Financial Regulators Contend With M&A and Evolving Fintech Sector

Recent election years were busy in the world of financial regulatory policy, and 2024 promises to be no different. This year may be even busier considering the large backlog of proposed rules and fallout of the spring 2023 regional banking crisis.

Regulators will also continue to respond to evolving crypto and tokenization innovations, and the contours of private credit markets. Here are several key issues worth watching.

Election-Year Impact

It is common wisdom that every branch of government slows down in a presidential election year. Recently, the opposite has been true of financial regulatory rulemaking. The 201 final rules adopted in 2020 by key federal financial regulators was the highest of any year in the post-Dodd-Frank era, and far exceeded preceding non-election years: 2017 (95), 2018 (106), and 2019 (144).

This year seems well-situated to continue that trend given the large backlog of proposed rules at regulatory agencies, particularly the Securities and Exchange Commission. A looming election with very uncertain results—and therefore uncertain political appointments—will likely motivate heads of financial regulatory agencies to complete the policy work they wish to be part of their legacies.

We’ll be watching the progress of Basel III endgame bank capital proposals from the Federal Reserve, FDIC, and Comptroller of the Currency in July that would revise the regulatory capital framework for banks with more than $100B in assets. Comments are due Jan. 16 and the Fed is expected to finalize rules this year.

We are also keeping an eye on changes to equity market structure and required climate disclosures.

Challenges to Authority

Financial services regulators embarked on an ambitious policymaking agenda over the last several years. The industry has filed numerous lawsuits against regulators, arguing that reforms lack appropriate cost-benefit analyses and overstep legal authority, and that regulators have played fast and loose with the rulemaking process.

Many of these cases will be heard in 2024 and could reshape the regulatory process, either bringing more emphasis on statutory standards and cost-benefit analysis—limiting the threat of suits on future reforms—or leaving a muddled landscape. Notably, five cases that may have important ramifications for financial regulators will be heard before, or decided by, the Supreme Court in 2024.

Oversight of Agency Heads

No matter how the lawsuits are resolved, Capitol Hill is likely to continue to conduct oversight of agency heads. While it’s typical for the non-presidential party to challenge actions of presidentially appointed regulatory leaders, oversight in 2024 has the potential to be bipartisan in certain cases, such as workplace conduct at the Federal Deposit Insurance Corporation.

We expect the heat on Capitol Hill to intensify heading into the election year and potentially spur policy or personnel changes.

Bank Mergers

Bank funding conditions, the interest rate environment, and the imposition of more stringent regulations also are encouraging mergers among banks of all sizes, including regional banks.

Some argue that consolidation of regional banks in a way that creates national franchises is necessary to ensure competition with the very largest global banks and, in turn, a healthy US banking sector.

At the same time, banking regulators and DOJ are reviewing the standards that are used to give bank mergers a green light. How the regulators apply these standards is a major issue.

Bank Funding

The way banks fund themselves has changed over time. The Federal Reserve’s dramatic increase in interest rates and focus on uninsured deposits in the spring 2023 bank failures are likely to change it once again.

The SEC has started the process of requiring clearing of Treasury repos, a key funding mechanism, and the Federal Reserve’s emergency funding to banks through the Bank Term Funding Program expires in 2024 absent further action.

Role of Nonbanks

A trend since the reforms enacted after the 2008 global financial crisis has been that the nonbank sector steps in where more stringent regulations or other factors cause banks to scale back. That trend has accelerated in recent years, with nonbank private credit providers playing an increasingly important role in commercial lending markets.

The coming year may test the resiliency of that sector and, at the same time, banks and private credit funds are likely to continue to develop mutually beneficial relationships with each other—all while the regulators play catch up and try to learn more about this market.

Artificial Intelligence

This may be the year AI enters the statutory and regulatory rulebooks. The leaders of many key regulatory agencies have already set the stage for such action through public speeches on various potential implications of AI. The Financial Stability Oversight Committee focused heavily on AI in its recent 2023 annual report.

We’ll be watching what aspects of AI the regulatory community prioritizes, and how it balances the ever-present question of promoting technological innovation versus protecting against often-unanticipated effects.

Crypto and Blockchain

Many thought crypto was a bubble that burst with the failure of FTX in November 2022. Many in the regulatory community were relieved, to be blunt. But the price of bitcoin rose about 160% in 2023, reenergizing crypto proponents.

The legislative and regulatory community will need to address these growing markets beyond the current enforcement-first mantra of agencies such as the SEC. We’ll be following how that goes and whether the US legal and regulatory scheme promotes or kills the digital asset industry in the US.

In blockchain more generally, there’s been increasing institutionalization, primarily in the areas of tokenized payments and traditional assets such as stocks and bonds. We will see whether this represents a permanent shift in the technology and how it’s used by incumbent and digitally native financial institutions.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

David L. Portilla is partner in Davis Polk’s financial institutions practice and advises non-US and US banking organizations on M&A regulation, policy, enforcement, and governance matters.

Gabe Rosenberg is partner in Davis Polk’s financial institutions practice and counsels clients across financial services, fintech, and banking on SEC, CFTC, CFPB, Federal Reserve, and OCC regulations.

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