The prospect of weaker regulation for the U.S. banking sector may be appealing in the short-term, but it poses higher risk over the long-term, Fitch Ratings says.
In a new report, the rating agency said that sweeping efforts to curb bank regulation in various areas — including consumer protection rollbacks, easing prudential regulation, and a friendlier stance on mergers and acquisitions — are neutral from a credit rating perspective in the short run, but that the risks these efforts entail increase over time.
The report points to a couple of key areas — watering down bank capital rules, and reducing regulatory independence — as particular concerns.
For instance, under the new U.S. regime, proposals to implement the final Basel III reforms, which would have raised banks’ capital requirements — and would have been positive for their credit ratings — are now expected to be “watered down or abandoned,” the report said.
“Regulatory capital regulation could see material changes and we would view an erosion of capital buffers in conjunction with higher risk appetite as negative for ratings,” it said.
At the same time, there’s been a push to enhance government oversight of the U.S. banking sector regulators. While streamlining regulation could reduce industry compliance costs, efforts to curb regulatory independence would be a negative, Fitch noted.
Simplifying the regulatory landscape may improve its efficacy, but Fitch said it would view “a structural and politicized change in the regulatory framework as negative for our U.S. operating environment assessment with potentially broad implications for bank ratings.
“… Increased political influence in regulatory decision-making may erode public trust in financial system oversight. It may also amplify the cycle of policy reversals with each incoming administration, hindering banks’ long-term planning efforts,” it said.
Crypto risks
Additionally, more specific reforms, such as rolling back consumer protections, and taking a friendly approach to banks’ involvement with crypto, could also raise other kinds of risks, the report suggested.
So, while easing the rules that cap bank fees may support revenues in the short term, significantly weaker consumer protections could also drive an increase in banks’ appetite for operational risk, and may raise banks’ reputational risk, Fitch said. It may view these sorts of shifts negatively, “on a case-by-case basis,” the rating agency noted.
Similarly, dropping enforcement of federal anti-bribery laws may reduce compliance costs, but also raises the risk that banks facilitate foreign corruption, which would also raise reputational costs, it said.
It also noted that “the administration’s tolerant stance toward digital currencies increases opportunities for bank-facilitated money laundering given these assets’ utility for criminals and the absence of legislation.”
Indeed, the greater tolerance for bank involvement in the crypto sector overall “raises risks to bank credit profiles, outweighing the potential benefits from financial innovation and growth,” the report said.
Tougher regulation protected banks from the fallout of the “crypto winter” of 2022, which saw asset prices plunge amid the collapse of several major players in the sector, the report noted.
“Absent legislative guardrails, regulatory standards and stronger industry oversight, Fitch may negatively reassess bank business models and/or risk profiles for banks that are active in the space,” it said.