Will Donald Trump and Steven Mnuchin Make Small and Medium-Sized Financial Institutions More Competitive?

Financial stocks of all sizes have propelled the stock market to new highs since Steven Mnuchin’s November 28, 2016 appearance on CNBC. In that appearance, Mnuchin made a vague pronouncement that he wants “to strip back parts of Dodd-Frank”, saying that the law is too complicated and restricts lending. Neither Trump nor Mnuchin, nor anyone else on their team, has outlined with any specificity how they plan in particular to adjust Dodd-Frank, the Volker Rule or other federal legislation governing the financial sector.

Dodd-Frank, which emerged from Congress as a response to the 2008-2009 financial crisis, has been particularly burdensome to smaller and midsized financial institutions. These institutions have borne extraordinary costs of compliance and been forced, as a result, to retreat from those activities where compliance is too costly. Regulatory requirements can be most efficiently met by institutions with large economies of scale. As a result, the irony of the entire governmental response to the financial crisis has been that it has only strengthened the competitive position of the mega-financial institutions that created the crisis in the first place.

So, yes, a peeling back will change the competitive landscape and empower smaller and medium sized financial institutions. This peeling back, however, is not going to happen overnight nor will it be done with a magic wand. It is not going to happen as a result of broad pronouncements either. Changes to the law are going to take time to be formulated by a Republican legislature and then to overcome the opposition of Democrats like Massachusetts Senator Elizabeth Warren.

As 2017 progresses, this removal of regulations will coincide with a steepening yield curve, enabling financial institutions to benefit from a time spread (lending on the long end and taking deposits on the short end).

In the end, consumers may be real beneficiaries of increased competition from small and medium sized banks.

Now more than ever, it makes sense to look more broadly at the products that are offered by financial institutions in your geographical area.

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