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Newly elected US President Donald Trump attends a viewing of the launch of the sixth test flight of the SpaceX Starship rocket in Brownsville, Texas, US on November 19.Brandon Bell/Reuters
Newly elected US President Donald Trump could ease regulatory burden on the banking sector’s biggest lenders, but experts warn rising geopolitical tensions could offset some of the gains for Canadian and US banks in 2025.
Trump is expected to reduce regulatory requirements in the financial sector, particularly those on capital levels and the supervision of takeovers of banking deals implemented under President Joe Biden. But rising protectionism and a weaker Canadian economy could hinder a potential turnaround in the banking sector, which has faced rising sour loan provisions and tepid loan demand.
Under Mr. Biden, banking regulators proposed raising capital levels, which would require lenders to build up piles of excess cash as a buffer against souring loans. US banks launched a major opposition campaign, saying the change would hurt the economy and make the country’s banking sector less competitive compared to global peers.
The proposal follows mandates from Basel III, an international agreement signed after the 2008 financial crisis to help prevent bank failures.
“Changes in banking regulation, including further adjustment or reimplementation of the pending Basel III Endgame rules, could reduce or further delay final capital requirements for U.S. banks,” said John Mackerey, senior vice president of Morningstar DBRS and industry leader of the North -American financial institution. reviews, said in a note. “The M&A landscape for banks could also benefit from shorter approval times, which could accelerate consolidation.”
US regulators have already reversed the proposed capital increases, reducing the increase to 9 percent from 19 percent in September.
A further U.S. contraction or slowdown could prompt other countries to roll back their own rollouts of Basel III mandates. While Canada’s banking watchdog approved the regulatory changes, the Office of the Superintendent of Financial Institutions in July postponed the implementation of higher capital requirements for a year.
Victor Dodig, CEO of Canadian Imperial Bank of Commerce, said on a conference call in early December that banking regulations in the U.S. were likely to relax and that Canadian regulators would want to create a “level playing field.”
“You can read the tea leaves in the United States in terms of where things are likely to go,” Mr. Dodig said in response to a question from analysts while discussing fourth-quarter earnings results. “And I would like to think that we have an opportunity to continue to compete for business in our own economy, but also in the American economy.”
OSFI head Peter Routledge said the regulator is monitoring the policy environment in the US as Mr Trump prepares to take office in January, and could provide an updated assessment in its quarterly update in February or May.
“As far as what happens in the United States with the transition to a new administration, let’s just let that happen,” Mr. Routledge said during a mid-December conference call discussing bank capital requirements. “We are ready to adapt in a way that is constructive and healthy for Canada’s financial system.”
But looming tariffs threaten to offset a looser regulatory environment. Fitch Ratings expects banks’ profits to remain flat through 2025 amid weak loan demand and tumultuous corporate and investment banking activity due to potential trade disputes.
“The protectionist stance of the new US administration will create some instability in US-Canada relations,” Maria-Gabriella Khoury, senior managing director at Fitch Ratings, said in a note. “An increase in US protectionism will impact corporate lending.”
While Canadian banks would not be directly exposed to the impact of U.S. rates, they would face challenges through key sectors where lenders have direct credit risks, including manufacturing, transportation and natural resources, according to the Bank of Nova Scotia. analyst Meny Grauman.
“All banks would be heavily exposed to the economic fallout of a trade war between Canada and the US, although banks with a greater share of profits coming from (from) the United States, such as (Bank of Montreal) and (Toronto-Dominion Bank), would be relatively better insulated,” Mr. Grauman said in a note.
Bank CEOs largely say that while the threat of tariffs and rising global strife pose risks to the industry, easing inflation and borrowing costs will help boost economic activity and boost customer demand.
“While risks remain from still-restrictive interest rates, ongoing geopolitical tensions and potential trade protectionist measures, we are optimistic that central bank easing and expansionary fiscal policy will pave the way for relief for Canadian and US customers and will support a moderate recovery. in growth in both countries,” Darryl White, CEO of BMO, said during a conference call in early December. “This optimism is reflected in my recent conversations with customers.”