While bank stocks enjoyed a sharp rally amid expectations that President-elect Donald Trump's victory would help produce less regulation and more favorable business conditions, these same securities suffered a notable decline on January 17 after Trump stated that the U.S. dollar was "too strong" and criticized a Republican corporate tax plan, according to Bloomberg. (For more, see also: Top Bank Regulator Urges Trump to Keep Dodd-Frank.)

The KBW Nasdaq Bank Index fell more than 3% on January 17, while shares of investment bank Morgan Stanley (MS) dropped as much as 4.4% to $41.80, according to Google Finance data. Shares of major financial institutions JPMorgan Chase & Co. (JPM) and Bank of America Corp (BAC) declined at least 2% during the session, additional Google Finance data reveals. 

Regulatory Obstacles

While the anticipation surrounding Trump's pledge to pare back regulations has run high, this initiative could encounter some serious roadblocks, as many key government officials appointed by President Barack Obama have revealed they plan on retaining their posts as regulators, Bloomberg reported. Federal Reserve Chair Janet Yellen, for example, has publicly stated that she has no plans to leave her highly visible post until her term ends in February 2018.

Financial regulators, whose agencies have jurisdiction over a broad range of matters ranging from credit cards to rules affecting money laundering, have expressed their hesitance at leaving their current positions according to Bloomberg. This situation could make Trump's desire to weaken the Dodd-Frank Wall Street Reform and Consumer Protection Act more difficult, as repealing certain provisions would require a Congressional majority that may be out of reach. 

Alternatively, opponents of the landmark reform could weaken it if regulators either interpret the reform's language in a way that is less strict for banks or refuse to enforce the legislation altogether, Bloomberg reported. (For related reading, see also: States May Step in if Trump Changes Wall Street Regulation.)

Potential Upside

Even though the KBW Nasdaq Bank Index has surged more than 20% since November 8, bank stocks could still push higher, analysts told Bloomberg. For these gains to materialize, market participants will need to see evidence that the Trump administration is making progress on hiking interest rates, lowering corporate taxes and reducing financial regulation.