Is the Policy Pendulum in D.C. Swinging in Banks’ Favor?
The CFPB is gutting itself, pending capital rules seem about to be eased, and climate issues and reputation exams are off the table. Happy days for big banks? Not so fast: Fitch Ratings analysts say banks must think beyond current developments to address long-term risks. They are.
By Steve Cocheo, Senior Executive Editor at The Financial Brand
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The banking industry has been cheered by a good deal of what’s come out of the Trump administration so far, but analysts at Fitch Ratings have a cloudier outlook.
In a report published in late April, Fitch looked at the actual and potential shifts in policy and regulations made so far. Some, such as speedier merger and acquisition approvals and the quashing of credit card late fee caps and overdraft fee limits at the Consumer Financial Protection Bureau, Fitch considers a return to status quo ante, meaning “a previously existing state of affairs.” M&A policy appears poised for a return to some normality and the fee rules never kicked in. As such, these developments are neutral for the industry’s ratings.
Other moves that may allow greater risk taking, in the name of deregulation, depart from the past and “are, on balance, negative for bank credit profiles,” according to the report.
“Fitch sees limited near-term ratings risk for U.S. banks from these policy shifts,” the report continues. “However, over the medium term, an erosion of capital buffers in conjunction with evidence of higher risk appetite could pressure ratings.”
This isn’t a doomsday forecast, but really a warning to the industry to be careful. The title of the report is “U.S. Banks: Regulatory Pendulum is in Full Swing.”
“What we were trying to get across is that banks need to take a long-term view,” says Christopher Wolfe, managing director.
The ratings agency’s report also comments on the apparent increase in politicization of banking regulation on some fronts, including Treasury Secretary Scott Bessent’s intention to coordinate bank supervision and regulation from his post. Bessent also serves as chair of the Financial Stability Oversight Council, an interagency group established by the Dodd-Frank Act in 2010 in the wake of the Great Financial Crisis.
“Increased political influence in regulatory decision-making may erode public trust in financial system oversight,” the report says. “It may also amplify the cycle of policy reversals with each incoming administration, hindering banks’ long-term planning efforts.”
Climate Issues as a Case Study of the Pendulum Effect
In an interview, Wolfe points to the Biden administration’s focus on climate issues, including a focus by banking regulators. That and much more is being unwound — for now.
“There will be an election in a couple of years, so you might not want to get rid of all the infrastructure you had in place because there could be another swing back in the pendulum,” says Wolfe in an interview. “Take a long-term view of regulation. Try to separate out the politics from some of these things being done to focus on the actual fundamentals.”
Wolfe acknowledges that climate issues were critical in the last administration and have been shoved off the table now.
Examination issues may have been quelled, but not so Mother Nature.
“Look at the L.A. wildfires or the floods in the Carolinas, and take a hard look at the costs to the banks involved,” says Wolfe. “Banks largely came out unscathed, because of insurance and governmental support. Now, take those away and you’d have a different outcome.”
Wolfe’s point is that banks should still focus on how climate issues can affect them and what the risks are in different scenarios — even if no regulator is breathing down a bank’s neck to tell them so.
Mark Narron, senior director, in the same interview says U.S. banks have to maintain an awareness of context: “Internationally, the direction of travel is to treat climate change as a systemic risk, one that touches on institutions of all risk stripes, capital, liquidity, credit quality and more.”
Read more: How the Nation’s Largest Credit Union is Leaning into Trust to Weather Economic Sea Changes
Consumer Protection Is About More than Compliance Duties
Other areas of banking regulation currently in one stage or another of being unwound or revamped should also be treated with the same long-term viewpoint, the analysts argue.
Take the gradual dismantling of the CFPB, for example, which has gone so far as to reverse major enforcement cases.
“It beggars belief that consumer protection will be gone forever,” says Narron. “At some point, banks will be answering to reputational risk, junk fees, Zelle fraud, what have you. It’s going to come back.”
Much on the consumer protection front has multiple facets. On one hand, the report says, the opportunity to make “reasonable fee income” supports revenue diversification and overall earnings. Banking lobbies cheered the death of the late fee and overdraft rules.
“However,” adds the report, “if consumer protections are loosened significantly, leading to an increase in banks’ appetite for operational and, in turn, reputational risk, we may view these developments negatively on a case-by-case basis.”
The report notes that CFPB has abandoned Biden-era attempts to pull some significant nonbank competitors under the federal consumer protection umbrella. This includes rules covering buy now, pay later products.
Should Banks Get Involved in Cryptocurrency?
The Biden administration not only frowned on most things crypto, but essentially sidetracked the beginnings of development of a U.S. central bank digital currency. Under the Trump administration, not only is there a broad openness to many things crypto, but there’s also the controversial involvement of the Trump family in crypto businesses of their own.
Regulators have been putting through liberalized rules on bank involvement in aspects of crypto in the wake of the administration change.
