10 minute read 9 Dec 2020
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Through the looking glass: how the election results will impact FIs

Authors
Peter Davis

EY Americas Financial Services Markets & Solutions Leader

Complex problem solver. Husband. Father. Volunteer. Avid world traveler.

Bridget Neill

EY Americas Vice Chair, Public Policy

Regulatory and policy strategist. Three decades in shaping public policy impacting global financial markets and accounting profession. Passionate about family. Outdoor sports enthusiast.

Marc Saidenberg

EY Financial Services Global Regulatory Network Co-Lead, Principal US Financial Services Consulting, Ernst & Young LLP

Financial services advisor. Facilitating active dialogue between industry and the public sector. Public speaker and thought leader. Husband and father.

Aaron Byrne

EY US Financial Services and Strategy and Transactions Principal

Expert in advancing the client's capital strategies and future vision. Adept in building strategy and executing M&A, divestiture, joint venture transactions and new entity stand-ups.

Michael Beaty

Partner, Financial Services, Ernst & Young LLP

EY US FSO tax partner serving the insurance industry. Interested in US tax policy and legislative developments. US tax reform thought leader. SSAP No. 101 publication coauthor.

10 minute read 9 Dec 2020

Financial services firms must monitor developments closely as Washington debates the ongoing support for a post-pandemic economic recovery.

In brief

  • In the near term, we do not expect financial services issues to be at the top of the Biden administration’s agenda.
  • Large FIs should expect renewed supervisory scrutiny of their growth strategies, while increases in consumer-protection regulation that could have medium- and longer-term implications for the M&A market.
  • The new administration’s priorities will challenge the financial services industry to demonstrate how it can aid the economic recovery and confront other societal challenges in a sustainable, consumer-focused manner.

The 2020 presidential election was marked by record turnout amid a global pandemic, a related recession and ongoing social justice issues. The first 100 days of the Biden administration almost certainly will be dominated by negotiations over the size and scope of another COVID-19-related economic stimulus package and other pandemic-related issues, such as vaccine production and distribution.

Against that backdrop, financial services industry issues may not be at the top of the president-elect’s immediate agenda. But the administration will recognize the important role of financial services in facilitating the economic recovery and improving social equality.

Biden’s broader legislative priorities, and his cabinet and regulatory agency appointments, will bring shifts in policy and emphasis that carry strategic implications for banks, insurers, and wealth and asset management firms.

We are monitoring three key areas — legislative and tax policies, regulatory appointments and M&A market reaction — for signs of how the new administration’s early moves will impact the financial services arena.

biden policy priorities

Tax policy

During the campaign, Biden proposed increasing taxes on corporations and wealthy individuals to pay for key policy initiatives. If Republicans control a majority of the Senate, most tax hikes likely will be blocked. However, if Democrats emerge from the Georgia runoff elections with a 50/50 Senate split, the tax policy landscape will change, but it will still be challenging to enact significant increases.

Regulatory changes

Cabinet and regulatory agency appointments likely will usher in a reversal of the deregulatory trend of the last four years. The largest FIs should plan now for increased supervisory scrutiny. Areas of emphasis under the Biden administration are expected to include financial inclusion and racial equity. Overall, we expect a more consumer-oriented approach, with a greater focus on climate change and sustainable finance.     

M&A market reaction

Financial markets have responded favorably to the election results and the expectation that no significant legislative changes — including those to corporate tax rates — will emerge from a divided government, preserving business-environment stability. But the M&A market has accelerated in anticipation of changes in the regulatory environment.

Future impact to financial services

In the months ahead, we expect the new administration’s policy approach to address two meta areas — society and business — each with important implications for financial services.

Socially, many Biden administration policies will focus on the individual and fairness, including COVID-19 policy, health care reform and social justice. Key areas of emphasis that could impact the industry include climate-related risk, social and corporate governance matters, consumer protection, and racial equity and financial inclusion.

FIs will need to find a balance that aids distressed customers and addresses a large backlog of potential foreclosures. We expect to see greater scrutiny of how lenders’ actions and strategies affect consumers and employees, not just shareholders.

