The Deregulation Gamble: How Trump's Banking Policies Could Make or Break Old National Bancorp

The Trump administration has wasted no time in initiating what may become the most significant financial deregulation push since the 2008 financial crisis. According to recent reports, US watchdogs are preparing to slash capital rules designed to prevent another financial meltdown, marking the beginning of Trump’s promised “bonfire of regulation” during his second term in office. This sweeping deregulatory agenda targets the supplementary leverage ratio (SLR) – a post-crisis rule requiring large banks to hold high-quality capital against risky assets.

Is this the dawn of a new era for American banking, or are we witnessing a dangerous dismantling of critical safeguards? The answer lies somewhere in the complex interplay between financial stability, market competitiveness, and political expediency.

Understanding the Deregulatory Push

The Trump administration’s focus on slashing the SLR comes after heavy lobbying from major financial institutions such as JP Morgan and Goldman Sachs, which have long complained that these capital requirements hinder competition and lending capabilities. Bank lobbyists argue that the current rules unfairly penalize institutions for holding ultra-safe assets like US Treasuries, creating inefficiencies in the financial system.

According to Greg Baer, CEO of the Bank Policy Institute, “Penalizing banks for holding low-risk assets like Treasuries undermines their ability to support market liquidity during times of stress.” Analysts at Autonomous suggest this regulatory change could unlock up to $2 trillion in lending capacity by exempting Treasuries and central bank deposits from SLR calculations.

However, critics such as Nicolas Véron of the Peterson Institute for International Economics warn that “loosening capital rules in a volatile economic climate could increase systemic risk.” The timing of these changes raises serious questions about financial stability amid global economic uncertainties.

Regional Banks: The Overlooked Beneficiaries?

While much of the deregulation discourse centers on Wall Street giants, regional banks stand to gain significantly from this regulatory overhaul. These mid-sized institutions have long operated in a regulatory gray zone – too small to be classified as systemically important yet large enough to face substantial compliance burdens.

For regional banks, the regulatory relief could manifest in several ways:

1. Reduced compliance costs – Smaller regional institutions typically dedicate a disproportionate amount of resources to regulatory compliance compared to their larger counterparts.

2. Enhanced M&A prospects – The relaxation of merger approval processes could accelerate consolidation in the regional banking sector, enabling institutions to achieve economies of scale.

3. Improved capital flexibility – Reduced capital requirements would free up resources for lending, potentially boosting profitability and shareholder returns.

4. Competitive repositioning – Regional banks may find themselves better positioned to compete with both larger banks and fintech disruptors in an environment of reduced regulatory friction.

Old National Bancorp: A Case Study in Regional Banking Strategy

Old National Bancorp (NYSE: ONB) provides an illuminating example of how regional banks are navigating this evolving regulatory landscape. The Evansville, Indiana-based institution has positioned itself as a strategic acquirer, most recently announcing the acquisition of Minneapolis-based Bremer Financial Corp. for $1.4 billion in November 2024.

What makes ONB particularly noteworthy is the market’s positive reception to this acquisition announcement – with shares rising 6% on the news. This favorable reaction signals investor confidence in regional bank consolidation strategies amid the deregulatory environment taking shape under the Trump administration.

ONB’s approach incorporates several strategic elements that align with the emerging regulatory paradigm:

• Strategic portfolio management – The bank announced the sale of commercial real estate loans as part of the Bremer acquisition, demonstrating proactive risk management.

• Capital optimization – A $400 million common raise indicates ONB’s focus on maintaining strong capital ratios despite regulatory relaxation.

• Geographic diversification – The Minneapolis expansion represents a calculated move into new markets with distinct economic characteristics.

The case of Old National Bancorp illustrates how forward-thinking regional banks are neither simply waiting for regulatory relief nor ignoring the fundamentals of risk management. Instead, they are strategically positioning themselves to capitalize on the changing environment while maintaining institutional resilience.

The Dual-Edged Sword of Deregulation

The potential benefits of deregulation for regional banks come with significant caveats. The 2023 failures of Silicon Valley Bank and Signature Bank serve as stark reminders of the risks inherent in inadequate liquidity management and regulatory oversight. These collapses placed substantial demands on the FDIC, raising questions about the agency’s practices in resolving failed banks.

For regional institutions like Old National Bancorp, the deregulatory environment presents a complex risk calculus:

Opportunities:

• Higher earnings potential through reduced regulatory costs

• Enhanced growth prospects through M&A and lending expansion

• Improved competitive positioning against larger institutions

Challenges:

• Increased vulnerability to market shocks without adequate capital buffers

• Greater exposure to credit risks in a potentially overheated lending environment

• Heightened scrutiny from investors and rating agencies concerned about risk profiles

Looking Ahead: Strategic Implications for Regional Banking

As the Trump administration advances its deregulatory agenda, regional banks face pivotal strategic choices. While the market appears optimistic about deregulation’s impact on bank stocks, analysts suggest that “future bank stock returns will be driven by EPS growth rather than P/E multiple expansion.” This implies that banks must leverage regulatory relief to generate sustainable earnings growth rather than relying on market sentiment alone.

For Old National Bancorp and its peers, several strategic imperatives emerge:

1. Balance regulatory opportunity with risk discipline – While capital requirements may ease, maintaining strong risk management frameworks remains essential.

2. Pursue strategic consolidation – The M&A environment is likely to improve as “application of [merger] policies to announced transactions will fall to the Trump administration’s regulators.”

3. Optimize asset-liability management – As interest rate environments shift, banks must carefully manage their balance sheets to benefit from yield curve steepening.

4. Invest in technological capabilities – Reduced compliance costs should be partially redirected toward technological investments that enhance efficiency and customer experience.

5. Prepare for potential policy reversals – Prudent regional banks will maintain flexibility to adapt to future regulatory changes that may accompany political transitions.

Conclusion: Navigating the New Regulatory Frontier

The deregulatory push under the Trump administration represents a significant inflection point for the American banking system. For regional institutions like Old National Bancorp, this environment offers both substantial opportunities and considerable risks.

The most successful regional banks will be those that leverage regulatory relief to strengthen their competitive positions while maintaining disciplined risk management. They will recognize that deregulation is not simply a reprieve from compliance burdens but an opportunity to fundamentally reassess strategic priorities and operational models.

As the regulatory landscape continues to evolve, investors, policymakers, and bank executives must remain vigilant about the delicate balance between financial innovation and systemic stability. After all, the true test of deregulation’s success will not be measured in short-term stock price movements but in the long-term resilience of the American financial system – a system in which regional banks play an increasingly pivotal role.

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