This post offers a few initial thoughts on areas to watch in U.S. bank regulation during the second Trump administration. As always with these posts, there is no claim that these are necessarily the most important topics. In fact, some topics covered in this post, if we are being honest, probably are not very important at all, and several other topics of at least equal importance will be mentioned only in a footnote.1
My baseline assumption for purposes of this post is that Federal Reserve Chair Powell and Vice Chair for Supervision Barr will remain in their roles through at least the end of their current terms, while Trump-appointed regulators will be installed at the OCC, FDIC and CFPB.2
1. Is Basel Endgame Dead?
A Reuters story last Thursday quotes Gene Ludwig, Comptroller of the Currency from 1993-1998, as saying that “The Basel endgame rule could be completely dead.” On Substack Peter Conti-Brown offers a similar prediction: “Basel III is likely dead, to be replaced by nothing.”
Comptroller Ludwig and Professor Conti-Brown each know more about bank regulation than the author of this blog, but in this case I don’t think abandoning Basel entirely is the most likely outcome. Or, to offer a more falsifiable prediction, I expect that, at some point in the next eighteen months, the U.S. federal banking regulators will finalize changes to their current capital rules, and these changes will be mostly consistent with the updates to the internationally agreed Basel Framework that jurisdictions are meant to be implementing.
Obviously “mostly consistent” is doing a lot of work in the previous sentence, and I concede that there is a point where the deviations become so extensive that one could say that the United States no longer truly follows the spirit or letter of what is agreed in Basel. Maybe that will wind up being the case, but for now I would be cautious about establishing a baseline that anything less than a provision-for-provision implementation of the current Basel standards in the United States means the Basel Framework has been abandoned and left for dead.
For one thing, if that is the baseline I am not sure the Basel Framework was ever alive in the first place. The U.S. capital rules adopted in 2013 were not entirely faithful in their implementation of the Basel standards as they stood at that time, and the U.S. banking agencies’ 2023 proposed implementation of the Basel Endgame changes also deviated from the Basel standards in several areas.3
I also come back to the fact that as recently as June 2021 senior Federal Reserve staff were explicitly saying that their aim with the Basel Endgame changes was capital neutrality.4
The US Federal Reserve will try to finalize the last phase of the Basel III capital reforms by January 2023 with new requirements to be calibrated for “capital neutrality” across the entire US banking system, a Fed official said.
“If we can’t find the right dials to turn inside the Basel III end-game risk-based reforms we’ll look at other parts of the capital framework” to ensure that it’s “no more stringent than the capital framework we had before,” Fed General Counsel Mark Van Der Weide said at a webinar* yesterday.
He added: “If we need to tweak the GSIB capital surcharge, if we need to tweak the stress capital buffer, that will be on the table.”
The Federal Reserve Board’s plans later changed, and then changed again after that. One can reasonably prefer one of those later plans over a capital neutral approach, but if the agencies had in 2023 proposed something like what Mr. Van Der Weide described in 2021, would the argument have been that the Basel Framework had been rendered dead? I think very few people would have been making that argument, and I think the same should hold true if in 2025 or 2026 something closer to capital neutrality is ultimately where things wind up.
2. The “Broad Support” Standard
Federal Reserve Chair Powell has placed a clear emphasis on the Federal Reserve Board’s positioning as a consensus-driven organization. To this end, Chair Powell at a November 2023 FOMC press conference said he expected the final Basel Endgame package to have “broad support” on the Board of Governors.
Chair Powell took care to leave ambiguity about what this standard means. From that November 2023 press conference:
VICTORIA GUIDA. So does broad support mean more support than the proposal had?
CHAIR POWELL. It means broad support.
And then again at a Senate hearing in July 2024, as described by the American Banker:
“Broad support, empirically, would mean a good solid vote on the Fed board. I've tried not to be specific about what that means,” he said.
Chair Powell at that same Senate hearing then also added another factor, saying that he would regard a final Basel Endgame rule as broadly supported only if it had garnered “broad support among the broader community of commenters on all sides.”
It was never totally clear what this broad support standard was going to mean for Chair Powell in practice had Vice President Harris won the election and had bank regulation continued on its 2022-2024 path. It is even less clear what the standard will mean, or how relevant it will be, for Chair Powell now.
A related question: President Biden’s appointees on the Board of Governors (other than Chair Powell and Vice Chair for Supervision Barr, of course) have generally commented little, if at all, on bank regulatory developments.5 Will that change?
