A new presidential administration often means change. Change brings uncertainty, and uncertainty presents risk.
Shrewd boards, C-suites, and risk managers should seize this opportunity to assess the political winds of change—not only to identify and mitigate potential risks, but to adopt strategies to capitalize on and maximize potential opportunities.
What can we expect in the days ahead? Let’s look at five areas that are top of mind for financial institutions: COVID-19 relief, interest rates, business taxes, regulatory environment, and geopolitics.
1. COVID-19 Relief
COVID-19 continues to ravage our country. Biden’s platform includes a coordinated and comprehensive approach to tackling the pandemic, including mask mandates as well as national testing and vaccination initiatives, but how does that potentially shift the risk landscape?
If we “shut down” the country, how significantly does that affect investments? Moreover, what types of investments will be most impacted? Conversely, what opportunities will present themselves in the investment arena?
You don’t have to look very far to see clear winners and losers. CFOs with their eye on the “winners and losers” approach to this COVID-19 economy, as well as to the effectiveness of the Biden administration’s response, will put themselves in the best position to identify and capitalize on opportunities in their investment portfolio.
2. Interest Rates
President Biden’s early move to name former Federal Reserve Chairman Janet Yellen as Secretary of the Treasury suggests the administration wants to move in lockstep with the Fed and not go significantly against the grain.
However, that’s just one small piece of a much larger economic puzzle. The effectiveness—or lack thereof—of Biden’s COVID-19 strategy may dictate monetary policy over the next year or so.
The real questions begin after we (finally) have put the COVID-19 nightmare to bed. When COVID-19 is no longer the top priority, what will be the driving force influencing monetary policy?
Questions like this dictate measured forecasting by CFOs, who will need to carefully shape asset-liability committee (ALCO) forecasts based on both COVID-19 recovery and political motive. Those who forecast correctly stand to make significant improvements to their institution’s bottom line, while those who are overly conservative in their forecasting may find their institutions watching from the sidelines.
We need only to look at history to identify a pattern when it comes to taxing and spending that suggests taxes will rise. However, there is uncertainty regarding which taxes will rise, when, and by how much.
This creates an opportunity for firms in the short term. If we operate with the understanding that our institution is likely to carry a heavier tax burden at some point in the not-too-distant future, then now becomes the perfect time to invest in infrastructure. Projects that have been shelved, such as implementing ERM or vendor management software, start to look like a wise move in the immediate term before tax burden increases.
Firms that put these projects off any further may find that it’s too late should the tax burden increase. Conversely, firms that are aggressive in their pursuit of infrastructure will reap rewards in the long term, as they will be better able to compete in a rapidly changing industry.
4. Regulatory Environment
The selection of former Consumer Financial Protection (CFPB) Assistant Director Rohit Chopra as CFPB director suggests that the laissez-faire approach of the Trump administration is being supplanted by increased financial industry regulation.
While there is significant speculation surrounding Chopra’s focus as CFPB director, one thing is clear: Change is coming. The name of the game here is risk avoidance, and the challenge for risk and compliance officers is to anticipate potential regulatory changes and report these changes promptly to the board and C-suite.
From a strategy perspective, the challenge for the board will be growing the business while avoiding the pitfalls of products or services that may draw the attention of the CFPB. As many small bank compliance officers will tell you, this is far easier said than done. This presents yet another reason to invest in infrastructure, such as an automated compliance management system (CMS) application.
For those interested in learning more about Chopra’s potential areas of focus with the CFPB, take a look at my friend and colleague Kimberly Boatwright’s blog post Lending Compliance 2021 Outlook: What to Expect from the Biden Administration.
Geopolitics is a significant investment risk. The Biden administration is expected to be less aggressive than the Trump administration when it comes to foreign policy, but it’s unclear what it will look like.
This uncertainty may lead to opportunities, both in the investment and operational space. On the investment side, CFOs should seek to capitalize on investments in or partnerships with firms in countries where the geopolitical winds have blown in their favor. On the operational side, there may be opportunities for foreign correspondent banking or to offer other products and services in countries where the political tide has shifted.
However, the pursuit of these opportunities should be offset with the appropriate risk mitigation strategies. For example, a more robust vendor management approach may be appropriate when seeking business partnerships across borders. In the event of concentration risk to foreign firms, vendor management software may significantly bolster the control environment and continue to capitalize on these relationships.
A financial institution’s response to change—including a change in presidential administration— dictates its competitive position.
In our rapidly changing industry, being risk averse is less of an option, especially as fintech innovation continues to disrupt. Strategy is key to the survival of your institution and the industry.
We need to leverage information—including from the political environment–to guard against risk and align strategy with perceived opportunity. In so doing, we are able to maximize our opportunities and remain competitive in an ever-changing industry landscape.