The showdown over bank regulations may finally be here. And bank stocks are on an upward tear as a result.
As reported by Forbes, the rally in banks, which as a group were up 25 percent in the wake of Donald Trump’s election in November, continues apace as the new president has, as of Friday (Feb. 3), introduced an executive order instructing the U.S. Treasury Department to scale back Dodd-Frank and its inherent oversight of the financial industry.
Banks stocks are up in the low single digits as a result, with the implication that relaxed regulations will open up the ability to do more with capital on banks’ balance sheets and gain earnings momentum. The key here is that trading activity (commonly known as prop trading) currently and previously truncated by the mandate of the Volcker Rule will likely resume, with marquee names like Morgan Stanley and Goldman Sachs benefitting.
Also, as is well-known by now, the Consumer Finance Protection Bureau is in the crosshairs, as the very structure of that agency is, along with the scope of its powers, under review.
As Forbes noted, banks with at least $10 billion in assets are faced with greater regulatory oversight, and those with $50 billion in assets are subject to stress tests via the Fed. Those who advocate for a rollback in regulations say that capital would be freed up enough so that these smaller institutions could put money to work in the form of business loans.