By John Hintze
The most common descriptor of the Trump administration policy impact to date has to be “uncertainty,” affecting businesses across industry sectors. That includes banking, and while some recent and anticipated changes favor banks, the rapid pace of change should put institutions on risk alert.
Those risks vary from macro-level uncertainties, such as the direction of inflation, interest rates and geopolitical frictions, to more directly influential changes in regulations and executive-branch downsizing. The resulting uncertainty has fueled a perception of volatility, according to Todd Cuppia, who heads up Chatham Financial’s balance-sheet-management practice, that is likely to remain while national leadership is intent on upsetting the status quo.
“When visibility is low, banks try to keep tail risks in mind and interest-rate risk as close to neutral as they can, so they have the bandwidth to handle what could be coming down the pike,” Cuppia says.
In terms of their balance sheets, that means locking in funding costs, typically using pay-fixed interest-rate swaps. Cuppia says that ever since Silicon Valley Bank and other large regionals ran into trouble a few years ago, even community banks with only a few billion dollars in assets are using basic derivative instruments to hedge interest rate risk.
“Others are being more creative, using options in transactions like caps and collars so that they can be very targeted in the risk they’re trying to hedge,” Cuppia says.
He added that banks have recently taken advantage of the declining basis between the Treasury curve, over which they price assets and liabilities, and the swap curve used to price hedges, to purchase Treasuries matched with a pay-fixed swap.
“It’s a way to lock in favorable financing costs to fund a balance sheet while keeping the risk metrics close to home, because no one wants to be caught off guard when there’s volatility,” Cuppia explains.
Regulatory worries
Besides financial volatility, banks now confront rapidly unfolding regulatory risk. Among regulatory changes already or nearly inked, the House of Representatives and the Senate already approved — under the Congressional Review Act — the overturning of the Consumer Financial Protection Board’s rule finalized in December 2024 to limit overdraft fees. With the president signing it, regulators will be forbidden to write substantially similar regulation without the express permission of Congress.
Also eliminated is the CFPB’s credit-card late fee rule, which was finalized in March 2024 and reduced the fee to a maximum of $8. A federal judge ruled April 15 that the CFPB had overstepped its authority under the Credit Card Accountability, Responsibility and Disclosure Act, and the CFPB declined to challenge the decision.
The court ruling, says Stephanie Lyon, SVP for financial services content at Ncontracts, a provider of risk management and compliance software, illustrates how banks must broaden how they monitor for regulatory changes.
“Banks must stay informed about decisions regulators are making outside the regulatory process itself, including court decisions and legal filings,” Lyon says. “If you’re just looking at the exam manuals, you likely don’t have the most up-to-date information for what’s in play in the next four years.”
CRA redux
Regulations must otherwise go through the full regulatory process to be rescinded or revamped, and that process is anticipated to begin for several major rules. The prudential banking regulators announced March 28 their intent to rescind the rule to modernize the Community Reinvestment Act and to seek comment about reinstating the existing framework that was adopted in 1995. The new rule was finalized in October 2023 and was slated to take effect mostly at the start of next year.
“It was one of the most complex regulations I’ve seen and very challenging for banks to comply with to get the ratings they expected and effectively serve their communities,” says Peter Dugas, managing principal for Capco’s Center of Regulatory Intelligence.
Similarly, the CFPB has announced its intention to rescind and likely reissue its Section 1071 rule, requiring banks to collect and report information about their small business lending. ABA EVP Ginny O’Neill says a new rule would likely require banks to report only the original statute’s 13 data points rather than the new rule’s 81 data fields. Speaking at the ABA Washington Summit in April, Secretary of the Treasury Scott Bessent mentioned his interest in reducing community banks’ burden, including exempting them from some CFPB rules. In terms of Section 1071, ABA has pushed for increasing the rule’s application threshold of 100 small business loans over the past two years.
“They could go quite a bit higher — we’ve advocated for 500 and some have contemplated 2,500,” O’Neill says.
Just when regulators will start the process remains unclear. The CFPB said in an early April court filing that it has directed staff to initiate expeditiously new Section 1071 rulemaking, although that could be hindered by its plans announced around the same time to reduce staff by 90% (since paused by a federal judge). The FDIC has announced reducing its workforce by 20%, and the OCC is also shedding staff.
