By  Gilad Fortgang

How the U.S. election could impact the financials sector

Next president will determine whether financial regulators will mount up or stand down.

July 2024, In the Loop -

Key Insights
  • Financial regulators would likely be more proactive and involved under a Democratic president than in a Republican administration.
  • Policy differences could make a difference in bank mergers, banks’ capital requirements, and the regulation of consumer finance and the nonbank financial system.
  • The economy’s health and the outlook for inflation and interest rates are likely to be more important for financials’ performance over the next presidential term.

President Joe Biden’s decision to drop out of the election introduces another element of uncertainty to the race.

The situation is evolving quickly. However, the key issues and policy differences should remain the same.

No matter the Democratic candidate, the outcome of the U.S. presidential election is likely to influence the intensity of the financial regulatory environment. Developments on this front could have important implications for traditional banks as well as for the insurance, asset management, and credit scoring industries.

Push for stronger regulation would continue with a Democrat in the White House

Heightened scrutiny, increased intervention, and a push to expand oversight of nonbank financial companies have characterized the Biden administration’s approach to regulating and supervising the sector.

Notably, financial regulators took a stronger hand even before the failures of Silicon Valley Bank and Signature Bank in March 2023.

A different Democratic candidate would create some uncertainty about the details, but financial regulators would likely be more proactive and involved under a Democratic president than in a Republican administration.

A Trump win could ease regulatory pressure on financials

In contrast, deregulation would likely be a key pillar of former President Donald Trump’s domestic agenda if he were to win the presidency.

What could that mean for the financials sector?

A leadership changeover at key federal agencies could bring a lighter touch to financial regulation and supervision. It would also open the door to halting, reversing, or weakening policies advanced by the Biden administration. Rules that have been proposed but not yet finalized would likely be most at risk.

Where the election outcome could make a difference:

1.    Consumer Finance

A win by the Democratic nominee:

A win by Trump:

Fees: The restrictions on fees for late credit card payments and overdrawn accounts imposed by the Consumer Financial Protection Bureau (CFPB) would remain in play. However, court challenges to these rules could be an impediment. The agency’s current director has called out the rising cost of obtaining credit scores as a possible area for action.


Online payments: Scrutiny of emerging payments systems could increase. For example, the Biden CFPB has sought to classify online buy-now, pay-later companies as credit card lenders.

Regulatory restraint?: Republicans, including Donald Trump during his first presidential term, typically have advocated for a lighter touch to financial regulation.

 

CFPB appointee is key: Could this pro-business bent change? Who the Trump administration nominates to head the CFPB will be important to watch.

 

2.    Bank Mergers and Acquisitions (M&A)

A win by the Democratic nominee:

A win by Trump:

M&A restrictions: Federal financial regulators have been subjecting banking deals to greater scrutiny, especially those that would result in a combined bank with more than USD 100 billion in assets. This hawkishness could continue.

Regulatory forbearance: A changeover in agency leadership could lead to a less restrictive approach to bank mergers, although megabanks might still face constraints.

3.    Nonbank Oversight

A win by the Democratic nominee:

A win by Trump:

Extended reach: Lending outside of traditional banks has expanded significantly,[1] so efforts to increase oversight of nonbank lenders would likely continue gaining momentum. Regulators currently are focusing on collecting data and information for potential future action. These efforts could create headline risk for insurance and asset management firms that operate in these markets.

Status quo: Federal agencies would likely be disinclined to push for further regulation of the nonbank financial system, barring a crisis.

4.    Bank Capital Rules

A win by the Democratic nominee:

A win by Trump:

Scaled-back increases in capital requirements: After strong industry pushback, regulators are reworking proposed rules for determining how larger banks assess risk and how much capital they must hold. The initial proposal would have entailed 15% to 20% capital hikes; however, reports indicate that the revised proposal moderates this requirement.

Potential relief, but timing matters: If the Biden administration fails to finalize the proposed risk framework for large banks during his term in office, that would open the door for Trump regulators to put their own stamp on the rules. 

Context is key

The U.S. presidential election is likely to have important implications for the intensity of financial regulation. However, government policy is only part of the equation.

The health of the overarching economy, which influences loan demand and credit risk, and the outlook for inflation and interest rates will exert even greater influence on the financials sector’s performance over the next presidential term.

Gilad Fortgang Washington Associate Analyst, U.S. Equity Division of T. Rowe Price Investment Management, Inc.

Gilad Fortgang is an associate analyst covering Washington and regulatory research in the T. Rowe Price Investment Management U.S. Equity Division.
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1Arif Husain, head of Global Fixed Income and chief investment officer of the Fixed Income Division at T. Rowe Price Associates Inc., discussed this trend and its implications in the July 2024 installment of his Ahead of the Curve blog, “Shadow Banking System’ Creates a Trickier Path for the Fed.”

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The views contained herein are those of the authors as of July 2024 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

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