Fed Oversight Under Trump: Navigating Regulatory Shifts in Banking

The Trump administration's aggressive push to redefine the role of federal regulators—including the Federal Reserve—has created a seismic shift in the financial sector's compliance landscape. While no single executive order explicitly altered the Federal Reserve's statutory authority, the broader deregulatory agenda and White House influence over regulatory priorities have reshaped banking risks and opportunities. For investors, this era offers a stark divide: institutions with political alignment may thrive, while others face rising compliance costs and regulatory uncertainty.

The Deregulatory Framework: What Changed?

President Trump's Executive Orders 13771 and 13777 set the stage for systemic regulatory reduction. The “two-for-one” rule (13771) required agencies to eliminate two regulations for each new one, while 13777 established regulatory reform task forces to identify burdensome rules. Though not Fed-specific, these orders indirectly pressured the Fed to streamline its oversight. Key outcomes included:
- Simplified Stress Testing: Smaller banks gained relief from complex Fed stress tests, reducing compliance costs.
- CRA Modernization: The Fed and OCC revised the Community Reinvestment Act to focus on tangible community investments, favoring banks with localized operations over national giants.
- Living Will Streamlining: Banks no longer had to resubmit entire resolution plans, cutting administrative overhead.

Sector-Specific Risks: The Cost of Non-Alignment

The Trump era highlighted how political alignment with regulatory priorities could skew competitive advantages:
1. Regional Banks vs. National Institutions:
- Winners: Regional lenders with strong local ties (e.g., Bank of the Ozarks (BOZ), First Horizon (FHN)) benefited from reduced compliance costs and CRA flexibility.
- Losers: Larger banks like JPMorgan (JPM) and Wells Fargo (WFC) faced scrutiny for “overreach” in complex products, even as their scale made them harder to align with deregulatory goals.

1. Shadow Banking and Fintech:
   Deregulation created openings for fintech firms and non-bank lenders (e.g., PayPal (PYPL)), which faced fewer Fed-imposed capital requirements. Traditional banks lacking digital agility were sidelined.

2. Geopolitical Exposure:
   Banks with heavy exposure to trade-reliant sectors (e.g., KeyCorp (KEY) in manufacturing) faced risks as Trump's Section 232 tariffs disrupted supply chains, indirectly straining their loan portfolios.

The Long Shadow of Fed Independence Erosion

While the Fed's monetary policy remained insulated (thanks to court rulings like Trump v. Wilcox), its regulatory functions became a political battleground. The Trump administration's push to subject Fed supervision to White House oversight created lasting instability:
- Policy Divergence: Monetary easing (e.g., 2020 rate cuts) contrasted with regulatory tightening in areas like consumer protection, confusing market expectations.
- Litigation Risks: Legal challenges to Fed rules (e.g., revisions to the Volcker Rule) introduced uncertainty for banks reliant on consistent guidance.

Investment Strategy: Navigate the Divide

1. Overweight Politically Aligned Banks:
   Prioritize institutions with strong regional footprints and ties to Republican policymakers. For example, Zions Bancorp (ZION), which lobbied for CRA reforms, outperformed peers during Trump's tenure.

2. Underweight Compliance-Heavy Firms:
   Avoid banks with complex, federally insured operations (e.g., Citigroup (C)) that face disproportionate scrutiny under shifting rules.

3. Monitor Fed-Administration Tensions:
   Track metrics like regulatory enforcement actions and bank exam failure rates to gauge Fed independence erosion. A sustained rise in enforcement could signal broader instability.

Conclusion: A New Era of Regulatory Volatility

The Trump years underscored that banking profitability is now as much a function of political alignment as of financial acumen. While deregulation created short-term gains, the erosion of Fed independence risks long-term market instability. Investors must balance opportunistic plays in politically favored banks with hedging against regulatory unpredictability. As the Fed's dual role as both monetary guardian and political pawn persists, the sector's winners will be those best positioned to navigate this fraught terrain.

Final Note: The Biden administration's revocation of Trump-era deregulation (e.g., EO 13771) adds another layer of uncertainty. Monitor policy reversals closely to adjust strategies.