added a 115-page “expansion.” “Regulations grow like barnacles on a boat,” observes Ludwig. “Periodically, they have to be scraped so that the ship does not sink. »
Trump officials won’t be able to get away with it at will, however.
Another little-known law, the Congressional Review Act, only allows outright rescission of very recent regulations, notes Steven Balla, co-director of the Regulatory Studies Center at George Washington University. The effective date for the Trump administration will be around August 1, 2024.
With that deadline in mind, Biden’s people made last April and May “the most active months in 40 years” for rule-writing, Balla says. “A wholesale rollback of regulations by Trump is simply not realistic,” he added.
Finding the right regulatory balance is also not a simple task. “Effective deregulation must be done with a scalpel, not a meat axe,” says Ludwig.
Given these constraints, short-term relief for banks is likely to favor regulation that was in preparation but not yet in force.
“Our view is that existing regulations will not see a significant rollback,” says Stuart Plesser, senior director of U.S. bank supervision at S&P Global.
Basel III: “partially or totally emptied”
A rollback of current regulations could be significant, however, particularly for large banks affected by the so-called final phase of Basel III.
Even more than acts of Congress, the global Basel III agreements on financial governance, which have progressed since their introduction in 2010, are general guidelines that leave it to national regulators to specify the details. The final step calls for a “fundamental review of the trading book”, to ensure that trading losses do not impact the “banking book”, which includes state-insured deposits, and that trading operations are sufficiently strengthened against their various risks.
In 2023, Federal Reserve supervisory chief Michael Barr released a proposed rule that bankers said would have increased capital requirements for the largest institutions by 19%. After strong protests from the industry and many lawmakers, he cut that figure to about 9 percent last September.
While Barr and his boss, Fed Chairman Jerome Powell, have promised to serve out their terms until mid-2026, banking observers believe Trump could force him to further moderate Basel III requirements, or even to abandon them completely.
“Basel III will be partially or completely gutted,” predicts Jeb Beckwith, managing director of industry consultant GreenPoint Global.
Second-tier banks, that is to say in the United States those which hold between 100 and 250 billion dollars in assets, could escape a series of new regulations that have been brewing since three of their peers, Silicon Valley Bank, Signature Bank and First Republic Bank, collapsed in spring 2023.
The initiatives failed due to sector reluctance and disagreement over the real causes of the implosion of regional banks. The new administration will sideline most of them altogether, Bonici expects.
“After the failures of 2023, regulators pushed oversight to a fine-toothed level rather than on a risk basis,” he says. “All of this will be reviewed and then most of it will be unraveled.”
Banks also expect a more favorable government stance toward mergers and acquisitions in their industry under Trump 2.0, says Rodney Lake, who teaches finance at the George Washington University School of Business. “The Trump project we are considering is more about mergers and acquisitions in the banking sector.”
The U.S. government’s primary gatekeepers are the Federal Trade Commission and the Justice Department’s Antitrust Division, where Biden appointees have increased scrutiny of proposed mergers. The entire financial industry took note when these watchdogs forced credit card giant Visa to abandon a $5.3 billion acquisition of fintech Plaid in 2021, Lake notes.
The Justice Department has issued stricter guidelines on bank mergers in 2023, replacing a regime in place since the 1990s. Washington’s hostile attitude may have nipped many potential deals in the bud, says S&P’s Plesser: “There has certainly been a quiet aspect to M&A. Executives questioned whether it was worth starting if the acquisition could ultimately be turned down.”
More correction than revolution?
The most controversial changes in financial regulation under a second Trump administration will likely involve cryptocurrency.
Crypto-related companies that sell tokens like Dogecoin, namesake of Musk and Ramaswamy’s Department of Government Efficiency, have spent more than any other industry on the 2024 election campaign, at least $130 million, and have supported winners in 54 of 58 races, according to Stephen Gannon, Bonici’s colleague at Davis Wright Tremaine. Trump himself, once a crypto skeptic, now supports his own TrumpCoin and pledges to turn the United States into the “crypto capital of the planet.” His pick to head the Securities and Exchange Commission, Paul Atkins, argued that “the SEC should be more accommodating and deal more directly” with crypto traders.
This promises an about-face from outgoing SEC Chairman Gary Gensler, who has largely denied U.S. domicile to digital asset providers. Not everyone outside of the regulatory sphere is happy with Trump’s embrace of crypto either. “The last thing we need is to inject a whole new risk into the system whose primary use is untraceable illegal activity,” says Sanjay Sharma, president of GreenPoint Global.
However, crypto aside, upcoming changes in financial regulation will likely be more of a correction than a revolution. Trump and the new Republican leadership in Congress may well stem the tide of regulation that began in 2008, but it is less likely to be reversed, for example by major amendments to the Dodd-Frank Act.
Trump will also fail to alleviate the key structural challenge facing U.S. banks, Ludwig says: a steady loss of market share to private credit providers, mortgage “originators,” and other unregulated entities. “The heart of the problem for banks is that it is very difficult to compete with non-banks,” he observes. So even though bankers are heading into 2025 with a new spring in their step, they’ve probably already stopped dancing in the streets. This is very good from the point of view of banking security, says Wolfe of Fitch: “Creditors have benefited from good and solid legislation. We view the deregulatory agenda with some caution.
