The US has elected Joe Biden, a Democrat, to the White House — a development loaded with implications for the country’s big banks in terms of taxation and regulation.
What is happening?
On November 3, the US voted to put a Democrat in the White House. Joe Biden, the president-elect, has different ideas to the current Republican administration run by Donald Trump.
Rather than trying to push economic growth to the max and “make America great again”, Mr Biden’s focus will be on environmental and social issues.
The biggest impact on banks under Mr Trump was around taxation as, in the end, he did not do that “big number” on Dodd-Frank that he promised at the beginning of his term. Mr Trump cut corporate taxes from 35% to 21%. Taxation could also be one of the biggest impacts on banks under Mr Biden as he wants to raise the rate to 28%. This could wipe billions of dollars off the market caps of the big banks as they tend to pay the full rate of tax.
Many Democrats also favour a financial transaction tax, which could reduce trading volumes and profits from capital markets activities.
How far the Democrats go with their policies will depend on securing a majority in the Senate, as its consent is crucial for passing key legislation.
But even without a Senate majority, there is still a lot the Democrats can do in the area of regulation.
Why is it happening?
Many Democrats feel that the Trump administration was too lenient on banks and, regardless of a Senate majority, regulation is likely to be toughened if not at a legislative level then certainly at a supervisor level.
US supervisors have considerable scope to interpret the regulatory framework. Once Democrat agency chiefs are appointed, they can use stress tests to influence bank capital levels and even their lending priorities, such as towards supporting ‘greener’ projects or projects with a strong ‘social’ dimension to them. That also likely means bigger capital buffers.
International bodies, such as the Basel Committee on Banking Supervision and the Financial Stability Board, will also give the Democrats scope to influence international regulatory frameworks that would be imported into the US. It is possible there will be a ‘greening’ of Basel IV.
Examples of two big regulatory pieces that could receive regulatory attention are the fiendishly complex Volcker Rule, banning banks from some proprietary trading activities, and the leverage ratio. The former had some simplifications under the Republican-led agencies, which could be reversed, although some believe that unlikely.
The Republicans also made tweaks to the leverage ratio. The enhanced supplementary leverage ratio for big banks was lowered from 6% to 5%. And they came up with a Covid-related revision that temporarily allowed US Treasury reserves held at the Federal Reserve to be excluded from the leverage ratio. The former could be reversed as the Democrats criticised the move and, while there was some expectation that the latter measure could become permanent, that is now unlikely.
Meanwhile, the Fed pursued a supervisory approach based on transparency and rule of law, which gave banks greater clarity. Some Democrats think this gives the banks too much leeway to game the rules and, therefore, may rethink this approach to keep banks ‘on their toes’.
What do the bankers say?
Many US bankers were probably quietly hoping for a Trump win. However, the Biden victory is not all bad news for them. Firstly, the banks are playing a key role in supporting the economy. Secondly, hitting the banks is not a top priority for him as the Democrats did not set out detailed policies on financial regulation in their manifesto. Thirdly, any changes will take time. Instead, Mr Biden will prioritise digging the country out of the Covid-induced economic quagmire. Issues such as the green deal and healthcare are also top priorities.
These policies may even create opportunities. European bankers have enthusiastically embraced the business opportunities promised by the European Green Deal, for example.
Will it provide the incentives?
There is always a danger that political priorities overly influence sound prudential regulation, nudging banks towards making potentially unsound loans to fulfil a social agenda. At this stage there is no evidence that this will happen.
More important to banks than eventual tax rates or regulatory interpretations is whether the Democrats can spur a full economic recovery (and maybe higher interest rates). In the long run, that will be crucial to the resilience of the big banks and their profits. As a strategist for former Democrat president Bill Clinton said back in the early 1990s: “It’s the economy, stupid.”
