The contrasting views of Republicans and Democrats on banking regulations could be one of the starkest differences in the upcoming U.S. presidential election: Republicans believe in a more laissez-faire approach while Democrats favor a tighter regulatory environment.

During President Biden’s term, many bank management teams have told us that the longer reviews by the Federal Trade Commission and other regulatory bodies have made for a difficult merger & acquisition (M&A) environment.

While the impacts from increased regulations are hard to measure and have impacted numerous industries, we believe the banking industry is disproportionately exposed to what happens in November. Under the Biden Administration, regulators have increased the magnitude and severity of their oversight. This has ranged from tougher capital rules under a strict interpretation of Basel III to rhetoric against bank M&A to limiting fees that banks can charge.

A universal complaint we’ve heard during our conversations with bank management teams is that regulators today are never satisfied with compliance and systems spending, always demanding more. This applies to the largest and smallest of banking institutions.

Implications for M&A activity

In a GOP administration, it is likely the “muzzle” will once again be placed on the regulators, resulting in a stagnation of new regulation. Over time, key regulatory positions will be replaced with “business- friendly” appointees, and we could even see a reversal of some regulation enacted under the current administration. Additionally, we expect a dramatic rebound in bank M&A under the GOP as antitrust rhetoric is rolled back.

As shown in the chart below, the M&A environment was more robust during former President Donald Trump’s term. We believe there is pent-up demand for deal making per conversations with managements, which could result in a wave of industry consolidation in future years. Consolidation would enhance the return profile of acquirers, while providing takeout premiums to shareholders of target banks. A more business-friendly administration should also aid loan demand and ensure a favorable tax environment, which disproportionately benefits domestic banks.

Source: S&P Capital IQ

Potential Catalyst for Commercial Loan Demand

While a GOP victory is a major tailwind for the banking industry, green shoots for the sector still exist if the Democrats retain control. At recent conferences, bankers have stated that their commercial client base has growing pent-up loan demand but remain on the sidelines pending clarity on the direction of Federal Reserve policy and the outcome of the election (with Fed Policy cited as the primary driver).

Getting past election uncertainty, in conjunction with a Fed that communicates easing inflation and lower rates, should lead to a rebound in loan demand. This environment would also lead to a welcomed easing of funding costs. The combination would aid net interest income under either administration. That said, a GOP presidency would be a “supercharger” for the engine of the banking sector.

We share our thoughts on other potentially material issues we’re watching this election year in the blog post, Election 2024: Part 1 - Parties, Policies, and Perspective.

For more insights, including our near-term outlook for the markets and economy, read our 2Q 2024 Commentary.