Listen: Street Talk | Episode 132: How the 2024 election could reshape bank regulation and M&A

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Nathan Stovall

I’m Nathan Stovall and on this episode we’re talking about the impact that next week’s election on banking regulation and supervision.

We hosted a webinar on the topic on Oct. 14 with that tried to offer clues to what different election outcomes could mean for the banking industry. I led a discussion with three terrific guests who focus on policy, regulation and rulemaking for banks:

They were:
Paul Merski, EVP, Congressional Relations and Strategy, at the Independent Community Bankers of America (ICBA); Naomi Camper, Chief Policy Officer at the American Bankers Association; Isaac Boltansky, Managing Director and Director of Policy Research at BTIG.

The discussion was wide ranging and began with discussions on the current regulatory framework under the Biden administration and how it has different from the Trump administration. The panelists agreed that a Harris presidency could be seen as a continuation of current regulatory framework for banks under the Biden administration and noted that a Trump victory could lead to significant regulatory shifts, particularly around consumer issues, fintech and be more supportive of bank M&A activity.

We began the conversation with Paul Merski from the ICBA. Here it is:

Nathan Stovall

At a high level, what you've seen from the supervisory environment under the current administration? And what not only big points of focus have they had, but how, in your mind, it feels comparable or different from the prior administration?

Paul Merski

Right. So we had some large bank failures a little over a year ago, and I think that helped set the tone in Washington for increased supervision, increased scrutiny of certain areas of the bank's management and particularly third-party risk. The good news is that Congress didn't overreact to those bank failures, even though they were the second and third largest bank failures in history, Congress didn't churn out and pass any legislation to impact that. So it really fell upon the various regulatory agencies and a couple of areas that had increased focus was clearly any institutions that have a large amount of uninsured deposits, institutions that have a significant amount of broker deposits and just the extra scrutiny on how sticky your deposits are at institutions. Another area that has been a big focus is BSA/AML.

We just saw some very large fines against large banks in the BSA/AML enforcement space. I think that's going to continue. We had legislation in 2020 to implement a whole new regime of BSA/AML with FinCEN and the Corporate Transparency Act. That's still being implemented. And I think we're going to see greater focus on BSA/AML enforcement. So that's something that we're watching very carefully. And really, probably the biggest thing is anyone involved in crypto assets and crypto clients, another big area of focus. Not many banks are highly engaged in that, but that is something that we've seen increased scrutiny. And we could talk about the CFPB and really they've ramped things up quite a bit, particularly after they won their Supreme Court decision.

I think that was May 16, where they said the Supreme Court said that basically the funding of the CFPB is legal. There was kind of a lull in CFPB enforcements and supervisions. Keep in mind that the CFPB doesn't -- isn't supervising banks under $10 billion, even though all the rules apply, they're not in there. The primary regulator is in there. But I think we'll see increased scrutiny by CFPB and the whole junk fee campaign and overdrafts and credit card fees and things like that. So I'll stop there and others might have some other ideas of what's going on.

Nathan Stovall

No, great, great stuff. So definite focus on liquidity and deposit composition post the failures, but also focus on the compliance framework, both from the BSA/AML, but also the consumer. Naomi, what has your view been? What have we seen in terms of supervision? And how do you think it's different?

Naomi Camper

Sure. I mean, every administration when it comes in, uses all of the tools at its disposal to push forward big picture agenda items. So across the different sectors. And so one of the things we saw right out of the gate with the Biden-Harris administration was a focus on climate. And we saw that in lots of different areas with the energy sector, et cetera, but we also saw it with the banking sector at the beginning. And so there was a big focus in terms of the regulatory environment on a focus on climate and what were banks doing in terms of their own portfolios. And I think you could say that some analysts or market participants viewed this as problematic because it arguably diverted some of the risk management resources from traditional safety and soundness activities over to new activities focused on climate.