“Greater bank involvement raises risks to bank credit profiles, outweighing the potential benefits from financial innovation and growth. Specifically, banks with concentrated exposures to crypto will face the challenge of managing high price volatility,” says the report.
In the joint interview, Chris Wolfe builds on this point. “We would be concerned about banks jumping into crypto absent some legislative guardrails that we feel need to be in place,” says Wolfe. “The rules of the road need to be written before banks jump in.”
Wolfe says Fitch is concerned about the crypto industry itself. “It needs a better framework to prevent the kind of meltdown that we saw during the ‘crypto winter’.”
Wolfe is referring to 2022, when crypto market capitalization plummeted about 67% from a high. In mid-April Coinbase raised the possibility of another winter in the wake of tariff concerns, but by mid-May was talking about Bitcoin becoming a reliable store of value in the face of a weakening dollar. It’s testimony to the volatility of this market.
In discussing pending stablecoin legislation, Narron raises concerns about those digital assets themselves.
“There have to be customer protections built in, as you would see in the money market mutual fund industry. Customers need to know that a stablecoin is really backed one-to-one with safe assets,” says Narron.
Reputation risk in this area is real. Narron points out that both Signature Bank and Silvergate Bank actually “did a lot of things right, but were hobbled, we would argue, by their association with crypto.” This seemed to precipitate the deposit outflows both institutions suffered, Narron says.
In the report, the company issued a warning: “Absent legislative guardrails, regulatory standards and stronger industry oversight, Fitch may negatively reassess bank business models and/or risk profiles for banks that are active in this space.”
Read more: Why – and How – Fifth Third is Getting Serious about Crypto and Stablecoins
Is the Capital One/Discover Deal a Blueprint for Trump M&A Policies?
The acquisition of Discover by Capital One, set for consummation on May 18, represents a bellwether for Trump financial M&A policy, according to Wolfe. “We took the view that this administration will be more laissez-faire as it relates to bank M&A.” (Sen. Elizabeth Warren was continuing to challenge the merger as this article was published, her latest sally an attempt to get the Justice Department to intervene.)
Wolfe says the deal will create an even bigger powerhouse in cards and payments and that Capital One could reinvigorate Discover’s network operations.
Something to watch for is whether the administration’s policy will be tested by a proposed deal like the merger of two big regional banks. “That would be an interesting test,” says Wolfe.
Fitch expects to see more small deals proposed now that the regulators seem to have signaled, through regulatory moves, that they are willing to expedite things.
Smaller deals were happening during the Biden years, says Wolfe, but they were taking much longer to make it through the process than had formerly been the case. He explains that while a proposed merger or acquisition languishes with regulators, the economics of the deal can deteriorate.
One wild card in the mix is that the new administration is not only open to more industry consolidation, the report says, but also to new entrants. This includes granting new national bank charters but also, potentially, more involvement by nonbank firms. Already interest has renewed in nonbank firms’ applying for industrial bank charters, which are issued by states but insured by the FDIC.
Read more: Why the Capital One/Discover Deal Is About Much More Than Payments
Keeping an Eye on Capital Policy Developments
Bank capital is always contemplated in a sort of tension, Wolfe says. The bigger the cushion, the more losses can be absorbed. Creditors — who rely on ratings such as Fitch’s — favor big lumps of capital. Shareholders like things trimmer, he says, because it improves their returns.
Fitch is watching the outcome of continuing debate over the “Basel III Endgame” capital framework. Major banks impacted by this proposal have given a lot of resistance. “Then the Federal Reserve started to walk back where they were going with it and seemed to be inclined to water it down significantly,” says Wolfe. Then the election took place and “this administration isn’t in a mood to put out new regulations.”
“So where does that leave us?” says Wolfe. “The answer is, we don’t know. Nobody quite knows.”
He says the “path of least resistance” would be to propose the capital rule in a way that effectively doesn’t change the current requirements. He says it remains to be seen how Trump regulators view the concept of risk-based capital standards versus the traditional “leverage” approach to capital, which does not account for differing risk levels among various bank activities and assets.
To the extent that a final outcome doesn’t shift the status quo, Wolfe says, Fitch won’t change its view on industry capital levels. That is, Fitch sees U.S. banks generally, and notably “GSIBs” as pretty well capitalized overall. Regional banks have beefed up capital too, in Fitch’s view. (GISB stands for “Global Systemically Important Bank.”)
However, he adds, to the degree that a policy change gives banks the opportunity to bring capital ratios down, and they do so, “that could take away some of their ‘headroom,’ as we call it — and that could put pressure on ratings.”
How that will proceed hinges on the regulators and banks’ reaction to what they do. Narron points out that the initial proposals had already had some effect.
“Banks have really tried to ramp up their capital in advance, even though there was going to be a three-year phase-in,” he says. Fitch didn’t give the industry credit for that in its ratings, he says, but probably wouldn’t penalize it on the way down — an exception being specific cases.
