US financial institution (FI) regulatory reform may feature as a priority legislative agenda item, reflecting the campaign of President-elect Donald Trump as well as the ongoing views of several key majority Congressional leaders, says Fitch Ratings.
Fitch does not foresee any changes to US FI ratings as a result of the election. Changes that potentially reduce capital or liquidity requirements are likely to be a negative, but the impact on individual ratings will depend on how banks respond to this change. To the extent that capital or liquidity levels decline materially, that could result in negative rating implications, but Fitch views this scenario as unlikely.
The Dodd-Frank Act (DFA) has featured as a target in President-elect Donald Trump's campaign statements, but most aspects of DFA have been implemented, and it is unclear whether a wholesale repeal could pass or what a partial repeal may encompass.
The Consumer Financial Protection Bureau is a relatively high-profile target for those opposed to the DFA, but its elimination on its own would be unlikely to have a material impact for banks in the aggregate. Notably, there has been little specific discussion of peeling back the Volcker Rule or Resolution Authority, some of the more costly aspects of the DFA.
Fitch notes that the reduction in proprietary trading activity linked to Volcker has been largely positive for banks, while the resolution process has been largely positive for banks' governance.
Anti-Wall Street sentiment has been a recurring theme in the presidential campaign for both candidates, so it remains an open question as to the likelihood or urgency of any proposed financial sector regulatory reform or repeal.
Smaller regional or community banks may be viewed as more worthy beneficiaries of regulatory relief than money center banks. In addition, the reintroduction of Glass-Steagall (GS) is unlikely to be a policy priority.
The reintroduction of some elements of GS was included in both parties' platforms, but it was not a prominent theme in the campaign. The industry is likely to continue to strenuously oppose regulation that would re-impose restrictions that had existed under GS.
It is also important to note that capital and liquidity requirements have not historically been dictated by the Legislature but through banking regulators in the US. The US has adopted Basel III and those requirements will continue to be implemented, regardless of the administration. Therefore, while aspects of the DFA may be peeled back, core banking regulation is unlikely to change.
Generally, US financial institutions' performance tends to be correlated with the overall US macroeconomic environment, particularly as it relates to economic growth.
Judging by the campaign, the new administration's economic policy is likely to revolve around tax cuts, renegotiating trade agreements, de-regulation and higher infrastructure spending. However, it remains to be seen the degree to which Trump will implement or be able to carry out his policy initiatives and the long-term effect policy changes will have on growth.
In the near term, increased policy uncertainty could dampen prospects for private investment growth. If the Fed judged these effects were likely to outweigh the impact of any additional fiscal easing, it may prompt them to raise rates at a slower pace than previously expected over the coming year. This would delay any positive operating leverage from rate hikes out further, as the impact tends to be lagged.
Overall, Fitch expects that incremental interest rate increases would be positive for banks' net interest margins.