People have different views on that and different opinions about it, but I think it's a clear differentiator between the Biden administration and its predecessor administration. I think Paul is exactly right, lots of focus on safety and soundness and liquidity. Let me just delve a little bit more into some of the things he said at the end. The focus of the CFPB in terms of the administration's framing on junk fees, I think, are especially concerning in the banking industry because one person's junk fee is another person's risk management. So if you take the example, for example, of late fees for credit card issuers, right, is it a junk fee? Or is it risk management?

And if banks are only going to be allowed to charge $4 for customers who are late paying, are they going to continue to have those customers. Overdraft fees, you could frame in a similar manner, right? And so that's an approach that seems more representative perhaps of this administration than the prior and who knows the future. And then one other thing I want to highlight is what we're seeing in the enforcement area in fair lending and use of statistical correlations to prove malfeasance, especially where you have banks who are new entrants into new lending areas, whether it's through mergers or other forays in and the lack of a grace period for banks to get acclimated to make themselves known to new customer bases.

And a use of statistical modeling to call new entries out for lacking the numbers in proportionality to the number of -- to the new population base to the number of applications. This also comes up in our concerns about 1071 in the small business area. We at ABA and our member banks strongly support the goals of 1071, which is to make sure that banks are lending fairly and equitably to people of all races and demographics. But the way that it was rolled out and we're challenging it in court, we think has the potential really to chill small business lending more generally. So I think combined with what Paul said and what I've observed, there's a clear sort of orientation of the Biden administration in regulation and supervision, and we've seen it play out over the last several years.

Nathan Stovall

Yes, and I heard a couple of things there, too, that actually, I think, are consistent where there's a little bit of focus on the price or the fee that a bank can charge for what they think they need to do to compensate for the risk they're taking. And we talked about this on the front end a little bit about what -- could you have some unintended consequences maybe of pushing folks away from a business line, and we've seen that in mortgage over the last decade. And that seems to be a clear difference in terms of what they're facing today from what they face four years ago.

Isaac, I want to turn to you and more bigger picture, I guess, less about what we have seen, but maybe what could we see. And one of the things I do, I'm lucky enough to follow your research, and I've seen you put out a variety of scenarios of most likely policy actions depending on the different makeups we can get coming out of the election, whether whoever wins the presidency, but also is there party empower and the House and Senate? Or is it split? In your mind, what are the biggest policy items for banks that you could see if Republicans have full control, if Democrats have full control or if there's one of the two splits you could get?

Isaac Boltansky

Yes. Look, I think a lot of this has to do, obviously, with the administrative state. And so if we start perhaps on a Harris administration, I think, that it would be largely a continuation of the Biden administration. The best framing that I've heard, Nathan, is think about it as H.W. Bush taking over from Reagan. You would eventually see some changes to some of these regulators. But by and large, the policy will remain similar. I think that, that would be true at the CFPB and the bank regulators, which I know is what we're focused on primarily. So by and large, on the administrative state, I think it's status quo in a Harris victory.

If it's a Trump victory, while he's going to fire the head of the CFPB on day 1, he'll probably fire the head of the FHFA, which oversees Fannie and Freddie and the Federal Home Loan Banks, maybe not on day 1, but in the first month or so. And you would see some battles for other bank regulatory seats. The OCC would flip over immediately. The FDIC, I believe you would see a change there under what is now the precedent in light of what happened to Jelena McWilliams. And in due time, I think you would see a new Vice Chair of Supervision. There's some debate over how quickly that would happen, Nathan, and whether Trump would try his luck in court there. But my point here is, you would see the regulatory pendulum shift back pretty aggressively. From a thematic perspective -- and look, that's not surprising anyone. I'm not breaking any new ground here.

But from a thematic perspective, I think the one area that my clients, which, as a matter of context, are hedge funds, mutual funds and private equity shops. My clients are focused on M&A and I know we're going to talk about this later. But to me, that's the biggest change. We've had four years now of what some call new brand ICE thinking on competition policy. Some use the pejorative hipster antitrust, if they want to try to make fun of it. But you would see an end to that at the FTC, the DOJ and I think the bank regulators as well. So you'd usher in, I think, a much more supportive landscape for bank M&A in a Trump administration. The unknown, and I promise I'm going to shut up after this. The big unknown is the big picture, right?

