Republicans retain the House and Senate and Donald Trump surprises as winner of the presidential election, providing a Republican sweep of all the elected branches of the federal government. At this moment, it is unclear and uncertain what the election results will mean long term for U.S. financial institutions. However, the win will likely embolden the Republicans to continue to aggressively pursue deregulation led by Congressman Jeb Henserling and his efforts to roll back onerous provisions of Dodd-Frank, including potential elimination of the Volcker Rule and exempting community and regional banks from being required to comply with a stringent regulatory regime.
While banks may have thought that Hillary Clinton would hopefully preserve the status quo and market stability, she had laid out a very aggressive increased regulatory plan aimed at more bank regulation and scrutiny. President-Elect Trump, on the other hand, has indicated that Dodd-Frank should be repealed because increased regulation has adversely impacted the banks’ ability to lend and thereby impeded job growth. It is also conceivable that the combined Congress and Trump presidency may seek to curtail the powers of the CFPB or eliminate it in its entirety. At the very least, we expect a new director for the CFPB will be appointed promptly after the election.
President-Elect Trump stated publicly that he would limit the powers of the Federal Reserve and seek to authorize the Congress with oversight authority over the Federal Reserve and its decisionmaking process. Contrary to the Republicans’ call for regulatory reform, President-Elect Trump expressed support for the restoration of the Glass-Steagall Act (Glass-Steagall). This obviously would require an Act of Congress and more regulation. There is no way to know at this time whether Glass-Steagall will be on his agenda with a Republican Congress. Until Trump lays out his economic plan, legislation plan and tax policies, the high degree of uncertainty surrounding the impact on financial institutions of his upset election will continue well into 2017 even for those in the know inside the Beltway.
Once Trump’s victory was declared, the global international markets initially reacted negatively and were highly volatile, presumably because of his announced policies relating to trade and future international and cross-border relationships. The U.S. markets on the day after the election have risen sharply and the dollar has rallied. However, until there is clarity on Trump’s positions relating to the financial sector (not unlike what is happening in the U.K. with the political aftermath of Brexit), uncertainty will continue and investors will be in a risk-averse mode. Bank stocks, on the other hand, rallied the day after the election on hopes that the Congress and Trump will finally adopt broad regulatory deregulation measures benefiting financial institutions and making them more appealing to bank investors.
As a result, the early stages of a Trump presidency will likely have an adverse effect on capital market transactions and merger and acquisition transactions, particularly for financial institutions, as investors will likely be sitting on the sidelines. Moreover, bank buyers that were currently in the market looking for acquisition opportunities may put their plans on hold for the short term until there is clarity on Trump policies toward financial institutions as well as political and market stabilization. However, the strong possibility of deregulation may outweigh the uncertainties, and banks will become more attractive again possibly making it easier to raise capital and complete transactions on a timely basis without undue regulatory burden.
If regulatory relief for banks becomes a reality, there may be a resurgence of new community banks unfettered by overregulation and significant compliance costs. Existing community banks given regulatory relief would also have the option of remaining independent. In addition, regulatory relaxation could result in a resurgence of de novo charter applications from potential bank organizers that see a greater opportunity in starting fresh than they may have seen prior to the election results.
For public companies, regulatory relief could result in the elimination of disclosure obligations, including pay-ratio and hedging disclosures, and repealing of requirements related to incentive compensation and clawbacks.
Much is rather unpredictable and uncertain at this time. We anticipate that during the transition period to the new presidency, as nominees are proposed for various key cabinet posts and within the first six months of the administration there will be further guidance on the impact of the new regime on financial institutions. We will provide further updates as matters unfold.