Banks and investors are cheering the prospect of easier rules, but they should be careful what they wish for. — Reuters
US banks enjoyed a sharp stock price jump on Donald Trump’s election victory; two weeks later, they’ve held onto those gains.
There’s one good reason for this – and several poor ones, all to do with regulation.
The slam-dunk is that big banks now have very large amounts of excess capital: The six largest lenders have US$124bil more equity than they need, with JPMorgan Chase & Co alone counting for US$54bil of that, according to Bloomberg Intelligence.
Higher capital demands are now extremely unlikely from the Federal Reserve (Fed) and other regulators that are working to bring US bank oversight into line with global Basel III standards.
However, the overhaul of these rules isn’t about to be cancelled, and a broad relaxation of standards isn’t likely any time soon either.
Similarly, a complete rollback of the Biden-era antitrust stance, which bankers hope will kick start a wave of deal activity and stock market listings, is also far from assured.
The biggest change that could happen quickest is the Trump administration starving regulators and supervisors of the resources to do their existing jobs well.
To my mind, that’s one of the biggest risks for the banking sector, too.
The finance industry might not have unanimously cheered Trump’s candidacy, but it was definitely cool on Biden’s time in office.
He brought heavy handed leaders to the Federal Trade Commission (FTC), the Securities and Exchange Commission (SEC) and the Consumer Financial Protection Bureau.
Respectively Lina Khan, Gary Gensler and Rohit Chopra all did good work to protect consumers and investors, but are likely to be replaced.
Still, this will take some months, and it doesn’t mean all their efforts will be undone.
Chopra’s efforts to curb excessive overdraft fees, which has cost banks billions in revenue, looks most likely to be unwound.
That will hurt the poorest customers the most.
At Gensler’s SEC, tougher reporting and transparency rules were hugely unpopular among private equity firms and hedge funds.
Pension funds and endowments, however, were big fans of the greater insight into where their fees and expenses were going.
Khan’s FTC is blamed for the chill in mergers, acquisitions and initial public offerings (IPOs), particularly linked to technology firms and private equity.
One of JPMorgan’s top tech bankers, Madhu Namburi, told Bloomberg Television on Tuesday that he expected a wave of IPOs and faster deals once Trump gets into the Oval Office.
But the politics are far muddier than bankers hope, especially with JD Vance as vice-president, as my colleague Chris Hughes has written.
In truth, the real problem for sales of startups and privately owned businesses has been the yawning gap between the valuations put on them in the post-Covid boom and what public markets or other buyers are willing to pay today.
That so-called bid-ask spread still has some way to close.
Falling interest rates will help – unless Trump pursues tariffs and tax cuts that stoke inflation.
Bank capital rules
The question of bank capital rules is far more stubborn.
The Fed’s Michael Barr had already been through a humbling experience even before Trump’s victory, but he, like other Fed board members, can’t be pushed out as easily as leaders of the other agencies.
Also, Michelle Bowman, the Fed governor who was most critical of Barr’s work, still supports minimum international standards and comparability to help ensure a level playing field.
Without cooperation, there’s the risk of a regulatory race to the bottom, Bowman warned in a speech to British Conservative campaigners in June.
Barr tried to do too much with too little impact analysis and too many inconsistencies in his first proposal for the “Basel III Endgame,” as it became known.
In September, he outlined changes that cut the expected average rise in capital demands among big banks to less than 10% from nearly 20%.
Resistance from lenders
Banks would likely have taken the deal with a figure of 5%; as things stand, they’ll likely keep resisting.
Before Silicon Valley Bank (SVB) and several other regional lenders failed in spring 2023, the Basel III changes were expected to result in no average rise in capital.
That could yet be the outcome, leaving big lenders free to hand their US$124bil excess equity back to shareholders.
But that doesn’t mean US banks are in line for a total break from global standards: There are still important technical changes to complete in what risks are measured, and how.
Barr’s proposal can be tweaked to preserve international consistency and ensure more transparency for operational risks like fraud or information technology failure, while also limiting banks’ ability to game the rules with their own risk models.
These are all key aspects of changes made in the UK and Europe.
Bad practices
But the key lesson of SVB and other failures last year wasn’t that banks were undercapitalised or that rules were too loose; it was that downgraded supervision meant these lenders weren’t steered away from bad practices and dangerous business models.
That weakness was a legacy of Trump’s first term in office; given his pledge to slash public budgets, it’s set to be one of the biggest threats of his second.
Banks and investors are cheering the prospect of easier rules, but they should be careful what they wish for.
A lack of oversight will inevitably lead to disaster somewhere sooner or later – it always does – and they will suffer the blowback. — Bloomberg
Paul J. Davies is a Bloomberg Opinion columnist. The views expressed here are the writer’s own.
