With the 2024 national election results now behind us, speculation turns to what the change in Presidential administration and likely Republican control of both the United States Senate and the House of Representatives may mean for community and regional banks in at least the coming two years. We briefly focus on two key areas that may change significantly beginning in 2025, including (i) the regulatory environment and (ii) merger and acquisition (M&A) activity.
Regulatory Environment
We believe financial institutions across the country have experienced a higher level of regulatory scrutiny and more rigid examination protocols over the last several years and, in particular, following the well-documented failures of a small group of high-profile banks in 2023. Illustrative of these enhanced regulatory guardrails is the open proposal by the Federal Deposit Insurance Corporation (FDIC) to establish guidelines for corporate governance and risk management for certain institutions with greater than $10 billion in assets, which we previously reviewed, as well as the joint statement issued by the FDIC, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board on banks’ arrangements with third parties to deliver bank services and products. While, in many cases, such guidance and regulations are intended to enhance the risk management structure utilized by many financial institutions, they typically come with substantial cost and risk of infraction, which can result in regulatory enforcement actions and lead to additional cost and regulation.
President-Elect Trump has signaled that his new administration will be focused on reducing the cost of regulation and enforcement activity across multiple industries. As his new team comes into place, coupled with the Supreme Court’s June 2024 overruling of the Chevron deference precedent, we forecast that many proposed regulations will either be rolled back in their entirety or scaled in a manner to provide more flexibility for financial institutions to conduct their business. In addition, we believe that the federal regulatory examination process will slowly migrate towards reduced formality associated with missteps identified in examinations (outside of capital, asset quality and liquidity concerns) and institutions will be subject to more “matters requiring attention,” rather than informal memorandums of understanding or formal consent orders.
Merger and Acquisition Activity
The rapid positive reaction in financial institution stocks following the election results bodes well for the prospect that banks will steadily grow in a more business-favorable environment. The effect of this on M&A activity cuts both ways—while larger banks may be more inclined to engage in M&A with smaller banks using their more valuable stock as currency, the stock of smaller banks has similarly risen, and management of smaller banks will perceive a better (i.e., less expensive) environment in the years ahead. Particularly, if the cost of regulatory compliance improves significantly for banks, the pool of potential targets for acquisition may actually decline, rather than increase.
With the recent repeal by the Department of Justice (DOJ) of the 1995 Bank Merger Guidelines and application of its 2023 Merger Guidelines to bank mergers (coupled with a banking addendum), the climate for antitrust review of bank merger activity (at least at the DOJ level) has recently changed. While we anticipate that President-Elect Trump will make significant changes to personnel at the DOJ, we believe some of the general principles for the new guidelines that focus less on deposit concentration and more on holistic review of a bank combination’s effect on a broader swath of financial service customers will continue. This could facilitate in-market bank mergers that would otherwise face regulatory hurdles and divestiture requirements.
Coupled with the recent DOJ guidance, the FDIC and OCC issued final regulatory actions on bank merger policy in September 2024. We generally perceived these guidelines as creating a more challenging climate for bank M&A activity. As an example, the FDIC’s final statement of policy on bank merger transactions (i) requires acquirers to demonstrate how a merger transaction will “better meet” the convenience and needs of a community following a business combination (i.e., 1+1=3) and (ii) presumes that the FDIC will hold public hearings for any transaction where the resultant institution will have more than $50 billion in assets.
With a new administration, we anticipate that regulatory agencies will be more inclined to rapidly approve bank merger transactions that otherwise would have raised red flags. This improvement will be manifested either by new policies or procedures adopted at the agency level or, more likely, a more permissive climate for the actual review and interpretation of existing policy as M&A transactions are approved more quickly and with fewer conditions.
Conclusion
The 2024 election promises a sea change in executive and legislative initiatives across the entire business landscape, and financial services is no exception. With an anticipated relaxation of the regulatory environment, management for regional and community banks has much to think about as they plan ahead.
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