After the US presidential election, senior executives across the financial services industry are facing uncertainty about what lies ahead during Donald Trump’s second term. Two themes are emerging at the top of the agenda: the direction and intensity of deregulation, and the administration’s stance on sanctions and financial crime. Both will have implications for business strategy and risk mitigation.
Below we share some evolving perspectives on both topics from Douglas J. Elliott (an expert in financial regulation) and Daniel Tannebaum (an expert in financial crime and sanctions).
Deregulation in financial services under Trump 2.0
Trump 2.0 is likely to see bolder financial deregulatory action than Trump 1.0. The details will depend significantly on who is chosen for key positions, but certain early moves are probable. First, Trump will try to fire the existing leaders of the financial regulatory authorities. Second, he is likely to issue an executive order early on, pushing the administration and regulators on deregulation. Third, the new team will try to immediately suspend and quickly reverse some key actions of the previous team. This includes the revisions to the Community Reinvestment Act, the Consumer Financial Protection Bureau’s implementation of section 1033 of Dodd-Frank (“open banking”), and the FDIC and OCC merger guidance.
Legislative changes are unlikely, except in some specific areas like crypto, limiting how far regulators can cut back. This will also be a serious obstacle to any structural reforms of the regulators. Further, supervisory culture and actions are hard to change, and the innate caution of supervisors will remain. Beyond that, several issues need further regulation and supervision, such as on artificial intelligence (AI) and fraud, where action will occur even under Trump 2.0. The expected loosening in the regulatory attitude toward regional bank mergers, along with other factors, should spur a wave of consolidation.
The Basel III endgame is likely to be finalized under Trump 2.0 after the rest of the “gold plating” is stripped out. However, there is perhaps a one in three chance that it dies altogether.
It’s also important to keep in mind that “deregulation” can mean a lot of different things. Potential approaches include: easing up on specifics while retaining the same broad approach; reducing supervisory discretion to limit excessive interference with financial institutions; more focused supervision, prioritizing a core set of issues; and trading off major reductions in regulation and supervision for higher capital requirements. It will take some time before we see where Trump 2.0 is going and there may be disagreements among officials on their priorities.
The impact of Trump 2.0 on sanctions and anti-money laundering policy
Unsurprisingly, sanctions will once again play a key role in a second Trump administration. Despite fears that Trump will lift Russia sanctions as part of ending the Ukraine crisis, it’s not that straightforward. Depending on how Trump approaches Russia/Ukraine, more aggressive use of secondary sanctions authority against third countries trading with both Russia and the US could help achieve the sanctions policy objective.
Changes in President Biden’s sanctions and trade control implementation involved dedicated economists to identify unintended consequences, and Trump will benefit from their continued support. Trump won’t be able to approach China issues in the same manner as previously, as China has evolved anti-foreign sanctions and export restrictions on rare earth minerals and precious metals, much like the US, which could have a severe adverse impact on the US supply chain. We also predict anti-money laundering enforcement to decrease in line with Trump’s first term.