I think in a Trump administration, the questions I'm getting are, well, is it going to institute all these tariffs? Are we going to have a massive immigration policy shift? And what does that do to inflation? Those are the unknowns that I think are part of the conversation now on the Trump side specifically. And then finally, it's taxes, right? Taxes. You have $4.5 trillion in taxes expiring at the end of next year. That's the big ticket item. Our call on this is the vast majority will be reauthorized in some way. There's going to be some dials that are turned differently depending upon the composition of Congress. But the most endangered animal in D.C. is the deficit hawk. So we're going to keep on spending. And you've got to think about that when you think about the shape of the curve.

Nathan Stovall

Certainly. One thing I want to pick up there, we're definitely going to get the M&A piece, but you mentioned sort of Harris being a continuation. Do you think it's fair on some of the pieces you're talking about, you haven't said this, but can we look back to '16 to '20 as the playbook for some of the things in the Trump White House, whether it's CFPB or FHFA, some of those things that we would see change in terms of how they would try to approach it? Or is it a little bit too hard to say?

Isaac Boltansky

Look, I think that's fair. I think I've also started to embrace this idea that the ideological spectrum is obviously a spectrum with the far left and far right, but it's become much more of a horseshoe where the far left and far right agree. And like there are issues like, for example, at the CFPB, Nathan, I could see a Trump administration coming in and saying, goodness gracious, closing costs are up 40% over the past two years for mortgages. Biden folks did a lot of work on this, and there are some proposals. Maybe we should look at it, right? And I think that's one idea -- one area that I think is worthwhile. There are obviously some more in the populism bucket and I don't know if the other panelists want to jump in there, but that's one example.

Nathan Stovall

Naomi, I would be curious about your view there. And we had talked about this leading up to this. And Isaac just painted an interesting picture where you might have both candidates putting forward more populous ideas. What are your views on that prospect and what it can mean?

Naomi Camper

Yes. Look, I think it's a real wildcard. I think there's this going in presumption that a Republican administration is pro-business and a Democratic administration is pro-consumer, whatever that means. And I don't think you can take that for granted anymore on either side. Look at the example -- they may frame things differently, but look at the debate that's going on in the national dialogue right now about Child Tax Credit, right? The policies are quite similar. They're framed a little bit differently. But you could see in some of these areas about mergers. Well, not -- populists of both parties don't love big. There's a real skepticism about big.

There's -- on interest rate caps, we've always had this funny circumstance where some of the biggest proponents of hard caps are coming from the Republicans. And so I think it's going to depend on the exact individual. For the Biden administration, you have some of the choices for appointments who are really middle of the road. But all it takes is one person at the head of the CFPB, who is less moderate, and it can color the entire sort of record of the administration. I think the same could easily happen if we have a new Trump administration. We just don't know.

Nathan Stovall

That's interesting. Yes, so a definite wildcard, and November might not tell us the answer there. That might take some time to kind of figure out. Isaac, in your mind, what are the big market themes under a Trump White House versus a Harris White House? I know you talked about some of those.

Isaac Boltansky

Yes. Look, I think it's worthwhile to recognize right now that we are in the silly season of the campaign, and I'm reminded when I have to track everything each campaign says. And I'm reminded of that old Groucho Marx's line, "I've got principles and if you don't like those, I've got others." And so right now we're just throwing out ideas for everybody, right? And some positions are changing. Trump was against pot, now he's for pot. Harris was against fracking, now supports fracking. The 10% credit card cap is another great idea, right, that now Bernie Sanders and Trump are for it. It's hard to keep up with a lot of this. And I think a lot of this is just the stuff you say on the trail. But obviously, I agree with Naomi that some of these things are representative of the broader ship that this isn't our grandfather's Republican party, at least the Trump version is not.

