Investors in the six largest banks in the U.S. potentially stand to gain $100 billion in returned capital through dividends and share buybacks if President Donald Trump successfully loosens regulations on the banking industry.
Trump signed executive orders Friday that began the process of rolling back two major Wall Street regulations: the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the Department of Labor’s retirement advice rule, also known as the “fiduciary rule.”
The president said the goal was “cutting out” a lot of the regulatory burdens placed on the financial sector following 2007’s housing crisis. (RELATED: Trump Signs Executive Orders To Rip Up Dodd-Frank ‘Disaster’)
The most important of these orders for bankers and investors is Dodd-Frank, a law enacted in 2010 under the Obama administration following the housing crisis. The act was intended to increase transparency by implementing a consistent set of regulations aimed at closing loopholes and making firms accountable for their own mistakes.
The bill attempted to shift the burden of major financial mistakes from taxpayers to market participants, ensuring those who partake in risky investment practices would bear the financial burden of their mistakes.
Effectively, banks were required by federal regulators to hold excess capital reserves to guard against large market failures. These capital requirements are not explicitly laid out in Dodd-Frank, but are set by the Federal Reserve Bank and federal regulators. (RELATED: Trump To Repeal Dodd-Frank)
One of the externalities, or unintended effects, of Dodd-Frank is banks are holding more reserves, and not lending out money to businesses or consumers. It is estimated that the top six U.S. banks hold $101.57 billion in capital above what is required by federal regulators for them to set aside. If regulations were tapered back, banks could very well return all, or some, of these excess reserves to investors — a prospect shareholders would assuredly welcome.
Since capital requirements are set by federal regulators, it is not clear what Trump could do to change them. The president could, however, make personnel changes at the Federal Reserve and other agencies to seek desired policy changes.
Financial and credit lending stocks jumped Friday on the news that Trump was setting the stage for what looks to be an era of low taxes and deregulation. Friday’s boost was just the latest in a seemingly endless upward trend in the stock values of major banks and credit lenders since Trump defeated former Secretary of State Hillary Clinton. Goldman Sachs, JP Morgan Chase, and American Express all experienced marked gains Friday. (RELATED: Why Major Tax Reform Is No Longer Just Talk)
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