Trump's 'Big Number' on Dodd-Frank: Peril and Promise for Big Banks
February 03 2017 - 1:32PM
Dow Jones News
By David Reilly
Be careful what you wish for. Bank investors bid up bank stocks
after the election partly on hopes of a lighter regulatory load.
President Donald Trump's executive order mandating a review of
financial regulation and the Dodd-Frank Act would seem to confirm
that expectation.
A reopening of the post-financial-crisis regulatory order can
hold peril, as well as promise, for big banks, though.
The administration and many congressional Republicans have made
a point of saying the overhauls enacted in the wake of the
2008-2009 meltdown have failed to solve the problem of banking
behemoths. Speaking with reporters Thursday night, a senior White
House official explaining the administration's intentions said, "We
really never have dealt with too big to fail."
In one sense, that is true. The biggest banks -- J.P. Morgan
Chase & Co., Bank of America Corp., Wells Fargo & Co. and
Citigroup Inc. -- have in many cases grown since the crisis.
Goldman Sachs Group Inc. and Morgan Stanley, while down from their
peaks, are nearly as big as they were in the immediate run-up to
the credit crunch.
Instead of forcing the banks to dramatically shrink, or even
break up, the Obama administration and the Federal Reserve favored
an unspoken policy of giving banks a choice: stay big and get
treated like a utility, or shrink and gain some freedom. Most have
chosen the former route.
And regulators' assertions that they would allow big banks to
fail had a hollow ring to them. True, the new regulatory framework
stressed things like so-called living wills, which were meant to
provide a road map to regulators and banks for failing a struggling
institution. But experience in Europe has shown that when a failure
would force losses onto politically favored groups, usually retail
investors, political tends to be lacking for such drastic
actions.
So, one thing the Trump administration could do is clearly spell
out what it expects of banks, and how it will ensure that there is
no bailout backstop for them. That medicine may prove unsettling,
though.
While the administration isn't likely to call for bank breakups
based on size, reopening Dodd-Frank will likely lead to renewed
debate on that front. This could jar investors.
More likely, the administration or congress could choose to more
clearly define what is backstopped by the government and deposit
insurance and what isn't. Again, investors would have reason to be
wary.
The danger is that this pushes up banks' cost of capital if
markets became truly convinced that a big bank could fail. While
that could be good from a systemwide perspective, it could prove
painful short term for some individual firms.
And any attempt to ringfence certain portions of banks'
businesses could make them less nimble, especially in times of
stress. It may also lead to less efficient uses of bank balance
sheets and so more subdued returns.
Of course, there is also great opportunity. If banks are
required to hold less capital, they can return more of it to
shareholders, boosting returns and justifying higher valuations. A
lighter regulatory load also should lead to reduced compliance
expenses, helping profits.
The big question, though, is whether any new overhaul will be
evolutionary or revolutionary. The more the regulatory landscape
changes, the longer it will take banks to adjust to it. That is
likely why top bank executives have talked more of the need for the
existing rule book to not grow, rather than it being thrown out
entirely.
Change could prove a boon for banks. It's just that there also
could be too much of a good thing.
Write to David Reilly at david.reilly@wsj.com
(END) Dow Jones Newswires
February 03, 2017 13:17 ET (18:17 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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