Wall Street's Regulatory Rollback Yawn
Wall Street's excitement about the Trump administration's proposed changes to financial regulation is clear everywhere except on Wall Street.
Shares of the nation's biggest banks have fallen slightly since the Treasury Department released its 150-page report on Monday night detailing the ways it would like to water down Dodd-Frank, the banking law that was passed after the financial crisis. Goldman Sachs Group, the biggest winner among big bank stock since then, is up 0.6 percent. Bank of America is down a percent.
And that's despite that fact that a number of Wall Street analysts said the proposed rule changes were superlative for banks. One analyst, Cowen Group Inc.'s Jaret Seiberg, said the fact that President Donald Trump hasn't tweeted about it shows how big a deal it truly is.
Of course, bank stocks have already risen 25 percent since Trump was elected. And while you could argue that move has a lot to do with the coming deregulation, high interest rates and expected tax cuts have been drivers as well. Still, stock moves are about expectations. So the best thing you can say about the Treasury's proposed banking reforms is that they are, as Wall Street would say, in line.
Part of the problem is that the 150-page report, which many have described as detailed, is a laundry list. Individually, each proposed change could spiff up the banks, freeing up capital to make new loans, take more risks or give money back to shareholders through dividends or stock buybacks. Some bank analysts have said the Treasury's changes, taken together, could unlock as much as $2 trillion in capital, a hard-to-believe 11 percent of GDP, now "trapped" inside banks. And for small banks, the cost of compliance would be much smaller.
But when it comes to the big banks, it's not clear how big of a boon the suite of Treasury's Dodd-Frank "fixes" would be. In practice, it appears a number of the proposals would clash.
For example, compare the proposed changes to the capital buffer big banks are forced to hold with the way Treasury would like to alter the rules that govern the required mix of that capital. Treasury contends that when the excess capital rules for big banks were put into Dodd-Frank, most of them relied heavily on short-term borrowing. Now the banks have much more long-term debt, and, the Treasury argues, pose less of a risk of financial contagion, so they don't need to hold so much, or any, extra capital. But the chief reason the big banks have so much more long-term debt is because Dodd-Frank requires it, a rule that Treasury would, unsurprisingly, like to scrap as well. Regulators could do both, but it's unclear how.
Among the most-detailed proposals in the Treasury report is an adjustment to how much equity the banks need to keep on hand compared with their total assets, dubbed the supplemental leverage ratio. The SLR is a higher hurdle because it counts all of a bank's assets (including off-balance sheet ones) and not just the ones that have a reasonable risk of going bad. The Trump administration's proposal is to lower that hurdle by removing from the SLR cash, deposits at central banks and Treasuries -- all of which are pretty low risk.
Earlier this week, Goldman estimated that the SLR adjustment alone would leave seven big banks with a total of $96 billion more in capital than would be required. But here's the thing: The banks already have tens of billions of excess capital on paper, even under the current rules, money that has built up because regulators so far have limited what can be returned as dividends. Of that $96 billion, $46 billion is at one bank, Citigroup. And of Citi's $46 billion, which translates into a hefty nearly $17 a share, almost half, or $22 billion, by Goldman's math, is already above what it should have to carry on paper. In fact, Goldman says, of the seven banks, there is only one -- Morgan Stanley -- that would go from not being able to raise its dividend to having billions in excess capital if Treasury's SLR change was enacted. (Goldman is probably in this category as well, but Goldman's analysts didn't include their own bank in their analysis.) All the other banks already have well more than they need, more than $47 billion collectively, again under the current rules.
In the end, the reason Citi and the others appear to have more capital than required is because of the mistrust -- some would say justified -- that regulators retained about the banks, at least until recently. The Federal Reserve came up with ways, like adjustments to the annual stress tests, to ratchet up capital levels beyond the technical requirements. That mistrust was going to fade eventually. It will probably fade a bit faster under the Trump administration. But rewriting the rules, at least for the big banks, isn't going to matter as much as many people might think.
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Stephen Gandel in New York at firstname.lastname@example.org
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Daniel Niemi at email@example.com