The Effect of the Election on Community Banking


rp-1Well, the election is over. And the United States is about to have a new President.

A lot of time, energy and horsepower is being spent on what will or will not happen to the financial markets now that the election is over.

It does seem that it may make more sense to talk about what will not change, in the short term for consumers and financial institutions, especially smaller banks.

What Happens To Interest Rates?

First and foremost, the market environment which has been characterized by low interest rates, will not change dramatically in the short term.  Yes, interest rates will begin to increase, but as the Federal Reserve Bank of New York chief commented in a recent talk, “a quarter point either way is not a big deal.”
The new President’s comments regarding the Fed’s low rate policies have stoked speculation that his election may impact the policies of the Federal Reserve.  Even if the President were to appoints a new Fed chair or new governors, very little would be expected to change.
While the Fed can change benchmarks like the interest paid on bank reserves and the target rate for Fed funds, market interest rates are likely to remain relatively stable due to the huge amount of foreign capital enter the US market, keeping bond rates low.  While the demand for domestic credit is increasing, this capital continues to put pressure on bonds and interest rates.


The Staggering Cost Of Regulations … 

Despite the statements by the President elect that he will roll back regulations in many areas of the economy, the politics of reform are very different from those in the past.  The impact of Dodd Frank on banks has been staggering to the US economy. 

Legal and regulatory expenses are among the biggest burdens on banks and economic growth. “The roughly $275 billion in legal costs for banks since 2008 translates into more than $5 trillion in reduced lending capacity to the real economy.” Said Minouche Shafik, deputy governor of the Bank of England, at a conference in New York.

Not only will loan demand continue pressure on banks but it is possible that the political agenda of regulators offers the possible effect of further contracting credit for businesses and consumers.


1/3rd Excluded From Market … 

Thanks to Dodd Frank, roughly one third of Americans have been excluded from the markets for home mortgages due to new regulations imposed on the loan origination process.  

Dodd Frank, for example outlaw’s prepayment penalties on home mortgages, making loans to subprime borrowers uneconomical.  And rising operational and compliance costs are more difficult due to the Consumer Financial Protection Bureau.

So, what will happen to Dodd Frank and the Consumer Financial Protection Bureau (CFPB) under a Trump presidency?   Obviously, the market believes there will be some changes as the KBW-Nasdaq which tracks a basket of bank stocks, rose to its highest level in more than a year. But most money managers suggest that an outright repeal of Dodd Frank is unlikely.


A More Likely Approach … 

While Republicans control the House and Senate, Democrats hold enough seats in the upper chamber to block attempts to kill Dodd Frank.  A more likely effort will be changes to the CFPB with a new director being appointed.

But even there, there is risk for the administration.  While not loved by the financial services industry or congressional Republications, the CFPB has made a name for itself with the public by going after unpopular targets such as Wells Fargo.

“The CFPB is very popular with the public.” Stated Ed Mierzwinski of the US Public Interest Research Group.  

Attempting to weaken the CFPB could be problematic for a new President with other priorities.  And although expressing interest in loosening financial regulations, the President elect has not talked about the CFPB, payday lending rules or other specific issues.


Trench Warfare Is Unlikely … 

Instead of financial regulation, Dennis Kelleher, chief executive of Better Markets, expects Trump to focus on other priorities.

“This big infrastructure plan and probably tax relief are the two big pillars of his domestic policy.”

“He’s not going to want to get bogged down in trench warfare over Dodd Frank.”



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