We think material changes to prudential bank regulation are unlikely, but supervisory approach could vary. In S&P Global Ratings' view, the outcome of the U.S. elections won't result in any material weakening of current prudential bank regulation. However, it could affect to what degree regulation is strengthened and set the tone for future supervision and enforcement.
What's Happening
In November 2024, the U.S. will hold its presidential and congressional elections, the outcome of which may have ramifications for the direction ahead for the economy, market performance, and regulation, including for banks.
Why It Matters
Following the turmoil in the U.S. banking industry in March 2023, regulators indicated they would put forth initiatives to increase the system's strength and resilience. One of the proposals--the Basel III endgame--could significantly change how large banks calculate their capital ratios. Other likely and existing initiatives involve liquidity standards and resolution. We think the election outcome may affect the stringency of these initiatives and bank regulation in general, but likely won't affect credit ratings unless regulation is significantly eased, which is not in our base case. Generally, we view stricter regulation as a credit positive as long as it allows a bank to make a decent return and doesn't push them toward riskier strategies to try to boost profitability.
Bank regulation was last eased during the previous administration under a Republican Congress. So far, we don't believe either party has voiced a view that bank regulation should be eased further. However, a Republican controlled-presidency and Congress may lower the odds of regulatory tightening.
If Democrats control the presidency and Congress, we expect the current regulatory focus to remain largely unchanged, although scrutiny of other aspects (e.g., bank mergers) could increase. A divided outcome between the presidency and Congress would limit both parties' ability to influence bank prudential regulation.
The election results could also affect leadership appointments at the SEC, Consumer Financial Protection Bureau (CFPB), and the Federal Housing Finance Agency (FHFA), which in turn could affect topics like cryptocurrency regulation, consumer protections, and Fannie Mae and Freddie Mac. We also consider that the leadership at the various regulatory bodies largely dictates the tone of regulation. Changes in directors of federal agencies can signal a shift in priorities or even outright changes in policy. The table summarizes potential regulatory leadership changes.
| Potential regulatory leadership changes | |
|---|---|
| Regulatory organization | Leadership status |
| Federal Reserve System (Fed) | Terms of Chairman Powell, Vice Chair for Supervision Barr, and one other board member expire in 2026. |
| Term of Vice Chair Jefferson expires in 2027. | |
| Other three board members have terms lasting past the next administration. | |
| Federal Deposit Insurance Corp. (FDIC) | President Biden has nominated Christy Goldsmith Romero to replace Martin Gruenberg as chair of the five-member board at the FDIC. The FDIC board is made up of three presidential appointees, including the chair and vice chair, as well as the Comptroller of the Currency and the Director of the Consumer Financial Protection Bureau. |
| No more than three of the members of the board of directors may be members of the same political party. | |
| The Office of the Comptroller of the Currency (OCC) | The Comptroller of the Currency is appointed by the Treasury Secretary. The appointment requires Senate confirmation. |
| Michael Hsu is acting Comptroller but has not received Senate confirmation. | |
| Consumer Financial Protection Bureau (CFPB) | The President can replace the Director. |
| Federal Housing Finance Agency (FHFA) | The President can replace the Director. |
| Securities and Exchange Commission (SEC) | The SEC has five commissioners, appointed by the President, with staggered terms of five years. No more than three commissioners may belong to the same political party. The President also designates one of the commissioners as chair. |
| Chair Gensler’s term expires in 2026. | |
| President Biden recently nominated one commissioner for a second term. The terms of the three other commissioners will expire during the next presidential term. | |
What Comes Next
The new president will be able to make some immediate appointments to regulatory bodies, some of which will require Senate approval. For example, a new CFPB director could influence initiatives like the limit on credit card late fees that has been held up in court. For housing policy, a new FHFA director could revive plans to reform the mortgage market and release Fannie Mae and Freddie Mac from conservatorship.
We think most pending bank regulation won't be finalized until after the election, including the Basel III endgame proposal. Regulators issued the proposal in July 2023, but Federal Reserve Vice Chair for Supervision Barr recently indicated the rule would be re-proposed with less impact--for instance, it would increase capital requirements for the global systemically-important banks (GSIBs) 9% in aggregate, versus 19% in the original proposal. Barr also said the re-proposal would exclude banks with assets of $100 billion-$250 billion from most of the proposed changes. We think those changes make it less likely that elected officials will look to influence the Basel III endgame.
Regardless of the election results, we think the recent U.S. Supreme Court decision in Loper Bright Enterprises v. Raimondo could affect bank regulation over time. This ruling overturned the Supreme Court's "Chevron deference" precedent set in 1984, which essentially required courts to defer to a regulatory agency's interpretation of ambiguous language in federal law, as long as the agency's interpretation was reasonable. We think the Loper Bright decision increases the risk that banks may seek to challenge regulations in court, which could cause regulators to be more cautious regarding the scope and stringency of their regulatory mandate.
Related Research
- Tighter Liquidity Regulations Could Help Fortify The U.S. Banking Sector, Where Liquidity Risks Still Linger, July 11, 2024
- FAQ On Basel III Proposals And The Impact On U.S. Bank Capital Ratios Published, Jan. 11, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Stuart Plesser, New York + 1 (212) 438 6870; stuart.plesser@spglobal.com |
| Secondary Contacts: | Devi Aurora, New York + 1 (212) 438 3055; devi.aurora@spglobal.com |
| Brendan Browne, CFA, New York + 1 (212) 438 7399; brendan.browne@spglobal.com |
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