Bank Investors: Beware Senators Bearing Gifts
Reopening Regulatory Debate Carries Hazards for Banks
By John Carney And David Reilly
Nov. 5, 2014 12:47 p.m. ET
The ascension of Republicans to leadership in the U.S. Senate raises prospects for a change to financial regulation that has broad and bipartisan support and seemingly could be a boon to some medium-size banks. Unfortunately for investors, the potential costs of shaking the financial-reform tree may be too high.
Many bankers would like to see a change to rules for designating banks as systemically important. The Dodd-Frank Act drew a legislative line under banks with $50 billion or more in assets, subjecting them to greater scrutiny by the Federal Reserve and other regulators.
Voices across the political spectrum have talked about this demarcation being arbitrary or too low. In a speech this spring, even Fed Governor Daniel Tarullo , the central bank’s point person on financial regulation, said the line might better be drawn at $100 billion.
Around two dozen lenders with assets between $40 billion and $100 billion could seem to benefit from such a move, among them Zions Bancorp , Huntington Bancshares , M&T and CIT Group. This would relieve large cost burdens incurred to comply with enhanced regulation, including the need to submit to stress tests and resolution planning.
Proponents of the change also say it would allow regulators to better focus on those financial institutions that pose the widest-reaching threats to the financial system.
That rare consensus could put change within reach, giving Republican and Democratic lawmakers a rare chance to show they can work together. The danger: Any attempt to change one aspect of Dodd-Frank will be seen as a breach through which supporters of a far broader set of changes will charge.
Investors might be tempted to think reopening the debate over financial regulation could prove a bonanza for banks. Restrictions on trading, requirements to hold more capital, and stricter oversight have combined to weigh down returns, particularly at the biggest banks.
But reviving the debate over financial reform could also resurrect the question of what to do about too-big-to-fail banks and renew calls for them to be broken up. Some powerful lawmakers also have voiced support for raising capital levels even higher. That could put the likes of J.P. Morgan Chase , Bank of America and Citigroup back on the hot seat.
This is one of the problems that has plagued bipartisan efforts to amend the so-called Collins Amendment, which regulators say requires them to impose bank-capital requirements on insurance companies tagged as systemically important. No one thinks that is the right approach. But efforts to fix it have stalled, in part thanks to attempts to tack on other changes to financial regulations.
An added wrinkle: While banks have struggled with the onslaught of new regulations, they are getting a handle on them. Loan growth and returns on equity are starting to rise, as predicted by a Bank of England working paper published earlier this year. It found it takes about three years for banks to adjust to new rules. Upending them now could restart that clock, dragging returns down again.
Change has a sweet sound. But in this case it could leave a sour taste in the mouths of bank investors.
