(Newswire.net — February 9, 2017) — President Trump has hit the ground running with a series of executive orders designed to implement key policy changes for the U.S. government. Whether or not Trump is running in the right direction is a topic for hot debate in the political landscape but there’s no denying the fact that Trump is serious about fulfilling his campaign promises.
One of Trump’s campaign promises, which could have a material effect on U.S. investors is his plan to reduce the regulation on the finance industry. This piece seeks to explore how Trump’s plan to undo the Dodd-Frank Act could provide bank investors with at least a $100B windfall in the next couple of months.
Meet the Dodd-Frank Act
U.S. banks took a big hit during the 2008 global financial crisis and most of them required government bailout in order to stay afloat. The Dodd-Frank act came alive in 2010 after the financial crisis as a proactive measure to prevent another economic meltdown. The Democrat-controlled congress went ahead to pass the Dodd-Frank Act to mandate banks to set aside billions of dollars aside as a buffer against financial crises in the future.
The regulation called for huge capital buffers, strenuous stress tests, and increased capital bases, all designed to ensure that major U.S. would be able to withstand shocks in the global economy. The regulation also serves the purposes of dispelling the erroneous notion of “too big to fail” banks which often gives bank executives a false sense of security.
Why is the Dodd-Frank Act getting the ax?
Donald Trump has been very vocal about the need to reduce the regulation in the financial sector; hence, the Dodd-Frank Act is getting the ax in order to loosen regulatory requirement on banks.
To start with, Republicans think it is important to raise the $50-billion asset threshold at which banks face tougher oversight. Part of the changes they also want to push in the Dodd-Frank act is requiring more disclosure by the Financial Stability Oversight Council and changing the leadership of the Consumer Financial Protection Bureau from a single director to a five-person commission.
In addition, investors in the banking sector believe that some of the rules of the Dodd-Frank act are needless rules that stifle profitability for banks and their investors. For instance, Conor Muldoon, fundamental portfolio manager at Causeway Capital Management LLC observes that “regulatory relief could be a significant tailwind for the industry in terms of capital efficiency and managing cost.”
House Financial Services Committee Chairman, Jeb Hensarling speaks for majority of Republican who want the Dodd Frank Act to be rolled back. He says, “I was proud to stand next to President Trump in the Oval Office today as he signed two important executive actions that represent the beginning of the end of the Dodd-Frank mistake.”
$100B Reasons to Invest in Banks
The Dodd-Frank Act requires banks to hold some excess capital as buffer against economic shocks. However, Samuel De Marco, an analyst at Lionexo.com observes that “the excess capital held by banks is being considered trapped capital by investors because the capital buffers reduce the amount of money that banks can return to investors.” In addition, the Federal Reserve annual “stress test’ on banks often force many of them to hold excess cash in a bid to err on the side of caution.
The top six U.S. banks have more than $101.57B more than the capital buffers that they are required to keep under regulations. Rolling back the Dodd-Frank Act could make banks more comfortable enough to return some of that excess cash to investors. For instance, Citigroup has $27.5B in excess of required capital buffers, JPMorgan has $20.3B in excess of required capital buffers, and Well Fargo has $16.4B in excess of required capital buffers.
Interestingly, banks would be able to reward their investors if the regulatory framework doesn’t force them to keep excess cash buffers. Going forward, investors can expect banks to reward them through dividend increases or share buybacks.