The Regulatory Horizon for Finance
Deregulation sits high on the White House agenda. Finance is included, though the authorities mention it less often than other industries. Still, in just a few short weeks since the inauguration, the new administration has managed to shut down the Consumer Finance Protection Bureau (CFPB). And though other aspects of the financial regulatory structure have avoided this kind of drama, changes lie ahead for the Office of Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC),Federal Deposit Insurance Corporation (FDIC), and even though Trump has less control, for the Federal Reserve (Fed). Mergers of bureaus and agencies will make headlines, but more important for financial firms are the priorities of the regulators, however they are grouped and organized. In some cases, these regulatory priorities will change. In others, they will remain unchanged from the recent past. In addition to anything the Trump administration has planned, this year will also see the regulatory repercussions of last year’s Supreme Court decisions, most notably the end of what has been called “Chevron deference.”
The Shutdown of the CFPB
The CFPB was Trump’s easiest target. It was the brainchild of Senator Elizabeth Warren who fought to get it into the Dodd-Frank financial reform legislation that Congress rolled out after the 2008 financial crisis. It focused mainly on the retail side of finance, especially mortgages and credit cards. At its start, it raised considerable pushback from the financial industry. The bureau ruffled feathers pressing credit card lenders on interest rates and time intervals before lenders could impose penalties. It also frustrated lenders by insisting that credit scores can no longer consider medical debt. But after mortgage lenders worked with the bureau to standardize rules for transparency and other procedures much of the acrimony moderated.
Though some of the CFPB leadership engaged in bellicose rhetoric and irritated industry leaders, neither Trump nor his associates have voiced much objection to the bureau’s activities. The shutdown probably occurred less from anything the bureau was doing and more from an effort to streamline the government interface with finance. No doubt Trump also enjoyed stepping on the product of one of his harshest critics. Mostly, however, it happened because it was easy. Warren inadvertently set things up that way. In order to keep her “child” independent of the White House and the fraught process of congressional appropriations, Warren insisted that the bureau draw financing from the Federal Reserve and that the CFPB director alone can determine the size of that draw. Because the CFPB is a product of Congress, Trump could not simply close it, but the financing arrangements allowed his acting director, Treasury Secretary Scott Bessent, to decline any money from the Fed for the new year and effectively shutter the bureau.
Licensing, Mergers, and Acquisitions
Beyond the strange saga of the CFPB, the area where the White House seems most likely to make change is to ease strictures on licensing and on mergers and acquisitions. Expect more de novo bank formation, especially community banks. Such activity will likely get another boost from Fed Governor Michelle Bowman, who is front runner at the Fed to replace Michael Barr as vice chair for supervision. She is an ardent supporter of community banking. The likelihood is that more community banks will form than in the recent past, which should allow for the growth in the issuance of small and medium-sized business loans. The easier attitude toward M&A should allow some consolidation among small- and medium-sized banks as well as more purchases of fintech by banks and banks by fintech.
Basel III and Other Regulatory Priorities
The White House has exhibited some skepticism about upcoming rules on bank capital and liquidity requirements from the Bank for International Settlements, the so-called Basel III rules. For this reason, it seems unlikely that American regulators will embrace the new rules whole, as they have done in the past. Trump may yet change his mind, but a reserved American posture toward Basel now seems most likely. Nonetheless, whatever Basel puts out will have some effect, even if only informal. Even as the White House remains coy on Basel III, it is unlikely to interfere with the continued pursuit of long-recognized regulatory priorities, such as steps on cybersecurity, data protection, AI applications, third-party oversight, and bank resilience, including stress testing. Though these efforts stem from decisions made in the past administration, they come as a needed response to real world developments and will get little political pushback – and may even get encouragement – from the Trump administration.
The Role of the FDIC in Financial Regulation
Despite the sordid legacy of outgoing FDIC Chairman Marty Gruenberg, its rule makers are pretty much bound into regulatory commitments. One is the bank failure resolution planning guidelines. Another is rules on asset diversification. These priorities stem from the near failure of some medium-sized banks in 2023 and more recent problems with record keeping. Since these are widely considered essential steps, these efforts will remain in place even if the FDIC, as rumored, is merged with another regulatory bureau or agency. Other projects that should continue will include efforts to set corporate governance guidelines and rules on brokered deposits as well as third-party, for-benefit-of accounts. Rather than interfere with these efforts, the White House is more likely to pressure rule-makers on easing standards on mergers.
The Supreme Court’s Influence on Regulation
Perhaps even more than the Trump White House, recent Supreme Court decisions will have increasing influence in the regulatory sphere. Last year, the court settled several relevant cases, but the reversal of Chevron deference is the most significant. In the 1984 Chevron case, the court decided that judges, whatever their interpretation of the law, had to defer to the expertise of federal regulators. This gave regulators wide authority to interpret laws passed by Congress and even extend them. In last year’s so-called Loper decision, the court revered this earlier Chevron finding, severely curtailing the freedoms formerly enjoyed by regulators. Though applicable to all regulatory structures – the Environmental Protection Agency, the Transportation Department, etc. – this Loper decision will instill a certain conservatism in all rule making, including in finance. More than that, the new legal environment should encourage more communication and even collaboration between financial institutions and regulators. Such practices would constitute a huge change from the past.
The Risk of Regulatory Divergence
However the Trump agenda and this new legal milieu work out this year and beyond, the new direction, especially in the near term, risks what those close to the situation refer to as “regulatory divergence.” Several states, in response to their own political biases and experiences with financial problems, have their own regulatory priorities, many of which could stand in opposition to the new federal regulatory regime. Nor is it apparent that such contradictions will occur more in blue than in red states. Financial institutions then may find themselves facing contradictory rules. There are legal remedies to such problems, but these take time, and in the interim, financial firms will face uncomfortable vulnerabilities. This potential threat and the risk that all could change after the 2026 mid-term elections, should induce financial actors to move as quickly as possible to front run, so to speak, any regulatory changes, especially with acquisitions and mergers and well as de novo establishments.