And so look, for me, I'm most interested -- oh, there's Paul, now we can keep going. I am most interested in the immigration and tariff policy, right? Because that's going to -- those are going to have the biggest impacts on inflation. And obviously, I think that, that's something that the market really doesn't have its arms around. Most investors I talk to don't think that Trump is going to institute a 10% universal baseline tariff as he has discussed or 60% tariff on every good from China, but no one can be sure. And that's going to be a tool in the toolbox. Couple that with immigration enforcement, both at the border and internally.

And I think that you have a true belief in certain corners of the market that you will have upward pressure on inflation. And you add in there the complexity of trying to influence the Federal Reserve and impact its independence through jawboning or other means and I think that you have the recipe for some uncertainty with the curve and from an investment perspective. So that's the big ticket item. There's a bunch of other little things, Nathan, that we could spend all day on. Will Fannie and Freddie's conservatorship and things along those lines. But from my doing these types of calls and client conversations, it's really how far will we go on immigration and tariffs because that's going to impact everything.

Nathan Stovall

Paul, I want to give you a chance to chime in on sort of the broader populism debate or not even debate, discussion. How do you think about that in terms of impacting policy and kind of this -- maybe odd place to put it where you have the two sides who don't seem to come together that much, maybe agreeing on the far end there on some pieces.

Paul Merski

Right. I think Isaac hit on it. Whoever you appoint is pretty much in the policy position and should there be a turnover in administration, there's literally in Washington, D.C., 2,000-plus jobs that the administration gets to select. 1,200 of those jobs get approved by the United States Senate. So you could see a dramatic turnover in all the regulatory agencies from the Federal Reserve, OCC, FDIC, CFPB, the whole alphabet soup of who would be in those positions. It would take time, but you could see a dramatic shift. So it all depends on the elections.

Regardless of who is in control of the House and Senate, it's not going to be by wide majorities. And in the Senate, you need 60 votes for anything controversial. So if you have a majority of 52, 53, it's still going to be tough to make dramatic changes because of the filibuster and trying to get 60 votes. So change may come slow even if we do have some dramatic turnovers in the election.

Nathan Stovall

Paul, just teed it up, Isaac, I know you put out actual forecast on what you think is actually going to happen in terms of the election. You get the tough one here. What's your current thinking on the outcome right now? Are we still in Tulsa plan?

Paul Merski

Yes. Look, I said yes to this because I've got a long record with Nathan, and we've worked together long enough so he knows that I was wrong about 2016. I thought Clinton was going to win then, so no one should listen to me ever. And with this election, I've come to the conclusion that no one knows anything. But here's how we think about it. On the Presidential side, I've tried to more myself to state level data. The seven swing states that decide this. Well, I look at what voters say, animates them and will lead to their choice in the election. And by a large margin, they say the number one issue is the economy, the number two issue is immigration.

Trump leads on both of those in every swing. So our odds are 55% Trump. They've been there for a while. The House, I really don't have a call on. We're saying right now, it goes whichever way the White House goes, but it's going to be incredibly tight there. And the Senate is the one where you can actually say with some confidence that we think with 75% likelihood that the Senate is going to Republican hands. I just struggled to see Jon Tester in Montana holding on and Sherrod Brown in Ohio holding on. Those are two tough races for Democrats. Trump won Montana by 16 points. He won Ohio by 8 points. So we're going into this with the baseline conviction that the Senate is flipping, and we lean Republican control on the White House and House.

Nathan Stovall

Isaac, you already gave us a little sneak peek here, but what's your view on the election and changing the M&A environment? Do you think a change in administration is a sea change there if that actually does occur?

