(Yahoo! Finance) - US banks have a lot riding on the outcome of Election Day even if they’re not 100% sure how either candidate might treat their industry.
The "knee-jerk reaction," according to KBW analyst Chris McGratty, is that a Donald Trump victory will mean a return to looser regulation of banks and more leniency in approving the sort of corporate mergers that produce big profits for Wall Street giants.
A Kamala Harris win, on the other hand, may mean that a more aggressive period of overseeing the nation’s largest financial institutions under President Joe Biden will continue.
"In my investor conversations, it definitely feels like people are pricing in Trump," McGratty told Yahoo Finance. "So initially, if the election goes to Harris I would think banks would sell off," he added.
The country’s largest lenders have had a great year thanks to the economy's resilience during a period of elevated interest rates and a rebound in their investment banking and trading operations. The hope is next year could also turn out well, if lending and Wall Street dealmaking churn higher while interest rates fall.
An index tracking 24 of the largest domestically chartered US commercial banks (^BKX) is up 27% so far this year, outperforming the broader financial sector and major stock indexes.
Those other indexes for the financial sector (XLF), Nasdaq Composite (^IXIC), S&P 500 (^GSPC) are up 24%, 21% and 20%, respectively.
The consensus among industry observers is that a Trump White House might be more favorable for a run-up in financial stocks. After all, bank stocks rose 20% in the three months after Trump was elected in 2016.
But the challenge for bank executives as they assess the impact of a new president is that neither Trump nor Harris have said much about how they want Washington to oversee the biggest banks in the US.
So, instead, their track records have largely spoken for them.
The Trump administration of last decade delivered a big corporate tax cut, and it also rolled back some big bank rules that were imposed in the aftermath of the 2008 financial crisis.
Harris, on the other hand, has touted her clash with big banks when she was California’s attorney general as an example of her willingness to take on powerful interests.
Backing out of Basel III
One big unknown is what either administration would do with a new set of controversial capital rules proposed by top bank regulators that would require lenders to set aside greater buffers for future losses.
The requirements are based on an international set of capital requirements known as Basel III imposed in the decade following the 2008 financial crisis.
Banks have been fighting this US proposal for the last year in an aggressive public campaign and even dropped hints about suing regulators if they don’t get their way.
They won a big victory in September when some regulators said they would water down those requirements. But not all regulators appear to be on board with that plan, putting the final version in doubt.
Some in the industry expect regulators to scrap the proposal if Trump wins.
"If you're looking at how Trump views the world, I think you see less cooperation with international standard setters," Allen Puwalski, chief investment officer at Cybiont Capital, told Yahoo Finance.
“And I think you see the US back out of Basel III.”
And a Harris win means the proposal for bank capital increases likely won't "change that much," according to Ian Katz, a managing director at Capital Alpha Partners.
"If Harris wins, I expect regulators to sit down to reassess the proposal and try to move forward," he added.
But Katz is also quick to point out that even in a Trump win, a more friendly regulatory climate for the biggest lenders can't be assured, and it certainly won't be touted.
"You can't assume that every Republican these days is going to do favors for the largest banks," he added.
New regulators?
KBW predicts that on day one a Trump administration could make as much as eight leadership changes at federal regulatory agencies that oversee different corners of the financial services industry.
That includes the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB), the Securities and Exchange Commission, and potentially even the Federal Deposit Insurance Corporation if Biden nominee Christy Goldsmith Romero isn't confirmed by the end of the year.
New leaders would also take over the Justice Department and the Federal Trade Commission, which would likely make it easier for giant companies to merge without running afoul of antitrust concerns.
KBW expects significant change at the Federal Reserve in 2026, when the chairmanship of the Fed’s Jerome Powell ends.
What is perhaps even more relevant for the banking industry is that 2026 is also the end of a term for Michael Barr as vice chair of supervision. Barr is the architect of the new bank capital rules and one of the industry's chief antagonists.
The Washington Post has reported that bank executives and former Fed officials expect Trump to demote Barr, who was a Joe Biden appointee and a Treasury official during the Barack Obama era.
It is not known if Trump would have the legal power to make such a move, the Post reported.
Some big bank executives are clearly not fans of the current Biden-era regulators.
JPMorgan Chase (JPM) CEO Jamie Dimon this past week called a raft of regulatory proposals from his overseers "an onslaught," criticized CFPB director Rohit Chopra, and made it clear the industry is willing to push back on new rules in court.
"It's time to fight back," Dimon said while speaking at an American Bankers Association convention in New York City. "I've had it with this sh*t."
"We don't want to get involved in litigation just to make a point," he added, "but I think if you're in a knife fight, you'd better damn well bring a knife."
No matter which candidate takes the country’s top job, some bankers are convinced that the election will not define an industry full of institutions that have endured at least a century of change.
"We’ve done this through World Wars, money panics, depressions, the Texas meltdown of the 80s, great financial crisis, and COVID,” Phil Green, CEO of San Antonio-based Frost Bank, told Yahoo Finance. Frost is 156 years old.
"We're kind of like cockroaches in that way," he added. "We're going to still be here — at least that's our plan."
By David Hollerith - Senior Reporter
