Big banks are on a regulatory winning streak
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The incoming administration promises a lighter regulatory touch. For big banks, that era may have already begun — with an under-the-wire surprise from a top regulator as the latest indication.
Why it matters: Bank watchdogs wanted to implement tougher regulations on these institutions in 2024, a belated crackdown spurred by the regional bank crisis. But easier rules are on the horizon instead, possibly raising risks for America's financial system.
The big picture: Banks scored two wins near the end of 2024 on multiple regulatory fronts.
- A set of plans mandating banks to have a larger financial cushion in the event of a crisis was watered down, a victory for interest groups. (The proposal is on hold and ultimately might die — at least in its current form — under President-elect Trump.)
- Big banks have long called for changes to the Federal Reserve's stress tests, a regular checkup on the sector's health. Now officials will move to do just that in 2025 — even as bank lobbying groups sue their regulator to force compliance with those new plans.
Zoom in: Two days before Christmas, the Fed said it will soon propose "significant changes" to the stress testing process that help determine the extent to which banks can boost dividends or buyback stock.
- Among the proposals: Allowing the public — including the banks themselves — to weigh in on the hypothetical scenarios designed to test banks' balance sheets.
What they're saying: The proposal "intends to give the Wall Street banks the keys to the stress tests, almost certainly making them largely predictable, highly gameable, and very favorable," Dennis Kelleher, chief executive of Better Markets, a nonprofit that advocates for stricter financial regulation, said in a statement.
Yes, but: The Fed says these changes, which also includes the possibility of averaging stress test results over two years, are a result of the "evolving legal landscape" and "changes in the framework of administrative law" — likely a nod to a major Supreme Court decision curtailing agency power.
- "These proposed changes are not designed to materially affect overall capital requirements," the Fed said in a statement.
What to watch: The announcement came one day before the Chamber of Commerce and bank lobbying groups said they were suing the Fed over the stress test process.
- "Adopted in secret, it produces vacillating and unexplained requirements and restrictions on bank capital," according to the filing, which calls out the successful role public comments played in efforts to soften a previous regulatory proposal.
- In a statement, the groups called the Fed's announcement an "important first step," but said that the lawsuit filing "preserves legal options going forward.
The other side: Stress tests are meant to assess if banks had the wherewithal to keep lending during extreme, hypothetical economic backdrops.
- But the tests did not recently measure banks against an environment with rapidly rising interest rates, which helped spark the regional bank crisis nearly two years ago.
Allowing the public to weigh in might make stress test scenarios easier, but that is not a definite, Mark Calabria, a senior advisor and former director of financial regulation at the Cato Institute, tells Axios.
- "The assumptions are often not very stressful," says Calabria, who led the Federal Housing Finance Agency under Trump. "I see more public scrutiny here as a good thing."
The bottom line: The new Trump administration looks set to further ease up on financial regulations, adding to some wins notched during the Biden era.
