One of the potential positive angles investors see when Trump won the Presidential election last year was some sort of a de-regulation. The market interpret that de-regulation is generally good for the market.
Last month, I put out a summary note of the conversation between Steve Eisman and the folks at Portales Partners. How Sturdy are the US Banks and Private Equity Going into the Next Recession?
The note shed light on how some of these de-regulation will play out.
I am still not sure if any of these are priced in or whether this will eventually be positive for equities, especially the group that people think that it will benefit. I guess if there are uncertainties, there is risk premium and therefore the potential reward is there.
In general:
- The first de-regulation will help more mergers and acquisitions gets approved. This means that if you are a company that appears attractive to others, you might get bought out. If you have more of this, it generally results in some attributable small-cap, mid-cap premiums being realized. (means better small cap or mid cap performance due to this).
- The second type of de-regulation involves bank de-regulation. There were many stringent regulatory rules put in place for the banks in the aftermath of the Global Financial Crisis. Some (likely the banks) argue they were overly stringent. The banks are in better shape today in that if a recession hits, they have enough capital such that they don’t have to fire-sale the assets on their balance sheet which normally kills them. There are certain benefits for this:
- Under the Dodd-Frank Act, banks with over US$100 million in assets face heightened regulatory scrutiny. There is a chance the threshold is raised to $250 million or eliminated. This would free up many regional banks from costly stress testing and capital planning requirements, allowing more capital to flow to lending and growth initiatives.
- Under the Volcker Rule, banks are limited from proprietary trading and certain investments in hedge funds/private equity. The de-regulation may alleviate this or for smaller banks that are under $10 or $50 billion from compliance. This will give the banks more flexibility.
- Under Basel III, there are capital conservation buffers such as liquidity coverage ratios to be maintained. Deregulation may optimize this better based on bank size. This would result in some bank segments to have larger lending capacity, and would improve their ROE
We have already seen some evidence of a more relaxed, lenient regulatory environment.
- Wells Fargo was placed under an asset cap by the Federal Reserve in February 2018 as a punishment for widespread consumer abuses, particularly stemming from the fake accounts scandal. Their assets were capped at $1.95 trillion. This means they cannot grow their balance sheet until Wells Fargo fixed its governance, risk management and compliance systems. As of June 3, 2025, the Fed officially lifted the asset cap after determining Wells had met its obligations under the 2018 consent order. Link
- The $35 billion merger between Capital One and Discover, announced Feb 2024, finally closed on May 18, 2025 after Fed and OCC approval.
- In April 2025, Columbia Banking System (parent of Umpqua Bank) announced a $2 billion all-stock merger with Pacific Premier Bancorp to create a Western U.S. regional bank powerhouse with approximately $70 billion in assets. The deal, expected to close in the second half of 2025, significantly expands Columbia’s presence in Southern California and accelerates its growth strategy by about a decade. The merger combines complementary strengths—Columbia’s treasury and wealth services with Pacific Premier’s niche in HOA banking and custodial trust services—and is projected to deliver mid-teens earnings accretion and $127 million in annual cost synergies. The transaction reflects a broader wave of regional bank consolidation amid a more deregulatory regulatory environment.
I think given how challenge they are trying to bring down the interest yields in the US so that they can refinance current matured US Treasury at lower rates, it is likely these to be pushed through. But I think more so, less regulation overheads may reduce costs and improve business profitability. This might drive the EPS group of the non-mega caps.
Here are maybe some other notes that you might wish to read about.
Trump administration prepares to ease big bank rules | 31 May 2025
- Scott Bessent: Reducing capital requirements is a “top priority” for federal banking agencies. And he said he’s expecting action on the issue “over the summer.”
- The capital rule under consideration would alter what is known as the supplementary leverage ratio — an additional safeguard that requires banks to maintain a minimum level of capital based on the total size of their assets. Bessent: “Pushing to have this supplementary leverage ratio either reduced or removed, and it will allow banks to buy more Treasuries,”
Significantly reducing regulatory burdens is the one of the most practical and impactful way the new admin can achieve its goals of both sparking disinflationary growth and reducing the deficit. | Bob Elliot | 14 Jan 2025
Reforming Leverage Ratios Is Critically Necessary | Dr Zhang Guowei | 27 May 2025
The Trump administration attempted to de-regulate during Trump’s first term but was largely unsuccessful but this time round, Scott Bessent views this as more important because reducing the supplementary leverage ratio (SLR) will allow the banks to freely trade Treasuries more, and this allows the banks to buy more Treasuries.
If foreign entities are not demanding as much USD and in turn treasuries, then someone needs to absorb more of them. If banks are able to, then this would be a way to bring the Treasury yield down so that they can refinance easier.
Here are some data charts that are related, mainly from Apollo:
Credit Card delinquency looks to be peaking, which is a good sign.
Residential mortgage delinquency looks low still.
The loan delinquency rate for commercial real estate looks low still. The delinquency at the top 100 largest banks looks to be peaking, not so for the rest of the banks.
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