3. Tailoring
Last time President Trump was in the White House and Republicans controlled Congress, they with some bipartisan support enacted the EGRRCPA (also known as S. 2155). That law, among other things, amended Section 165 of the Dodd-Frank Act to provide that the Federal Reserve Board when adopting certain prudential regulatory requirements for bank holding companies with $250 billion or more in total assets “shall” tailor the application of those requirements, either individually or by categories of banks, based on complexity, activities, size and other risk-related factors.
Section 165, as amended, also provides the Board with the authority to apply enhanced prudential standards to companies with between $100 billion and $250 billion in total assets. But to do so the Board must first determine that application of the standard is appropriate and then when applying the standard must tailor its application based on risk-related factors.
The rules to which the statutory tailoring requirements apply have been subject to debate. Bank and trade group commenters on both the Basel Endgame proposal and the long-term debt proposal argued that Section 165’s tailoring mandate applies to these rules, and that the Board had failed to comply with this mandate.6 Other commenters argued that, first, Section 165 does not apply to these rules and second, even if Section 165 does apply, the Board has complied with Section 165’s requirements because the proposed rules would still, to some extent, apply at different level of stringency for firms of different sizes or categories.
The Federal Reserve Board, for its part, has been reluctant in its proposed or final rules to stake out a position on the scope of Section 165 and the regulatory requirements to which it does or does not apply.
It was a little surprising, then, when Chair Powell at a Senate hearing this July said that Section 165 “applies to everything.”
Senator Britt: Chair Powell, I have repeatedly talked about my concern with the long-term debt proposal and just think that it has not been well thought through. First, I have concerns that it blatantly undermines the tailoring requirement. And on that note, do you believe that 2155 will be applicable to the long-term debt requirement?
Chair Powell: I think it applies to everything. And on the long-term debt requirement, you know, we have voluminous comments that we’re looking at carefully and thinking through the process of what to do about them.
It is not much of a bold prediction to say that the rules adopted by the federal banking regulators in the second Trump administration will generally embrace a more tailored approach than was reflected in some of the proposals put forward over the last few years. But the more interesting question in terms of tailoring might be whether, in the course of adopting new capital, long-term debt or liquidity rules (just for example), the Federal Reserve Board will state clearly whether Section 165 applies to the rule in question.
If the Board were to formally take a position that Section 165 indeed “applies to everything,” or something close to that, this could make it more difficult for a different administration, down the line, to undo that tailoring.7
4. New Banks
In a speech earlier this year, Federal Reserve Governor Bowman stated she “continue[s] to be concerned about the decline in the number of banks in the U.S.,” and pointed to “several indications that there is an unmet demand for new bank creation.” Governor Bowman stated that “perhaps the most important factor that influences de novo bank formation is the regulatory and supervisory framework, which includes the application process and receipt of regulatory approval.”
I expect de novo bank formation to be an area of focus at the new-look OCC and FDIC, as well as in Congress, and there are probably helpful changes that could be made that would, on the margins, encourage more de novos. At the same time, as Governor Bowman also acknowledged in her speech, “[m]any factors influence the pursuit of de novo bank charters, including the interest rate environment, business opportunities, the intense competition for qualified bank management and staff, and potentially less onerous alternatives for financial services providers to operate outside of the regulated banking system.”
So, while very happy to be proven wrong on this point, I am not sure I would expect to see immediate meaningful changes in the number of applications to form new traditional full service banks.
What about other types of banks? Here there are a couple of areas where it will be interesting to see if applications pick back up.
Crypto National Trust Banks
In early 2021, the OCC conditionally approved the formation or conversion of three proposed national trust banks with a focus on digital asset activities: Anchorage Digital Bank, Protego Trust Bank and Paxos National Trust.
Anchorage Digital Bank opened for business as a national trust bank on January 19, 2021.8 Protego and Paxos were not as successful. The conditional approvals lingered out there for a while and ultimately for Protego and Paxos expired in 2023 after each bank failed to satisfy the OCC’s conditions for final approval.
The exact story behind why Protego and Paxos could not get over the line has never been clear, but the OCC’s actions or inactions in relation to these applications, as well a significant cooling of views at the agency toward crypto activities more generally, have led to a kind of strange situation where at present there is one and only one national trust bank with a focus on digital asset activities.9
For better or worse, the general posture of the federal financial regulators towards digital assets appears set to significantly change, and if this carries through to President Trump’s choice to head the OCC the national bank charter may again be an option that some crypto or crypto-adjacent firms choose to explore.
