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.
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. PNC Financial’s recent $11.6 billion acquisition of BBVA’s US franchise and S&P Global’s $44 billion purchase of IHS Markit 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.