Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

A new mood of hope and determination is washing over big U.S. banks.

President Donald Trump has pledged to roll back post-crisis banking rules, opening the door to bigger profits on Wall Street in an attempt to ignite growth.

Price Surge
JPMorgan, the biggest U.S. bank, has seen its value surge since the November U.S. election
Source: Bloomberg

But these promises won't translate into substantially bigger revenues in short order without a huge fight. Wall Street knows this. It's most likely why Citigroup just established a new global regulatory affairs team in Washington, which is being run by Kevin Bailey, a former longtime official at the Office of the Comptroller of the Currency, according to a Bloomberg News article on Wednesday.

The unit will be similar to groups at JPMorgan Chase and Goldman Sachs that are devoted to shaping financial rules. And they'll be busier and more relevant than they have been in years.

Still, it's important to note that the regulations that are being targeted most publicly, namely the Dodd-Frank Act, may take years to change and even longer to go into effect. While the battle lines are being drawn, the real action may take place behind the scenes in something like a covert action. 

That's because agencies such as the OCC, the Federal Reserve and the Commodity Futures Trading Commission have substantial power over big banks, and their rules are easier to change because they don't require action by lawmakers. Here are some areas that are governed by "softer" regulations:

First, there's leveraged-lending guidelines. These were put into place by the Fed, the OCC and the Federal Deposit Insurance Company in 2013 to prevent the largest banks from underwriting shoddy corporate loans. These rule-makers spent the next few years trying to identify what constituted a shoddy loan and came up with things like the leverage ratios of corporate borrowers, covenants and how companies planned to use the money.

But it turns out that investors want to buy these loans. So while the biggest U.S. firms may be prohibited from underwriting this debt, other firms, such as Jefferies and Nomura, have done so instead. This has helped rearrange the league tables of leveraged-loan underwriters.

Getting Crowded
New regulations have helped more firms get involved with underwriting lower-rated loans
Source: Bloomberg

If these guidelines were to be changed or eliminated, it's easy to see how the tables could revert to their earlier looks.

Second, the OCC could make life easier for the biggest banks in just months. Consider, for example, the agency's recent ruling prohibiting JPMorgan from reducing its capital requirements with a transaction that's similar to ones accepted by European regulators. 

In this case, JPMorgan basically sold bonds backed by a pool of mortgages on its books, bought the most senior ones and sold most of the riskiest notes, which are designed to absorb first losses, to outside investors. JPMorgan assumed that it would receive some credit for reducing its vulnerability to losses. But the OCC rejected the deal, creating ripples for other firms that were hoping to do something similar. 

If the agency had ruled differently, it would have paved the way for a new cottage industry of reducing capital requirements.

Third, there will likely be a fierce fight over CFTC guidelines that oversee swaps execution facilities, which aim to make derivatives trading safer and more transparent.

The CFTC has issued guidance on these swaps rules that have changed the derivatives business, which has become less profitable for the biggest banks.

For example, the agency has weighed in on whether traders can prevent specific counterparties from seeing certain prices displayed on these electronic trading systems as well as on important specifics of how trades ought to be cleared.

This guidance could change, especially since Christopher Giancarlo, a Republican member of the CFTC, recently took over as acting chairman of the agency after Timothy Massad resigned. 

Fourth, there is also the question of who will succeed Daniel Tarullo, the Fed official who headed a push to make banks safer after the 2008 financial crisis and who plans to step down in April. 

There will be many battles in Washington over the new regulatory landscape for Wall Street. The biggest near-term changes will likely come from changes in agency-level policies, not the broad sweeping rules laid out in Dodd-Frank.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net