Industrial Banks
Although the FDIC approved a deposit insurance application from Thrivent Bank in June 2024, the FDIC under Chair Gruenberg has generally been skeptical of deposit insurance applications from industrial banks, with most applicants taking the hint and eventually withdrawing their applications.
The FDIC earlier this year proposed rules that would appear to make it even more difficult for certain industrial banks to secure deposit insurance; these proposals were supported by consumer groups and trade groups representing banks both small and large. It is not clear how the next FDIC Chair will approach the industrial bank issue.10 If a new-look FDIC is again open for business on applications, some commercial firms may try again.
Worth noting: Last month Ford and GM filed sharply critical comment letters in response to the 2024 FDIC proposal mentioned above. The tone of these letters suggests to me that both firms remain interested in the ILC charter, if regulatory conditions become more favorable.
5. The FDIC’s Resolution Activities
Will there be a concerted effort to reexamine certain of the FDIC’s practices in relation to resolving failed banks? Some aspects of this question are dictated by statute, and so would require Congressional action to change, but there are several other resolution-related areas where the FDIC has the ability to make changes, should it have the desire and capacity do so.
There are at least some signs that an FDIC under new leadership might take an interest in these topics. In the past few years, each of the Republican members of the FDIC’s Board of Directors have raised questions about how the FDIC conducts various aspects of its resolution activities.
For example, here’s Vice Chair Hill in July 2024 on how the FDIC funds receiverships:
Much like the bank failures last year raised questions about banks’ contingency funding plans (or lack thereof), so too did the failures raise similar questions about the FDIC’s. Bank failures can occur suddenly and involve significant short-term liquidity demands, particularly in the event of large bank failures, or a large number of bank failures. The FDIC faced such a situation last spring, when the failures of SVB and Signature (and subsequently, but to a lesser extent, First Republic) placed substantial liquidity demands on the FDIC. The FDIC initially met these demands through borrowings from the Federal Reserve, and did not pay off the borrowings in full until nearly nine months later. The unprecedented nature of these borrowings, and the substantial cost incurred, have raised a number of questions. […]
The FDIC has an obligation to minimize losses when resolving failed banks, and it is hard to argue we did that here.
Or here’s Director McKernan in August 2023 on the FDIC’s auction for First Republic.
While some nonbanks were admitted to the auction, the FDIC did not extend to nonbank bidders the same generous financing and loss-share terms that it offered to bank bidders. Denying nonbanks the chance to compete on a level playing field with banks potentially reduced competitive tension in the auction, resulted in lower prices for First Republic’s assets, and increased the ultimate cost to the Deposit Insurance Fund. Perhaps even more importantly, by in effect excluding nonbank bidders, the FDIC might have lost out on a very real opportunity to pair one of the regional-bank bidders that submitted a competitive bid for First Republic’s deposit franchise with a nonbank that would have acquired the remaining assets at a price greater than the FDIC’s estimated liquidation value, which could have resulted in a less costly bid to the Deposit Insurance Fund.
One thing to keep an eye out for on this subject is an upcoming report from the FDIC’s Office of Inspector General that has been pending for a while and is now, for whatever this is worth, at the top of the OIG’s list of ongoing work. According to the OIG, it is working to complete the following:11
Evaluation of the FDIC's Resolution of Large Banks
The objective is to assess the adequacy of the FDIC’s resolution readiness and response efforts for the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank, including the extent to which the FDIC adhered to established policies and procedures for key resolution functions.
I have no idea if this report is going to be headline-grabbing, a dry recitation of procedures that provides few new details and attracts little notice, or something in between. But if the OIG’s report does draw public attention and suggests areas for improvement, that could provide momentum for changes to the FDIC’s approach.
Other topics that probably deserve more attention but that will not get that attention in this post:
Liquidity Rules. Vice Chair for Supervision Barr, as well as Acting Comptroller Hsu, have each given several speeches on liquidity requirements and the changes they would like to see. My guess is the initiative as described by Vice Chair for Supervision Barr in September still moves forward in some form, but maybe without its most controversial elements, and perhaps by starting with an ANPR.
