Bankers’ ears perked up when Donald Trump promised massive regulatory rollbacks during his presidential campaign.
Nearly a year into his presidency, Trump has yet to completely axe the post-recession reforms that some in the industry feel strangled them under the Obama administration. His administration has, however, changed the way regulators go about enforcing those laws – and that is a major improvement in the eyes of many bank executives.
“The entire tone of our regulatory bodies has changed from punitive to collaborative,” said Jeff Marsico, executive vice president of Bethlehem-based bank consulting firm The Kafafian Group Inc.
The tonal shift is one of several changes that helped banks in 2017 and will likely continue to help them in the new year. Financial institutions also could face challenges in the near future as a result of technology-driven competition and long-term impacts from the recently approved tax reforms.
The Federal Reserve raised interest rates by a quarter of a percentage point Dec. 13, marking the third rate increase of 2017. It’s a sign, Fed officials say, that the U.S. economy is finally growing at a solid rate following years of near-zero interest rates after the recession.
Banks have reaped the rewards of a generally improved business climate as more companies feel comfortable starting big projects and taking out the big loans that go with them. Even before Trump took office, most institutions were seeing a significant upswing in earnings, with American banks reporting record-high profits in 2016.
That momentum continued in 2017, thanks in part, some believe, to the new presidential administration.
“After a decade of intense scrutiny by regulators globally, banks seem to be sensing some stabilization,” professional services firm Deloitte says in its 2018 industry outlook. “At least in the United States, new rulemaking appears to have abated. There are also signs of divergence among national regulators, who, after a period of unprecedented coordination following the financial crisis, appear to be pursuing paths suited to regional and national priorities.”
Banks are seeing relief not from massive dismantling of the post-recession Dodd-Frank Act, but rather in the form of small, technical changes to the ways regulators interpret guidelines put forth in those laws, Marsico said. Regulators, for example, have loosened the verification requirements for larger banks that need to prove they could survive an economic downturn, and they have been more open to letting community banks take reasonable risks.
“It’s an attitude,” Marsico said. “It’s just the application of existing law.”
Marsico expects this attitude to continue into 2018, especially as legislators on both sides of the aisle continue to support regulatory reforms specific to community banks.
Tech brings challenges, opportunities
Thanks to technology, banks might be able to cut some costs as they increase profits in the new year.
Marsico expects banks to increase automation of certain support-center processes over the next year. Artificial intelligence, for example, could handle some of the work that goes into processing loans, as well as tasks like verifying the authenticity of checks submitted through mobile deposit apps.
The up-front costs of these innovations could hurt bank budgets in the short-term. One study predicts banks throughout the world will increase their tech budgets by 4.1 percent in 2018. Not adopting new technologies, however, would cost more in the long run if institutions continue to pay people for tasks that could be handled by software, Marsico said.
Technology brings potential threats along with its rewards. Cybersecurity continues to be a top concern for banks’ risk managers, according to the Deloitte report.
Banks could also see more competition from fintech firms in the near future, Marsico said, especially as companies like payment processor Square and online lender SoFi look to enter the banking business.
Banks likely to win big after tax reform
Banks might have received one of their biggest Christmas presents in recent history this year in the form of tax reforms Trump signed into law Dec. 22.
Some of the country’s largest banks will likely see earnings increase by an average of 14 percent under the the new structure, which lowers the corporate tax rate from 35 to 21 percent, according to research by Goldman Sachs.
Small banks are cheering too. Independent Community Bankers of America, a national trade group, has praised the drop in corporate tax rate as well as other aspects of the reforms.
“Among its many pro-community bank provisions, the legislation would carve out small-business borrowers from limits on the deduction for business interest expenses, preserve laws on non-qualified deferred compensation and mortgage-servicing assets and largely maintain the mortgage interest deduction,” the organization said in a statement. “ICBA particularly appreciates the improvements to provisions on Subchapter S community banks and other pass-through businesses that lower the effective tax rate for these small businesses.”
Some economic forecasters have warned that these tax cuts come with caveats. The Federal Reserve said this month that it expects no long-term economic boosts from the reforms, and Deloitte cautions that budget deficits caused by unfunded cuts could create issues in bond markets.