Among the AI boom, COVID and growth stocks the U.S. banking industry have been overlooked by many investors for over a decade now. After 19 years, Bank of America Corporation reached its all time high level surpassing the pre-crisis price of $55 per share. It took nearly 2 decades for a pre-crisis investment to become nominally profitable. After the Great Financial Crisis, KBW Nasdaq Bank Index (BANK) has been underperforming both S&P500 and Nasdaq.
| Year | Nasdaq BANK Index | Nasdaq 100 | Excess Return |
|---|---|---|---|
| 2020 | -1.5% | 43.6% | -45.1% |
| 2021 | 50% | 21.4% | +28.6% |
| 2022 | -17.7% | -33.1% | +15.4% |
| 2023 | -8.7% | 43.4% | -52.1% |
| 2024 | 13.2% | 28.6% | -15.4% |
| 2025 | 4.6% | 22.2% | -17.6% |
Banking after 2008
After the mortgage crisis, US regulatory authorities imposed strict regulations over financial institutions to prevent such crises from reoccurring. Banks needed to de-leverage, meaning they would face diminishing returns on equity. However, this might not stay the same — the first Trump term introduced the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, and the second Trump administration is currently pushing deregulation in banking further.
De-regulation
In both 2024 and 2025 many tried to explain the economic performance difference between EU and US, primarily by focusing on growth. It is a factual statement that US is less regulatory than EU. The Trump administration wants to take this further with deregulating banking industry, focusing on Federal Reserve's regulatory stance, capital requirements, and reserve management.
Treasury Secretary Scott Bessent's interview with CNBC on 25th November yielded a greater understanding for investors:
"I think that we've gotten to this point where monetary policy has gotten very complicated and it's more than just cutting rates. We've got this balance sheet and what are we going to do with it? I think we've got to kind of simplify things. I think it's time for the Fed to just move back into the background, like it used to do, calm things down and work for the American people."
Key takeaways: Are ample reserves really ample? Monetary policy is no longer just about interest rates — it involves managing a huge balance sheet, reserve levels, and various liquidity facilities. The Fed should simplify and step back from the spotlight.
What does it mean for the investor?
It is essential to know that changing such a regulatory framework is not possible at an instant — the changes we expect can take years to implement. Stricter regulations provide a safer financial system for all. Deregulating banks is likely to result in increased lending and borrowing, greater ROE, and better operational profits. On the other side, it elevates systematic risks and financial instability with possible spillovers.
In conclusion, it is good to keep up with the narrative but better to be ahead of it. All we have discussed is not guaranteed but it's possible to see a tendency to deregulate banks in the current administration. Investors should monitor related news in order to have a better sense regarding the timing of the "deregulation chain."
Personal Note: I do incorporate the potential deregulation impacts to my DCF models for US banks by taking "bull scenario" projections as my base case for the terminal value, and currently have exposure to banking stocks. However, my knowledge is limited on the banking industry and it is not my habit to take an investment action purely based on speculation.