The Trump-Driven Regulatory Rollback and Its Impact on U.S. Banking Sector Valuation

The Trump administration’s aggressive deregulatory agenda, spanning 2017 to 2021 and reinforced by recent executive actions, has reshaped the U.S. banking sector’s valuation landscape. By rolling back components of the Dodd-Frank Act, easing Basel III requirements, and addressing “debanking” practices, regulators have created a lighter compliance environment. This shift has unlocked opportunities for banks to boost profitability but has also introduced risks tied to systemic stability and market fragmentation.

Valuation Metrics: A Mixed Picture

The sector’s price-to-earnings (P/E) ratio has climbed to 14.5x as of September 2025, surpassing its three-year average of 11.7x [4]. This suggests investor optimism about reduced regulatory drag, particularly for large banks. For instance, noninterest income as a percentage of average assets is projected to reach 1.5% in 2025, driven by higher fees from investment banking and asset management [5]. However, return on equity (ROE) for global systemically important banks (GSIBs) has declined from 18% in 2006 to 11% recently, reflecting lingering constraints from pre-2025 capital requirements [3].

Net interest margins (NIMs) have shown resilience, with community banks reporting a 3.46% NIM in Q1 2025, fueled by lower funding costs [3]. Yet, industry-wide NIMs remain at 3.25%, a modest gain, as banks grapple with high deposit costs and sluggish loan growth [5]. The efficiency ratio is expected to hover around 60% in 2025, balancing cost-cutting efforts with rising technology and compensation expenses [5].

Opportunities in a Lighter Regulatory Framework

Deregulation has reduced compliance burdens, enabling banks to allocate capital more freely. The re-proposal of Basel III Endgame could further ease capital requirements for institutions under $250 billion in assets, potentially boosting profitability [5]. Additionally, the 2025 executive order targeting debanking practices has spurred regulatory scrutiny of politically motivated service denials, creating a more level playing field for smaller banks [3].

The decline in enforcement actions—down 37% in H1 2025 compared to H1 2024—reflects a strategic shift toward selective oversight of high-profile misconduct [2]. This has allowed banks greater flexibility in managing compliance programs, though it raises concerns about eroded risk safeguards.

Risks and Systemic Challenges

Despite these gains, the deregulatory push has exposed vulnerabilities. Credit card and auto loan delinquencies are rising, while commercial real estate (CRE) markets, particularly office properties, face distress [5]. The 2023 collapses of Silicon Valley Bank and First Republic Bank underscore the risks of fragmented oversight, as delayed regulatory responses exacerbated crises [3].

Moreover, the interplay between banks and non-banks in markets like repo has heightened systemic risks [4]. While banks maintain robust capital ratios (7.15% average tangible common equity), the reduced emphasis on stringent supervision could amplify exposure to risky lending practices [4].

Looking Ahead: Balancing Growth and Stability

The Trump-driven regulatory rollback has created a dual-edged environment. Banks benefit from lower compliance costs and expanded revenue streams but must navigate credit risks and evolving market dynamics. The re-proposal of Basel III Endgame and potential rate hikes could further influence valuations, though outcomes depend on economic conditions and regulatory finalization.

Source:

[1] How Trump's Deregulation Push Means for Banks [https://www.rmahq.org/blogs/2025/what-trump-s-deregulation-push-means-for-banks/?gmssopc=1]
[2] US financial regulatory enforcement plummets under Trump [https://www.wolterskluwer.com/en/expert-insights/us-financial-regulatory-enforcement-plummets-under-trump-report-finds]
[3] U.S. Banks Industry Analysis [https://simplywall.st/markets/us/financials/banks]
[4] 2025 banking and capital markets outlook [https://www.deloitte.com/us/en/insights/industry/financial-services/financial-services-industry-outlooks/banking-industry-outlook.html]