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Basel III endgame proposal may be scrapped

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Banks may use capital for lending, buybacks

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Regional lenders to benefit from easier merger scrutiny

By Niket Nishant, Manya Saini and Nupur Anand

Nov 7 (Reuters) - The banking industry is expected to

win big as former President Donald Trump returns to the White

House, ushering in Republican regulators who are expected to

ease capital rules and merger approvals, industry experts and

analysts said.

The President-elect's picks are likely to further dilute the

contentious Basel III endgame proposal aimed at requiring big

lenders to hold more capital to safeguard against soured loans.

While banks have already won major concessions on that

proposal which they say will crimp lending and hurt the economy,

the latest draft would still increase capital requirements by

around 9% for the largest lenders, according to a top Fed

official.

"The Basel endgame rule could be completely dead," said Gene

Ludwig, a former top bank regulator who advises financial

institutions as CEO of Ludwig Advisors.

The regulatory shift could bring some relief to investors

after a year in which some bank stocks were weighed down by

concerns over deteriorating loans.

First unveiled months after the collapse of three regional

lenders last year, the Basel proposal faced intense pushback and

an unprecedented lobbying campaign from big banks, which argued

the rules would erode their competitive edge.

The Federal Reserve agreed to water down the proposal in

September, when Vice Chair for Supervision Michael Barr said the

regulator would overhaul and re-issue the rules later.

Other planned rules requiring banks to hold more debt, as

well as changes to liquidity regulations, may also be in doubt.

"The outlook for the banking sector is more encouraging

under Trump," said Dan Coatsworth, investment analyst at AJ

Bell. "Banks would have fewer constraints and be able to use

more cash for lending or share buybacks."

The U.S. central bank declined comment.

The KBW Banks Index, which tracks large-cap banks,

fell 1.5% after closing almost 11% higher on Wednesday, while an

index tracking regional lenders dipped 1.5% a day after a 13.5%

surge.

REGULATOR TURNOVER

As Trump installs new regulators at key agencies, his picks

could have an immediate and seismic effect on a banking industry

more used to a slower pace of change, according to a financial

technology executive who declined to be identified discussing

the personnel changes.

"This is like an earthquake for bank M&A and bank regulatory

policy," said Ed Mills, an analyst at Raymond James, who

expected bank deals to be announced within weeks.

The aggressive financial regulators of the Biden era,

including Gary Gensler at the U.S. Securities and Exchange

Commission, Lina Khan of the Federal Trade Commission and Rohit

Chopra at the Consumer Financial Protection Bureau, are also

likely to be replaced by more business-friendly agency heads.

But Meg Tahyar, head of the financial institutions group at

law firm Davis Polk, tempered expectations for a radical change.

"There will be changes of personnel at the top level and

there will be more M&A, but the intensity of supervision and the

focus on junk fees is unlikely to change much," she said.

On Wednesday, midsize bank stocks were buoyed by

expectations that their capital requirements would be eased,

said Lazard chief market strategist Ronald Temple.

The potential for less-stringent antitrust policy also

bolstered shares of Discover Financial and Capital One

Financial ( COF ), he said. Both are awaiting the green light

for their $35.3 billion deal.

"The M&A landscape for banks may benefit with shorter

approval timeframes," Morningstar DBRS wrote in a note.

Many top industry executives have called for some

consolidation among banks in the U.S., which is home to more

than 4,600 lenders. Dealmaking would allow smaller banks to

compete more effectively against their larger peers.

"We can at least put M&A back into the discussion; whereas

it has been largely nonexistent over the past few years on a

punitive regulatory backdrop," Scott Siefers, a banking analyst

at Piper Sandler, wrote in a report.

Fifth Third Bancorp ( FITB ), Huntington Bancshares ( HBAN )

and PNC Financial may be more interested in pursuing

M&As, Siefers said.

The banks did not immediately respond to requests for

comment.

Despite the ebullient mood, potential policy uncertainty,

trade wars, protectionism and inflationary pressures under Trump

could also pose some challenges to dealmaking, some bankers

said.