By Niket Nishant, Manya Saini and Nupur Anand

(Reuters) – The banking industry is expected to benefit significantly with former President Donald Trump's return to the White House. Republican regulators are anticipated to relax capital rules and merger approvals, according to experts and analysts.

The President-elect's appointments may further weaken the controversial Basel III endgame proposal, which aimed to require large lenders to hold more capital as a safeguard against non-performing loans.

Although banks have previously gained significant concessions on this proposal, which they argue would hinder lending and harm the economy, the latest draft still intends to increase capital requirements by approximately 9% for the largest lenders, according to a top Fed official.

Gene Ludwig, a former leading bank regulator now CEO of Ludwig Advisors, indicated that the Basel endgame rule might be rendered irrelevant.

This regulatory shift is expected to provide some relief to investors, particularly following a year when some bank stocks were negatively impacted by concerns over deteriorating loans.

First introduced months after the collapse of three regional lenders last year, the Basel proposal faced immense backlash and an unprecedented lobbying effort from major banks, which contended that the regulations would diminish their competitive advantage.

In September, the Federal Reserve agreed to dilute this proposal, with the Vice Chair for Supervision, Michael Barr, stating plans to revamp and reissue the rules later. Other proposed regulations demanding banks to hold more debt and changes to liquidity regulations are also under scrutiny.

Dan Coatsworth, an investment analyst at AJ Bell, opined that the banking sector outlook would be more favorable under Trump. He stated that banks are likely to face fewer constraints, thereby allowing greater cash availability for lending or share buybacks.

The U.S. central bank opted not to comment on the matter.

On the stock market, the KBW Banks Index, tracking large-cap banks, fell by 1.5% after a nearly 11% increase, while a regional lenders index decreased 1.5% following a 13.5% surge.

REGULATOR TURNOVER

As Trump appoints new regulators to key agencies, the immediate impact on the banking industry, accustomed to slower changes, could be significant. One financial technology executive suggested this shift is akin to an earthquake for bank mergers and acquisitions (M&A) and regulatory policies.

Analyst Ed Mills at Raymond James anticipates bank deals will be announced soon. The change may result in the replacements of aggressive financial regulators from the Biden administration, such as Gary Gensler (U.S. Securities and Exchange Commission), Lina Khan (Federal Trade Commission), and Rohit Chopra (Consumer Financial Protection Bureau), with more business-friendly heads.

However, Meg Tahyar, the head of the financial institutions group at law firm Davis Polk, urged caution regarding expectations for drastic changes. While personnel changes and more M&A activity are anticipated, the intensity of supervision and focus on misleading fees are unlikely to see significant alteration.

On Wednesday, expectations of eased capital requirements buoyed midsize bank stocks, according to Lazard's chief market strategist Ronald Temple. A potential reduction in antitrust policy strictness also positively impacted shares of Discover Financial and Capital One Financial, which are pending approval for a $35.3 billion deal.

Morningstar DBRS stated that the banking M&A landscape might benefit from shorter approval timeframes. Many industry leaders have called for consolidation among the over 4,600 lenders in the U.S., which could allow smaller banks to compete more effectively.

Banking analyst Scott Siefers from Piper Sandler noted that M&A discussions are being revived now that punitive regulations are easing. Fifth Third Bancorp, Huntington Bancshares, and PNC Financial may show increased interest in pursuing mergers and acquisitions.

Despite the optimistic outlook, some bankers caution that potential uncertainty, trade wars, protectionism, and inflationary pressures under Trump could still challenge dealmaking.