Regulation Redux - 2024 Election Implications for Financial Institutions

One year ago, banks and other financial institutions were contemplating the prospect of an increasing regulatory burden and strategizing on how to adapt effectively. Now, with the 2024 election in the rear-view mirror, they’re dusting off their party hats, ready to celebrate a potential regulatory redux. 

In 2023, proposed changes to banking regulations focused on modernizing the Community Reinvestment Act (CRA) and revising the rules governing the Bank Secrecy Act (BSA). Additionally, lenders serving small businesses—including banks, credit unions, and other financial services firms—were gearing up for demographic data collection and reporting to the Consumer Financial Protection Bureau (CFPB) under Section 1071 of the Dodd-Frank Act. 

With a new administration entering office in 2025, the full impact of a Republican-controlled government on banking regulations remains uncertain. However, the potential for a more lenient regulatory environment suggests that financial institutions are likely positioning themselves to capitalize on this shift. 

Let’s look at six possible outcomes these institutions should prepare for. 

1. Tier 1 Capital: Banks could expect an easing of capital requirements allowing them to hold less Tier 1 capital relative to their risk-weighted assets. With lower capital requirements, banks would have more flexibility to increase lending. This would also make it easier for banks to engage in mergers and acquisitions or to reinvest in new growth opportunities.  
2. Oversight Changes: The new administration is likely to appoint officials who align with its deregulatory agenda. This includes potential changes in leadership at key regulatory bodies like the Office of the Comptroller of the Currency (OCC) and the CFPB. Fewer, perhaps less intrusive audits and compliance requirements would allow more time for core banking activities.  
3. Focus on Growth: Banks looking for opportunities to expand their operations and profitability will benefit under a government that may prioritize economic growth. Increased loan demand and possibly lower tax rates could further boost their financial performance.  
4. Investment in Innovation: With a lighter regulatory burden, banks can redirect more resources toward innovation and technology, strengthening their competitive advantage. Key beneficiaries of this shift include investments aimed at streamlining operations and enhancing the customer experience. 
5. Market Competition: Lower regulations could intensify competition among banks, as they may pursue aggressive strategies to capture market share. This could lead to consolidation in the industry, potentially enhancing market power for larger institutions.  
6. Increased Profitability: If the new government goes beyond merely extending the 2017 tax cuts, lower corporate taxes could significantly boost banks' profitability, enabling them to retain more earnings. This, in turn, could result in higher dividends for shareholders and provide additional capital for reinvestment in growth initiatives.

Despite the rosy outlook, it’s important to consider that while these changes could present opportunities, they also come with risks. A lack of regulation can lead to excessive risk-taking, which might result in financial crises if not balanced with prudent risk management practices. Additionally, lingering concerns over the 2023 bank failures may dampen any excessive enthusiasm.  

Do these potential regulatory actions disrupt your long-term outlook, or is your strategy resilient enough to adapt?  

At Endurium, we understand the importance of having a robust strategy that not only aligns with your institution’s vision but also accommodates fluctuations in market and economic conditions. Equally important is our proven expertise in implementing effective risk management practices, ensuring that all stakeholders can rest easy. 

References 

[1] How Trump will transform banking regulation - Morningstar 

[2] Bank Regulatory Considerations in a Second Trump Administration – What ... 

[3] Trump administration may upend banking industry regulations - USA TODAY