The financial services industry, particularly the banking sector, is more heavily regulated today than at any point in recent decades. Banks must hold more capital and liquidity than in the past, invest in state-of-the-art risk and compliance analytics, and respond to frequent shifts in approach from regulators and supervisors. This has weighed heavily on the economics and valuations of banks over the past 15 years. In 2006, return on equity across US global systemically important banks (GSIBs) was 18%. Today it is closer to 11%.

Donald Trump's reelection has many in the banking sector expecting the pendulum to swing toward light-touch regulation and supervision. But how far will the pendulum swing? Trump and his team have set a tone of aggressive deregulation across industries, including financial services, but it is important to remember that deregulation during Trump’s first term was ultimately modest.

Our view is that there will be substantial recalibration of regulation in the US that will relieve pressure on banks, but that the existing regulatory framework will remain broadly unchanged. Trump’s team now has more conviction and more experience, but key obstacles to fundamental changes in regulation remain. Much of the existing regulatory framework was created by legislation that cannot be revised without bipartisan support. The culture among financial supervisors will be slow to shift, especially given the criticism staff will face if anything goes wrong on their watch. Further, some critical personnel changes at the Federal Reserve would need to be voluntary.

Key factors influencing financial regulation in the US

The swing factors that will matter most for the industry will be regulatory personnel, capital requirements, stress testing, merger guidance, and crypto regulation.

Personnel changes in key agencies

Trump will likely remove the current heads of the Securities and Exchange Commission (SEC), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and Consumer Financial Protection Bureau (CFPB) in his first days in office, allowing him to appoint new leaders with a deregulatory bent. He will also pick the new Federal Reserve Vice Chair for Supervision from among the current group of governors, almost certainly Michelle “Miki” Bowman.

Changes to Basel III capital requirements

The capital requirements under the Basel III Endgame published last year were set to fundamentally change the economics of the banking business. It now appears certain that the final rules will be delayed until 2026 (with some chance that the rules will never be finalized) and the requirements will be recalibrated to limit required capital increases to a few percentage points. The rules are likely to be packaged with reductions in the global systemically important bank (GSIB) surcharges and the reduction or elimination of the enhanced supplementary leverage ratio (SLR), which would likely more than offset any uplift under Basel III Endgame. If Basel III rules are unchanged and the GSIB surcharge is recalibrated for economic growth (our Capital Relief scenario), GSIBs could accumulate as much as $650 to $750 billion of excess capital over the next four years. For comparison, redistributions were $390 billion during Biden’s presidency (a period of exceptional bank earnings).

Stress testing and shadow capital requirements

Litigation and the changing political environment are likely to produce major changes in the Comprehensive Capital Analysis and Review (CCAR) stress testing process. There will be significantly more transparency, and the connection between stress test results and capital requirements may be made less direct. Further, the scenarios are likely to be designed with less severe assumptions, effectively lowering capital requirements even if nothing else changes.

Merger guidance and bank consolidation

The economic case for bank consolidation in the US has been compelling for some time. It will become more so as midsize banks lose their advantaged regulatory treatment with the elimination (or recalibration) of the tailoring rule. The one holdup has been an aggressive anti-consolidation stance from financial regulators, especially the OCC. This will likely be substantially relaxed under the new administration.

Trump’s impact on crypto legislation and regulatory realignment

There is a strong expectation of bipartisan support for crypto legislation, leading to a significant realignment in regulatory approaches to the industry. There was already a growing bipartisan consensus for this, now bolstered by the crypto industry’s large campaign contributions this election cycle.

This is our base case, but the outlook for financial regulation under the new administration is far from stable. There are at least three potential surprises that could play out over the next four years:

1. Success of the Department of Government Efficiency

Despite the major obstacles confronting the incipient Department of Government Efficiency (DOGE), a successful launch could mean federal prudential regulation and supervision at the Fed, OCC, and FDIC are combined into one agency. Total supervisory headcount could be reduced dramatically and supervision could speak with one voice, further reducing compliance costs and complexities.

2. Potential demotion of Jerome Powell

Trump could defy consensus expectations and demote Jerome Powell from chair of the Federal Reserve Board of Governors to ordinary member of the Board. This would create significant political turmoil for the Board and uncertainty in the market. Powell would be well within his rights to remain as a member of the Board and Chair of the Federal Open Market Committee, the body that controls monetary policy.

3. Minimal deregulation in financial service under Trump 2.0

Deregulation in financial services could end up being relatively minimal, comparable to Trump 1.0. The recent changes that are most pressing for the industry and Republicans, such as on Basel III, could be undone, but with few further revisions.

This article is part of our Known Unknowns report highlighting the debates that will shape the future of financial services