Hawkishness over US bank M&As could continue with a Democratic win: T. Rowe Price

Felicia Tan
3-min read

However, other factors such as loan demand, credit risk, inflation will have a greater influence on the sector's performance.

Stronger regulations over the US financial sector would continue with a Democrat in the White House, says Gil Fortgang, Washington associate analyst for the US equity division at T. Rowe Price. This is seen by the increased supervision during US President Joe Biden’s tenure and before the country’s bank failures in March 2023.

However, other factors such as loan demand, credit risk, inflation and the outlook on interest rates will have a greater influence on the sector’s performance after the election, he adds.

“Under a Democratic president, financial regulators would likely adopt a more proactive and involved stance compared to a Republican administration,” Fortgang writes in his July 23 note. “This will influence bank mergers, capital requirements, and regulations governing consumer finance and nonbank financial systems.”

On the flip side, should former President Donald Trump win his second term, regulatory pressure may ease.

“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 finalised would likely be most at risk,” Fortgang adds.

In consumer finance, a Democratic win may mean increased scrutiny of emerging payments systems. For instance, the consumer financial protection bureau (CFPB) said, in May, that buy-now-pay-later (BNPL) platforms will be regulated like credit cards. This means BNPL lenders will have to look into disputed transactions and refund money on returned products and cancelled services, similar to credit card rules. A Republican win, however, is likely to favour lighter financial regulation with influence from the new CFPB director.

Bank mergers and acquisitions (M&As) are also likely to see continued hawkishness with a Democratic win. Under the current administration, federal financial regulators have been looking through bank deals with greater scrutiny, especially for combined banks with over US$100 billion ($134.52 billion) in assets. Meanwhile, a Republican win may see “possible leniency” in M&A regulations although constraints may still happen for megabanks.

Efforts to increase oversight of non-banking lenders may gain momentum in a Democratic win amid more lending taking place outside of traditional banks.

“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,” says Fortgang.

The current oversight over non-banks in the US may remain the same in the event of a Republican win.

Finally, a Democratic win would see 15% to 20% capital hikes as regulators rework on proposed rules to determine how larger banks assess risk and their capital requirement. A Republican win means Trump regulators will get to implement their preferences should the Biden administration fail to implement the proposed risk framework during Biden’s term in office.

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