Bank regulation in the U.S. is likely to ease or stabilize under the new Trump administration, which could lead to stronger financial results for the industry, according to Morgan Stanley Research.
For the first time since the global financial crisis, which led to turmoil in markets and the economy from 2007 to 2009, banks are expected to face a more favorable regulatory environment. The new framework could boost lending and activity in capital markets in the coming years.
Even if the economy slows because of policies related to trade, immigration and government efficiency initiatives, banks should be able to expand. “We expect bank regulators to address decade-old industry asks, shifting from years of increasing difficulty and complexity toward a more transparent, integrated and supportive approach” says Betsy Graseck, Global Head of Banks and Diversified Finance Research at Morgan Stanley. “This is likely to support earnings growth.”
Changes Have Started
Members of President Donald Trump’s cabinet have made it clear that regulatory reform is a central priority. Since the inauguration, the new administration has reversed prior executive actions and initiated new ones to encourage industry growth at several agencies including the Consumer Financial Protection Bureau (CFPB), the Federal Deposit Insurance Corporation (FDIC) and the Federal Trade Commission (FTC).
Treasury Secretary Scott Bessent has noted the need to “smartly reinvigorate” financial institutions with more “efficient, effective and appropriately tailored” regulation.1
Proposals to change agencies and rules on capital, liquidity and consumer lending are already under discussion, including:
- CFPB: The administration has taken steps to narrow the agency’s rulemaking and enforcement activity. A more constrained CFPB, with less uncertainty and oversight, could benefit banks, according to Morgan Stanley Research. Previous rules related to credit card late fees, overdraft fees and medical debt are likely to be reversed.
- Stress tests: This tool, which is used to inform regulators and the public how banks would fare under scenarios of extreme stress, could become more transparent in 2025. The Federal Reserve, which conducts the tests, has expressed its intention to take steps soon to reduce the volatility of results and begin to improve transparency.
- Basel Endgame: This is an international effort to create standards for capital requirements after the global financial crisis in 2007-2009. Regulators are expected to agree on a new set of rules after the initial proposal faced opposition. Having a final rule set would provide clarity for banks to fully optimize capital utilization for the first time since the global financial crisis.
M&A to Accelerate This Year
Dealmaking activity is one of the areas likely to help improve the outlook for bank earnings. In the fourth quarter of 2024, the annualized volume of completed M&A relative to nominal gross domestic product (GDP) was 44% below the annual average from 1996 to 2024. Last year there was only a slight improvement from 2023, when completed M&A volumes relative to GDP were at the lowest levels in three decades.
“The slowdown in M&A was driven primarily by macroeconomic uncertainty, including recession fears and sharply rising rates with debate around their end point,” Morgan Stanley Equity Analyst Ryan Kenny says. “However, antitrust enforcement also played a role.”
Companies gave up on deals or kept them on hold because of greater regulatory scrutiny, which increases the cost and time required to complete M&A transactions. New FTC Chair Andrew Ferguson appears supportive of antitrust transparency, recently saying “if you’re not violating the law, the FTC is going to get out of the way.”2
As boards become more comfortable with the economic outlook and the regulatory environment, Morgan Stanley Research expects M&A announcements to accelerate in the second half of 2025, fueled by three years of pent-up demand and about $4 trillion of sponsor dry powder to be deployed in deals.
Despite business leaders’ optimism around the new administration, activity in U.S. capital markets was still weak in January and February, with M&A fees yet to improve on an annual basis.
“CEOs need time to process the rapid changes coming their way including tariff whiplash, geopolitical developments, regulatory head changes and the impact of federal workforce reductions,” Kenny says. “We are at peak uncertainty now and expect more clarity going forward.”
Banks Poised to Consolidate
The banking industry itself could also be a focus for dealmaking activity. Consolidation has been a prominent theme in the sector for more than 40 years as banks use M&A to become more efficient and competitive.
Also, the U.S. banking system currently encompasses about 4,000 banks, making it one of the most fragmented in the world.
“We think smaller bank M&A deals, among banks with $25 billion in assets and below, will pick up first, likely over the next several months,” Morgan Stanley Midcap Bank Analyst Manan Gosalia says. “Larger deals are likely to follow over the medium term as management teams and boards get more clarity on the regulatory and macroeconomic backdrop.”