The business-focused policies will begin with the economic recovery. Biden’s “Build Back Better” plan prioritizes job creation, infrastructure spending, domestic manufacturing and supply-chain resilience.¹ While negotiations with Congress may temper some of the president-elect’s priorities, there are a few areas of potential bipartisan agreement, including ongoing scrutiny of China, certain tech-related issues and consumer data privacy. The new administration also will push for an aggressive additional stimulus. Much like with the Paycheck Protection Plan (PPP) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, FIs could be expected to play an active role in supporting those efforts and should be prepared for heightened scrutiny of the disbursement process.

For the longer term, FIs will be asked to provide support for sustainable finance initiatives, as well as affordable housing and public-private investment in minority-owned businesses.

Impact to financial services M&A

The market has responded favorably to the election results, which will require the administration to negotiate legislative priorities with Congress.  While the market will closely monitor and react to the new administration’s early actions, for now the need for compromise on tax changes and other significant legislative initiatives bodes well for valuations of FIs and the future of the M&A market. In the EY US Election Pulse Strategy Survey of 500 US business leaders, 79% said they would be likely to accelerate M&A strategies, alliances and joint ventures if corporate tax rates increased.

Even before the COVID-19 pandemic, financial services markets were in a state of change. Low interest rates, investor growth demands, strong capital positions, competition from Big Tech and FinTech firms, and rapidly evolving customer preferences fueled by ongoing digital transformation had FIs seeking to accelerate their own evolutions through M&A. Morgan Stanley’s February deal for E-Trade Financial, which bolsters its digital capabilities, reach and scale, illustrates those dynamics.[2] PNC Financial’s recent $11.6 billion acquisition of BBVA’s US franchise[3] and S&P Global’s $44 billion purchase of IHS Markit[4] are two other recent examples.  

The pandemic and responses to it have accentuated and accelerated many of those forces and made M&A an even more attractive vehicle for achieving strategic growth objectives. Consumers have moved rapidly in recent months to embrace digital products and delivery, raising the sense of urgency to add those capabilities via acquisition.

What we expect:

  • In the short term, M&A volume will increase as large institutions race to complete deals ahead of potential changes in policy and regulation. Negotiations that are already in flight will be accelerated, with truncated processes and faster deal signings.
  • Moving forward, Biden’s regulatory agenda likely will lead to greater scrutiny of larger financial-institution deals. For example, we expect closer examinations of how deals will affect consumers and communities.

The bottom line: M&A activity will likely increase in the short term as FIs accelerate negotiations to stay a step ahead of potential changes to the tax and regulatory environments.

Impact to regulatory and supervisory priorities

The last four years have seen an easing of financial services regulation. That likely will be reversed under Biden, and the first signs of direction should emerge once new agency leaders are in place and begin to advance their regulatory, supervisory and enforcement agendas.

Several significant appointments could be made quickly, including those of Consumer Financial Protection Bureau (CFPB) director and Securities and Exchange Commission (SEC) chairman, where Jay Clayton has announced plans to step down at year-end. Other key posts, including Comptroller of the Currency and Federal Reserve Board vice chairman, as well as two existing vacancies on the Fed board, will be filled in 2021.

We expect those appointees to spearhead a more active regulatory and enforcement stance in six key areas. They include:

Oversight of the largest banks

Expect the pendulum to begin to swing back to greater scrutiny, especially for global systemically important banks and some large bank holding companies. We also may see more aggressive policy stances down the road, including the potential for additional constraints on the growth and complexity of the largest FIs.

Regulation of systemically important nonbanks

Look for a potentially greater emphasis on identifying and designating systemically important nonbank institutions and activities through the Financial Stability Oversight Council.

Emphasis on consumer protection and financial inclusion

The new CFPB director, in conjunction with other regulators, likely will pursue an agenda that emphasizes enforcement of consumer-protection regulations and identification of policies that promote financial inclusion. We expect to see the Federal Reserve and other federal financial regulators focus greater attention on the Community Reinvestment Act and increase the use of the disparate impact standard to evaluate lending practices. Broadly, how FIs interact with and treat consumers will receive closer scrutiny.

