Following Donald Trump’s victory in securing a second term as president, bank stocks surged, with the KBW Nasdaq Bank Index rising 8%, and continuing its upward momentum on Monday
.This positive market reaction is fueled by growing investor optimism that the banking industry will see significant regulatory relief under Trump’s leadership, even with Jerome Powell remaining at the helm of the Federal Reserve.
The rally in bank stocks, which has extended across both large and regional banks, signals investor expectations of a friendlier regulatory environment. Christopher Marinac, director of research at Janney Montgomery Scott, credits the surge to “a combination of regulatory relief and prospects for more business activity,” which could lead to greater earnings through loan and deposit growth. Additionally, the Republican Party’s control of the US Senate further bolsters the likelihood of pro-business policies, including tax cuts, if they can also secure a majority in the House of Representatives.
While the financial media speculated on Powell’s continued leadership at the Fed, analysts agree that Trump has many levers to pull to reshape the banking landscape in his favor. Frank Mayer, senior counsel at Stevens & Lee and former senior official at the Federal Deposit Insurance Corporation (FDIC), noted that Trump can immediately act to reshape bank supervision. He could start by replacing Michael J. Hsu, the acting Comptroller of the Currency, with a more business-friendly leader. The Office of the Comptroller of the Currency (OCC) is responsible for overseeing national banks, and a new appointment would give Trump more influence over regulatory practices.
Additionally, Trump can exercise his power to remove Rohit Chopra, the director of the Consumer Financial Protection Bureau (CFPB), a move that would further align regulatory bodies with his policy priorities. Mayer predicts that such changes could occur swiftly, especially with the Republican-controlled Senate facilitating the confirmation of Trump’s appointees. These moves would also impact the FDIC, where both the OCC and CFPB sit on the board, thus allowing Trump to steer policy on banking mergers and acquisitions (M&A) as well.
Investors were quick to respond to the potential for lighter regulation with a spike in bank stock prices, especially for banks like Capital One and Discover Financial Services, which saw shares rise by 15% and 20%, respectively, following Trump’s victory. The expectation is that with a more lenient regulatory environment, M&A deals, which have slowed in recent years due to stricter rules, will have a smoother path to approval.
Marinac, in his analysis, highlighted that banks could see significant benefits from regulatory changes, particularly in M&A activity. A less restrictive approach could make it easier for banks to consolidate and expand their operations. Macrae Sykes, portfolio manager at Gabelli Funds, echoed this sentiment, emphasizing that regulatory relief would unlock opportunities for loan growth, which has been stagnant in recent months. As Trump’s administration moves forward, this regulatory shift is expected to fuel even more business activity, benefiting the banking sector.
Another area where Trump’s influence is likely to be felt is in capital requirements. Under Basel III, new regulations introduced after the Global Financial Crisis, banks are required to hold higher capital reserves, a mandate that many in the banking industry have criticized as too burdensome. Trump’s pro-growth policies could lead to a relaxation of these rules, freeing up capital for investments, stock buybacks, or dividend increases.
Mac Sykes believes that with regulatory hurdles reduced, banks will have more flexibility in using capital, which could contribute to higher profits. Trump’s potential to modify or even scale back the Basel III rules could create a more favorable environment for large US banks to make loans, drive profitability, and stimulate the economy.
Though Jerome Powell remains in charge at the Federal Reserve until 2026, Trump’s ability to influence banking regulation extends beyond the Fed. One key figure is Michael S. Barr, the current vice chair of supervision at the Fed. Traditionally, appointees in this role tend to resign after a change in administration, which could open the door for Trump to replace Barr with someone whose regulatory philosophy aligns more closely with his own pro-business agenda. Such a move would allow for a shift in the Fed’s approach to regulatory policies, including capital requirements and liquidity enhancements.
As Frank Mayer pointed out, the collaboration between the Fed, OCC, and FDIC is crucial for shaping regulatory policies, especially regarding banks’ capital requirements. By replacing key figures at these agencies, Trump could influence the direction of US banking policy and facilitate a more business-friendly environment.
While some caution that regulatory changes under Trump’s second term may take time to fully materialize, the immediate market response suggests optimism. The Securities and Exchange Commission (SEC), headed by Gary Gensler, and the Federal Trade Commission (FTC), led by Lina Khan, are both seen as potential targets for regulatory overhaul. With Trump’s influence, it’s expected that these agencies will shift away from stricter oversight and toward policies that prioritize market growth and efficiency.
This shift in regulatory philosophy is expected to drive a revival in both the IPO market and M&A activity, which has seen a decline since 2021 due to tighter regulations. Christian Nagler, a capital markets partner at Kirkland & Ellis, noted that the market has already begun to rebound, and the increased likelihood of regulatory changes under Trump’s administration could further accelerate this recovery.
With input from Market Watch and Forbes.