Isaac Boltansky

Back to me -- yes, look, I think the simple answer is yes. The one caveat is JD Vance, the Vice Presidential Nominee on the Republican side, has offered positive commentary regarding Lina Khan, who is the Head of the FTC. And again, this goes to what Naomi and I talked about in terms of the horseshoe effect of the ideological spectrum. I think that, that means big tech won't be able to do much. But on bank land, I think that we'll have -- I think, honestly, there's enormous pent-up demand. And I think that's going to come through. I also think that there's going to be lots of activity around certain thresholds, right? I think banks just under $100 billion are going to say now is the time to leap over while we're figuring out Basel III Endgame and applicability because these asset thresholds just keep going lower and lower in terms of the expansion during Democratic administration. So the simple answer is yes, more.

Nathan Stovall

Naomi, what's your view here?

Naomi Camper

So my view -- I have lots of views, but it's 154. I mean, first of all, if policymakers don't like the idea of mergers and consolidation, then they should calibrate the regulatory environment so that banks can continue to succeed and thrive on their own. They've clearly made the decision to put in regulation and burdensome regulation, we call it the tsunami of regulation, that forces banks to seek scale. And yet then when they go to seek scale, they're stymied on that side, too. And yet there's also complaints about, "Oh, why is all the financial activity going into the unregulated shadow sector." So my hope is that no matter who is in charge, there is a holistic view and understanding that these things all relate to each other.

So if you want to do burdensome regulation, then you should make it possible for institutions to merge, and you should make it so that banks can merge with other banks instead of having to be purchased by a credit union because they have a different set of standards and economics because of their tax preference. So whether that applies, it's going to -- whether it's going to be a different situation in a new Republican administration or in a Harris administration, we actually think that something has got to give because the current situation where you just have backlogs, lack of transparency and institutions wanting to do the right thing by their customers and just literally unable to comply with the flow, something is going to have to change.

Nathan Stovall

A quick follow-up there to you. I mean, something I hear from the advisory community a lot is they make an argument that from a systemic standpoint, if you're worried about systemic risk, you should create regional champions to compete with those who do both systemic risk. And that's not my bias on systemic risk. We've already said who they are, right? We've already [ designated ] these institutions. Is that something that the ABA or others have put up there? Or maybe said differently, is that something that you hear on the hill? Do you think that lands ever, that there's some understanding that maybe the best way to get away from risk at the very top is to create more larger regionals.

Naomi Camper

Look, our members all up and down the size spectrum will make analogous arguments in relation to whoever their big brother or big sister is right there. So I don't -- not to say that this isn't like a really interesting point you're making. I think we hear it from lots of different sources, whether it's economists, whether it's lawmakers, whether it's bankers themselves. If you don't let me do this, there's no way I can compete here and it just -- it keeps going up. So it starts with the $700 million or $500 million bank in the heartland wanting to merge with its neighbor. But I also think that what's really important is, for the ecosystem, to recognize that there are sources of nonbank competition that may have different rules and it all needs to be considered collectively.

Nathan Stovall

Certainly. And Paul, I'd love to give you a minute to chime in here. And to that last point, particularly, I mean, the vast majority of deals involve smaller institutions. But to Naomi's point, we continue to hear push for scale. We're seeing that investors are paying up more for scale. That wasn't always true going back a long period of time that the bigger guys might trade a lower multiple. But now the bigger you are, the higher multiple you tend to get. How do you think about M&A and where it could go in terms of the regulatory treatment of it with even community banks?

Paul Merski

Right. Well, I think a lot of it is driven by the desire to get scale because of the harsh regulatory treatment. And particularly if you want to go over $10 billion, you don't want to go just over $10 billion, you want to go big or go home because the rules and regulations that kick in over $10 billion are so onerous that you have to go much larger than that. So I think unless there's some regulatory relief, we're going to see these mergers continue. I know both the Republican members of the FDIC, Hill and McKernan voted against this most recent M&A proposal. So as Isaac said, it depends on the administration of what's going to happen with the M&A environment going forward.

Nathan Stovall

Well, great. Well, we are right at the top of the hour. I appreciate that point and all your points. Isaac, Naomi and Paul, thank you so much for joining us, and thank you, everyone, for tuning in.