How The Election Will Impact Your Bank’s Budget and Strategic Plan

Since the election falls right in the middle of bank’s budgeting and planning cycles, it is worth spending some time looking at potential outcomes. With a little more than two weeks before the election, the current polls and betting odds favor a Democratic Administration and both houses of Congress. According to FiveThirtyEight, Biden has a +10.5% lead, up from +7.6% two weeks ago. The polling also shows a 96% House retention and a 73% chance of winning the Senate. We look at the probability of the polls being wrong and what a “Blue Wave” outcome could mean for banks.

Could The Polls Be Wrong?

Like last time we wrote this piece, the polls could be wrong. This time in 2016, Hilary Clinton had a similar lead in the polls. However, short of some type of fraud or tampering, it is not likely the polls are that wrong this time for a couple of reasons.

First, polling and statistical projections of polls have improved because of 2016 and have proven more accurate in recent elections. Part of this equation is projecting undecided voters. Back in 2016, there was a record 15% of Americans reporting to be “Undecided” two weeks before the election. Today, that number is 3% or the lowest level since Franklin Roosevelt was elected. Another factor is record early voting. As of this weekend, the US Election Projects estimated that 17mm votes have already been cast, 10x more than this time last election. Statistically, polling error is reduced the more mail-in ballots are cast.

Because of these factors, the odds now favor a Democratic regime for the next four years. Let’s look at how that might impact your bank.

The Impact of Administrative and Congressional Democratic Control – Interest Rates

The three major considerations for banks are interest rates, policy, and financial regulatory environment.

Democratic control would first and foremost likely lead to more front-loaded stimulus. From a balance sheet perspective, the Committee for a Responsible Federal Budget calculates the impact of the current Administration’s stimulus package would increase the national debt by $4.95T over the next 10-years, while a Democratic Administration would add $5.6T.  

The latency of that stimulus is also interesting as the current Democratic plan calls for more spending on infrastructure and education, which is usually two of the faster paths to get money in the hands of workers outside of direct stimulus payments. Further, complete Democratic control would likely create more alignment with government departments helping to speed fiscal pump-priming to its source. 

A large historic deficit will force the Treasury to have longer-dated issuance, which will push rates higher to entice buyers to soak up the supply.

As such, we see lower rates in 2021 by about 15 basis points as the pandemic goes on longer than expected (stemming from problems getting the majority of the population vaccinated) plus the impact of the current credit shock. For 2022 and beyond, we see higher rates by some 50 to 150 basis points as inflation, and economic growth create less money supply and more capital demand.

The Irony of Credit Spreads

If you ask most bankers, a common refrain is that they are distrusting of what a Democratic President and Democratic Congress would do to bank performance. This historical record shows that this anxiety may be misplaced. The single most significant factor on bank performance is the value of a bank’s loans, and in political eras where a single party controls both the White House and Congress, loans increase in value. In fact, when there is Democratic control, the loan portfolio tends to increase in value an average of approximately 68 basis points per year, or more than any other Executive and Legislative branch regime structure. For clarity, we are not implying a cause and effect here, only that there is a correlation.