What would a Biden presidency mean for US banks? - Banking, Regulation & Risk -
joe biden

Rise in corporate tax rate could hit net income but spending plans might also drive growth and boost overall profits.

As the US presidential election enters the final straight, Democratic nominee Joe Biden holds a commanding poll lead over president Donald Trump, and many financial institutions are bracing for a likely change in administration following the November 3 vote.

A Biden victory, combined with the Democrats winning back control of the Senate, could see a big increase in taxation and federal spending, together with a shakeup of healthcare, regulatory and trade policy.

Mr Biden supports measures which, if enacted in full, would raise federal revenues and outlays by more than $4tn (or 10% relative to pre-pandemic levels), according to Capital Economics, and the burden of tax hikes are likely to fall on corporates and higher earners. Mr Trump in contrast has voiced support for further tax cuts.

One of Mr Biden’s flagship proposals is to raise the corporate tax rate to 28% from 21% (rolling back Mr Trump’s cut from 35%). The move could slash combined annual net income of the country’s 10 largest banks by more than $7bn, according to S&P Global Market Intelligence.

“Banks' tax bills more closely match the statutory tax rate than other industries, such as technology [which] means any increase in the corporate tax rate will have a more direct impact on earnings,” Zach Fox and Robert Clark of S&P Global Market Intelligence wrote in a recent report.

“This could affect banks' valuations especially in the opinion of investors who focus on price-to-earnings multiples.”

Other Biden policy proposals include introducing taxes on certain financial transactions, such as derivatives.  “[Such moves] frighten the banking sector because they generate profits from these transactions,” says Gregory Daco, chief US economist, Oxford Economics. “It could eat in to their revenues and profit margins.”

There is also support in the Democratic party for raising capital gains tax on the wealthy, which would also impact the banking sector and affect high-net-worth clients. The ability of the Biden administration to push through tax rises will, however, be curtailed if the Republicans retain control of the Senate.

Meanwhile, the Trump administration’s efforts to loosen the rules around the Dodd-Frank reform act that overhauled financial regulation after the global financial crisis a decade ago is likely to change under a Biden administration as it seeks to tighten enforcement.

‘Net positive’ overall

Increased regulation and higher taxes may present net negatives under a Biden administration, but Mr Daco emphasises that Oxford Economics’ analysis of Mr Biden’s budget blueprint points to a “net positive” effect on the overall economy.

“If some of Mr Biden’s spending plans are carried forward they would lead to stronger growth and a more profitable environment for everybody, including for the banking sector,” he says.

Proposals under consideration by the Democrats include a Green New Deal, a package of legislation that aims to address climate change and economic inequality.

Increased regulation and higher taxes may present net negatives… [but] Mr Biden’s budget blueprint points to a ‘net positive’ effect on the overall economy

Tim Adams, CEO of the Institute of International Finance, a global trade body representing the financial services sector, says the Green New Deal holds huge opportunities for banks.

“It’s a great opportunity for the financial sector to be the principal intermediation device in taking trillions of dollars and applying it to sectors that need retrofitting in order to meet Paris accord targets of zero emissions by 2050,” he says.

“Any node in the intermediation pipeline – such as banks as well as asset management firms and insurance companies – are going to benefit.”

Certainty and clarity

Mr Daco adds that one of the main restraints on economic activity under the Trump administration has been the instability in direction and uncertainty about the future.

“The financial services sector would rather know how things are going to evolve, one way or the other,” Mr Daco says.

“Businesses are resilient and can respond to a set of circumstances. But what they are generally not good at is adapting to a rapidly changing environment.

“Potential losses under a Biden administration in terms of increased regulation and an erosion of profits are therefore offset by greater clarity in terms of how policies will develop.

“It’s sometimes underplayed how important a good understanding between business and Congress is in creating a common goal of working towards a stronger economy.”

Mr Adams says the aggressive and nationalistic approach of the Trump administration has been extremely costly for the banking industry.

“The drift towards localisation [under Mr Trump] has led to a tremendous amount of fragmentation, which has made it more difficult to move capital between different jurisdictions, which is basically what the banking sector does,” he says.

“The more difficult the process of moving money around is, the more you constrain growth and increase inefficiencies. A Biden administration is likely to be much more internationalist in its approach and see the advantages of being able to move capital to where it's needed. A more global approach is good for the banking sector.”

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