Long-Term Debt Rules. These rules were reportedly close to finalization (so much so that some were pressing the FDIC and OCC to adopt them without the Federal Reserve Board) but were awaiting an agreement on the Basel Endgame reproposal. My guess is that ultimately there will indeed be long-term debt rules that apply to large banks, but without the requirement to issue debt at both the holding company and bank level, and perhaps at a lower level of calibration compared to the proposal.
Bank M&A: In terms of outcomes, I agree with the general market reaction that large and mid-size bank M&A transactions are more likely to be approved. But honestly with a few very notable exceptions most large and mid-size bank M&A transactions were - eventually - approved during the Biden administration as well. Beyond outcomes, what I think will be more interesting is whether there are durable changes made to the process for bank M&A review, such as by establishing clearer rules or at least baseline expectations for when an application is deemed complete, and for when an agency must act on that completed application.
Supervision. The thorniest and probably most important topic of anything mentioned in this post, but also frustratingly the most difficult one to observe. Only tangentially related, the Board’s semi-annual Supervision and Regulation report is always kind of interesting for what it says (or doesn’t say) about the state of supervision. The Board met a few weeks ago to discuss the report, and it will likely be released sometime this month.
Potential changes to the CFPB’s approach to consumer protection regulation are beyond this blog’s area of expertise, but as recent events have shown a CFPB Director may, if so inclined, exert potentially significant influence over prudential regulation through his or her role as a director on the FDIC’s Board of Directors, and so is relevant to a number of topics discussed in this post.
The agencies stated in the 2023 proposal that, “Where appropriate, the proposal differs from the Basel III reforms to reflect, for example, specific characteristics of U.S. markets, requirements under U.S. generally accepted accounting principles (GAAP), practices of U.S. banking organizations, and U.S. legal requirements and policy objectives.”
Several, though not all, of these deviations were unfavorable to U.S. banks compared to the Basel standard. For example, relative to the international Basel framework, the 2023 U.S. proposal would have imposed higher risk weights for residential real estate and retail credit exposures. This was done, the agencies explained, not because the agencies believed the Basel Committee had gotten the new risk weights wrong, but rather because the agencies thought allowing large U.S. banks to use the new more sensitive Basel risk weights “could have created a competitive disadvantage for smaller [U.S.] firms” that would not be subject to Basel Endgame changes and so would continue to be subject to the existing U.S. capital rules.
The light green boxes in this Davis Polk memo provide a more detailed and technical overview of differences between the Basel Framework and the agencies’ 2023 proposal.
These comments from June 2021 came at a time when the Vice Chair for Supervision role was still held by Randal Quarles. But even after Vice Chair for Supervision Quarles resigned at the end of 2021, there were suggestions the Federal Reserve Board was still aiming for capital neutrality. For example, footnote 28 here quotes Mr. Van Der Weide as saying in January 2022 that that the Board was committed to adopting Basel Endgame changes “in a way that’s roughly capital neutral for the U.S. banking system.”
Vice Chair Jefferson and Governor Cook each commented at a relatively high level on the 2023 Basel Endgame proposal at the open Board meeting in July 2023 during which they voted on it, but haven’t addressed it in depth since then.
Governor Kugler was not yet on the Board of Governors when the Board voted on the 2023 proposal. Since then, Governor Kugler has met privately a couple of times with representatives from Better Markets, but this is part of the job and it is not clear you can extrapolate from that to conclude that Governor Kugler uniformly shares that group’s views on bank regulation.
See page 18 of this summary of comments prepared by Latham & Watkins.
In a better version of this post this footnote would say something wise about the demise of Chevron deference and whether that makes the scenario described above more likely, less likely or does not change things at all.
Although Anchorage Digital Bank was able to get in under in the wire and open for business, their experience since then with the OCC has been up and down. The bank has operated under a consent order since April 2022.
Anchorage has described itself as “the only federally-chartered bank not impacted by SAB 121 due to our status as an OCC-regulated, non-SEC reporting company.”
Vice Chair Hill released a statement on the FDIC’s proposal that acknowledged difficult questions raised by certain ILC applications, while calling for a thoughtful and deliberative approach.
In July 2024, a bank trade group wrote to the FDIC’s Inspector General requesting an investigation into certain FDIC actions taken in connection with the resolution of Silicon Valley Bank and Signature Bank, and in relation to the special assessment imposed thereafter. But just to be clear, the ongoing FDIC OIG evaluation discussed in the main text above was on the FDIC OIG’s agenda before this letter was sent, and so will not necessarily cover the same or similar topics.