After the (US political) quake

By José María Roldán Alegre, Senior Advisor Kreab

The results of the House elections confirmed that republicans (and Trump) have achieved a government trifecta: simultaneous control of the House, the Senate, and the Presidency. It represents the endorsement of voters for a swift change of US politics that will reshape the US economy and, in fact, the world economy for years to come. The question is when, and how this change will come about.

Regarding the “when” the most likely answer is fast, very fast, almost immediate. The scale of the landslide will, for instance, facilitate the hearings and appointments through the political process (not to mention the potential use of other tactics, such as appointments during recess periods). And if the past is an indicator of future trends, the previous occasions where the political process delivered such a change, the reposition of all the federal agencies was almost instant. Even change of personalities within the same party provoke rapid changes in the orientation of policies. This is something that is usually overseen by Europeans: in the EU, the layers of non-political power structures (let´s be clear: the bureaucratic superstructure) are very strong, and powerful. Any changes in policies and priorities do take time. On the contrary, in the US the discipline of federal power structures to new leadership´s priorities and policies is absolute. And swift.

The Known Knowns

It is easy, very easy to spot what the political shift will mean in key areas such as climate (in terms of US internal strategy and international commitments, but also in terms of financial market and financial institutions requirements), trade (more tariffs across the board and a fragmentation of international trade, etc.), crypto assets and crypto currencies (deregulation is the name of the game here), etc.

In the area of crypto currencies, we know that under the new regime a movement towards a digital dollar (official digital dollar) will not be pursued unless it is seen as a cornerstone to compete successfully with a digital yuan. A digital dollar enshrines an ever-bigger role for the Fed in the US and international environments. On the contrary, private stable coins based on the US dollar can see a strong development. They may be perceived, and most probably rightly so, as a way to ensure the continued dominance of the US dollar as an international currency, avoiding at the same time an over presence and dominance of the Fed. Although private safe coins based on the US dollar may not represent a major threat for the euro, the yen, the pound, or the yuan, they do represent a major challenge for emerging markets currencies.

In terms of institutions, the SEC, the CFTC, the FDIC and the OCC are all presidential appointments (and in the case of the OCC and FDIC, both are chaired by provisional caretakers waiting a replacement). And the forced resignation of Jelena McWilliams (FDIC President appointed by Trump) during a bitter political power struggle under the Biden presidency could be considered a precedent and an indication that changes will come very fast.

In respect to general financial policy, deregulation is the name of the game in town. Sure, deregulation is easier to defend than to implement in practice, but that does not mean that the effects will not be seen rather fast. For instance, the final rules on Basel III (or Basel III endgame) expected for the next weeks, will most probably remain frozen until there is greater clarity on the future direction of financial regulation under the new administration.

The Known Unknowns

What will come next after the sudden stop of further toughening of regulations? We do not know, but most probably it will depend on the people selected for the top positions in the financial agencies. People do matter, a lot in fact. And we still know too little of who they may be. Let´s clarify why this is the case with a couple of examples.

When Dan Tarullo, a respected academic critical of Basel II, became the Governor of the Fed in charge of supervision in 2009, he reoriented the supervisory strategy towards stress testing (an approach that was extremely successful after the GFC). Immediately, all the supervisory staff that had worked on Basel II reoriented (within days, or even hours!) to the new strategy. Once he left, the stress testing process continued albeit with a lesser relevance in the strategy (as another tool, rather than as the main tool).

Another example, in this case from the first Trump presidency. Randy Quarles became Vice President of the Fed in charge of Supervision in 2017, under the first presidency of Donald Trump. Despite the initial fears of a more isolated strategy by US supervisors under the Trump presidency, Randy Quarles remained engaged with international fora, and eventually he became the first US Chairman of the FSB. During his tenure the Fed, and by extension the other US bank supervisors (OCC and FDIC), remained fully engaged in international cooperation, in the FSB, and the Basel Committee.

We know that people matter, and that there is a clear path for swift appointments at the SEC, the CFTC (although the current chair, Rostin Benham, has a bipartisan profile), the OCC, and the FDIC. But the situation at the Fed is complicated. Currently the Fed is dominated by governors appointed by the democrats (with just two Board Members being republicans, excluding the Chair, Jerome Powell) and only one of them has a supervisory background (Michelle W. Bowman). Up to now, these situations were sorted out through the resignation of one or several members, to allow for the new political sensibilities being included within the Fed. For instance, the resignation of the Vice president in charge of supervision, whose term expires in mid-2026, would not have been seen in the past as problematic. In the current US political environment, it remains to be seen whether this would continue to be the case.

As of potential names, very little is known on potential candidates for supervisory positions. Michelle W. Bowman, a current governor of the Fed, has a community banks background and sensitivity, coming also from the inner US (she is not a Washington DC bureaucrat). Jelena McWilliams, former FDIC president under Donald Trump, and obliged to resign by a democrat-controlled Board, is another person with a supervisory background that could play a role in the future. But, let´s be frank, we still know too little and the uncertainty will continue for some time.

Anyway, irrespective of the potential for main street or peripherical appointments, US financial regulation will be less geared towards international agreements under the FSB, the Basel Committee, or the BIS. In other words, do not expect the next chair of the FSB to be an American.

The Unkown Unknowns

Despite the clear victory of republicans in all fronts, US politics (and, in fact, US society) remain extremely fractured and confrontational. Between the (west and east) coast and the inner US, but also between big cities and rural areas, between Washington DC civil servants and people working for the private sector, between the lower judiciary and the upper judiciary (the Supreme Court), etc. In this context, although predicting outcomes based on past experience continues to be the sole way to guess future developments in the field of financial regulation, in the current circumstances the uncertainty is greater than in the past (and greater than in the first Trump presidency). The unknown unknowns are looming larger this time.

To Sum Up

Under the new Trump Presidency, there are things we know for sure are going to happen:

• less multilateral trade and more bilateral trade and tariffs,
• lighter regulation and supervision for anything related to crypto assets and digital coins (US private stable coins based on the dollar being of special relevance),
• withdrawal of US of any international agreements around climate change (and, more widely, ESG matters),
• a lighter regulation of financial markets and banks, in particular community banks,
• most probably, a freezing of Basel III endgame,
• a swift change in people responsible of US financial supervision agencies: the SEC, the CFTC, the FDIC, the OCC, and, possibly, the Fed (in the area of supervision).

But there remains a deep uncertainty, of the profile people in charge will have, of their political and personal views, but most fundamentally on whether the rules of engagement will depart from recent historical experiences. Stay tuned.