Donald Trump’s re-election is a result that will surely affect business and economic conditions both in the US and internationally. A key facet of the Republican’s campaign revolved around business-friendly policies, such as tax reductions and deregulation, notably in the energy and financial sectors. Trump aims to overturn some aspects of Basel III, making it easier for banks to engage in dealmaking, while also reducing capital requirements and allowing banks to appraise their own risk levels.
Regulatory relaxation and its potential impact on M&A
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The effects of these policy changes will be felt across the entire banking industry. First and foremost, regulatory relaxation will make it easier for banks to engage in M&A. This is likely to be most prevalent among national and larger regional banks, which wield substantial pools of capital. The direct result of this will be an increase in market concentration and a boost to the market shares of banks that have already captured a significant portion of the US population.
By itself, this may be of benefit to the US banking industry; indeed, according to GlobalData, the largest five banks in the US only control 24% of retail deposits, far below 55% in the UK and 78% in France. The US market leader, Bank of America, holds a lower share in current accounts, savings accounts, and mortgages compared to the leading banks in Japan, Germany, and China. While an increase in market concentration can threaten consumer welfare, the US market remains, at least on paper, more competitive than many other large economies around the world.
Basel III framework: potential risks
However, increased dealmaking power is not the only change anticipated under a second Trump administration. A key regulatory target is the Basel III framework, particularly its Liquidity Coverage Ratio (LCR) requirement, which mandates that internationally active banks hold enough high-quality assets to cover 100% of potential cash outflows during periods of stress. Industry lobbyists argue that this regulation creates unnecessarily high capital costs and restricts profit-making activity. Overturning this rule, especially with smaller regional or local banks, increases the risk of financial trouble in the future. A reduction in a bank’s LCR makes it less able to cope with periods of turbulence such as lower interest income or higher rates of non-performing loans. Many of the mergers are likely to be between large banks and smaller regional market actors, which could cause issues for the acquiring company’s capital adequacy and increase their overall risk profile.
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By GlobalDataResearch by GlobalData reveals that the US market already has the lowest average LCR among the top five global economies, suggesting further reductions could expose banks to heightened risk, particularly during economic downturns. Given that the Basel III standards were designed to prevent a repeat of the 2008 financial crisis, in which inadequate capital reserves led to cascading failures across the financial system, any reduction in these requirements may raise concerns about the long-term resilience of US banks.
Community Reinvestment Act amendment ahead?
Trump’s administration may also revise the Community Reinvestment Act (CRA), allowing banks to reduce investments in underserved communities. This shift could redirect capital toward shareholder returns or expansion but might reduce financial support in areas that rely on these investments, raising concerns about equitable access to banking services in less affluent regions.
The combined effects of increased market concentration, heightened risk exposure due to Basel III adjustments, and CRA modification raise questions as to the sustainability of the US banking industry. A smaller number of larger banks makes it far more difficult for the industry to absorb shocks, increasing the likelihood of a dominant competitor being seriously affected. Furthermore, as these banks grow larger, their activities become more deeply interconnected with other major financial organisations, creating a web where one bank’s actions cause drastic effects across the industry.
Jonathan Vaughan Burleigh is an Associate Analyst, Banking and Payments at GlobalData
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