CARES Act implementation and public policy support 

Regulators likely will scrutinize the role of FIs in supporting government stimulus efforts, including the extension and forgiveness of PPP credit. They also will look at banks’ loan forbearance activities and insurers’ treatment of business-interruption coverage.

Sustainability and climate

In speeches, Federal Reserve governors already have acknowledged climate as a potential financial stability concern. Going forward, we expect to see a greater emphasis on institutions’ disclosures and capabilities around managing climate-change risk. Similarly, the SEC is likely to focus on fund disclosures around sustainability.

Housing finance reform

While much of the recent discussion around housing reform has centered on returning the government-sponsored enterprises to private ownership, Biden’s team likely will emphasize a broader set of policy initiatives to promote homeownership, such as increasing the availability of quality affordable housing.

The bottom line: while significant legislative changes are unlikely to occur, appointments at the cabinet and agency-head level will set new regulatory, supervisory and enforcement priorities that pull back on the easing seen under the Trump administration.

Impact to the tax agenda

Tax policy is the area most likely to be affected by potential legislative gridlock. Biden’s campaign tax plan included increasing the top corporate tax rate to 28% from 21%, adding a 15% minimum book tax for firms with $100 million or more in net income and doubling the tax rate on foreign earnings of multinational companies.¹ Significantly, it also proposed applying a financial risk fee on certain liabilities of large financial institutions.²

Candidate Biden also proposed returning the top marginal tax rate on wealthy individuals to 39.6% and taxing capital gains and dividends at an ordinary rate for those who earn more than $1 million.³ The proposed increases were intended to raise revenue for specific priorities, such as climate change, education and housing.

If Republicans retain a majority in the Senate, any proposed tax increases would need bipartisan support and could be easily blocked. If the Senate is evenly split, Democrats could pass tax legislation without bipartisan support and avoid a filibuster by using the budget reconciliation process. Even then, however, achieving unanimity among Democrats could prove challenging.

Overall, the likelihood for substantial and immediate tax increases on corporations and wealthy individuals appears low. For now, financial firms should move forward with traditional year-end federal tax planning strategies, including CARES Act provisions, under the assumption that little will change in the near term.

While early federal tax changes are unlikely, FIs will need to monitor state and local taxes closely. Many jurisdictions are facing large deficits due to the COVID-19 pandemic and are required to balance their budgets. Addressing those gaps likely will require a combination of expense reductions and additional revenue collections, which could result in additional state tax liabilities for financial firms.

  • Show references#Hide references

    [1] “Build Back Better: Joe Biden’s Jobs and Economic Recovery Plan For Working Families,” Biden For President website, https://joebiden.com/build-back-better/, accessed 4 December 2020.

Summary

New presidential administrations always present opportunities and challenges. Financial institutions should prepare for change and actively engage.

About this article

Authors
Peter Davis

EY Americas Financial Services Markets & Solutions Leader

Complex problem solver. Husband. Father. Volunteer. Avid world traveler.

Bridget Neill

EY Americas Vice Chair, Public Policy

Regulatory and policy strategist. Three decades in shaping public policy impacting global financial markets and accounting profession. Passionate about family. Outdoor sports enthusiast.

Marc Saidenberg

EY Financial Services Global Regulatory Network Co-Lead, Principal US Financial Services Consulting, Ernst & Young LLP

Financial services advisor. Facilitating active dialogue between industry and the public sector. Public speaker and thought leader. Husband and father.

Aaron Byrne

EY US Financial Services and Strategy and Transactions Principal

Expert in advancing the client's capital strategies and future vision. Adept in building strategy and executing M&A, divestiture, joint venture transactions and new entity stand-ups.

Michael Beaty

Partner, Financial Services, Ernst & Young LLP

EY US FSO tax partner serving the insurance industry. Interested in US tax policy and legislative developments. US tax reform thought leader. SSAP No. 101 publication coauthor.