Avoid overcorrecting
Lyon says that the CFPB’s recently stated priorities include shifting the focus of its fair lending regulations away from reducing lending disparities, even though the notion of disparity has been upheld by the Supreme Court and is a bedrock of fair lending statutes. Until the relevant rules have been rescinded and the courts weigh in, however, any reduction of enforcement on that front could be reversed several years later under a new administration.
“Educating your senior management and board of directors becomes essential, because you don’t want to overcorrect and be called out in four years as an example of what not to do,” Lyon says.
More immediately, consumer groups or state attorneys general can seek to enforce fair lending and other federal rules. In fact, the state of New York proposed rules earlier this year to restrict overdraft and insufficient fund fees by banks operating in the state. A final rule could be enforced by the New York State Department of Financial Services in other states where the bank operates or to which its New York customers have moved.
“The most important thing banks can do is to avoid getting distracted by today’s political activity, because there’s still the risk of litigation and state-level enforcement,” Lyon explains, adding that “we’ve heard various regulator representatives state that discrimination, including illegal redlining, is something that they’re required by statute to protect consumers against and enforce, even if they’re not touting it.”
“The most important thing banks can do is to avoid getting distracted by today’s political activity, because there’s still the risk of litigation and state-level enforcement.”
The road ahead
Nevertheless, the executive branch is clearly in deregulatory mode and likely to seek to move in the directions described by the House Republicans in a March 28 letter to the chiefs of the banking agencies. In addition to rescinding or substantially modifying the CRA, the letter directs the banking agencies to re-propose Basel III “endgame” changes to capital requirements for banks with at least $100 billion in assets, to make them less burdensome, and to delay rulemaking imposing long-term debt requirements on banks.
Bankers might get a clearer picture of banking regulators’ regulatory-rule priorities and timetable in October, when the OCC issues its Fiscal Year 2026 Bank Supervision Operating Plan that the other prudential regulators generally echo. The House letter also asks the agencies to withdraw or revise guidance in areas including climate change and third-party relationships — much easier to accomplish. In fact, the OCC issued an interpretative letter March 7 that rescinded the Biden administration’s crypto-related guidance, which had established high hurdles for banks to engage in crypto-related businesses or services.
Changes are also coming to regulatory exam functions. The OCC, for example, has already announced merging its community and midsize examination divisions with the large-bank division. Some view the change as a net positive because the intensity of examinations is likely to lesson, Dugas says, but examiners accustomed to analyzing large banks could problematically apply those metrics to smaller banks, just as community bank examiners could be tasked with analyzing Wall Street giants.
“The merger is anticipated to be completed in mid to late summer, so the OCC will likely start moving forward with that approach in early fall,” Dugas adds.
Military priorities
The CFPB announced its supervision and enforcement priorities April 16, starting with supporting service members and veterans, including enforcement of the Servicemembers Civil Relief Act and the Military Lending Act regulations.
“If the bank has branches near a base or otherwise frequently services these folks or their families, it needs to ensure it’s doing it well because that appears to be one of the CFPB’s top priorities,” Lyon says, noting the agency stipulating that other key areas include mortgage lending and credit reports. “You have to be able to help a customer correct an issue on the credit report if the bank has been reporting inaccurate information.”
The CFPB’s other priorities include reducing supervisory exams by 50%, shifting its focus back to depository institutions, and prioritizing mortgage fraud.
Another area of potentially increased risk for banks from a regulatory pullback could be fewer exams of large technology providers authorized under the Bank Service Company Act. ABA EVP Paul Benda points out that small banks and even large banks often rely on those exam findings because they don’t have sufficient clout to make demands by themselves of major tech vendors.
“And they won’t know if those exams have been impacted until they request the reports and find out whether they’re at the same level of detail or even available,” Benda says.
He adds that funding for the nonprofit MITRE Corporation’s Common Vulnerabilities and Exposures database, which aims to identify, define and catalog publicly disclosed cyber weaknesses, was set to expire April 16 due to Trump administration funding cuts. Its funding was temporarily restored on that day after the database’s importance was publicly highlighted. Given banks’ reliance on the database to track new vulnerabilities that have to be fixed, Benda says, there’s talk now of establishing a separate nonprofit to manage that process.
Contributing editor John Hintze is a freelance financial journalist.
