If Donald Trump gets his way in overhauling banking regulation, it would free up some of the billions of dollars in capital that banks were forced to amass after the financial crisis. Less clear is what they’ll do with it.
After the administration released a highly anticipated 150-page report this week, Wall Street analysts spent two days churning out notes digesting its proposals. Researchers at Goldman Sachs Group Inc. calculated the five largest banks, excluding their own employer, have $96 billion in excess capital. Bank of America Corp. said the plan might unleash as much as $2 trillion in additional lending.
But is that how the money would be used? President Trump would like banks to plow their windfall back into the economy by making more loans to home buyers, small businesses or companies looking to expand. Some on Wall Street predict a lot will flow straight into the pockets of shareholders. One measure would ease annual stress tests, giving firms leeway to increase dividends, Credit Suisse Group AG analysts wrote in a May 24 note anticipating the proposals.
“These are shareholder-driven entities, first and foremost,” said David Hendler, the founder of New York-based researcher Viola Risk Advisors. “They will turn on a little more dividend or buy back stock, mostly.”
One problem is that qualified borrowers have ample access to financing and aren’t demanding more -- a slump that bank executives have bemoaned. And delinquencies on credit cards and auto loans already are rising. The loss rate on car loans made to people with good credit and packaged into bonds, for example, was the highest in the first quarter since 2008, S&P Global Ratings said in a recent report.
Some big U.S. banks have raised concerns in recent weeks that consumers may even have too much access to credit, increasing the risk that lenders will get burned.
Credit-card lender Discover Financial Services is more likely to tighten than loosen lending standards in coming months to head off problems, such as borrowers rapidly racking up debts from multiple sources, Chief Operating Officer Roger Hochschild told investors Wednesday. JPMorgan Chase & Co. has curbed auto-lending, according to consumer banking chief Gordon Smith.
“It’s not, in my opinion, a time to be loosening,” Smith, 58, told investors at a conference Tuesday. “The industry is at a point where it should be rigorously managing credit.”
That didn’t stop Treasury Secretary Steven Mnuchin from pushing forward with his plan Monday. Trump signed an executive order in February that called for the report, which suggests staggering the largest banks’ annual stress tests to once every two years. It also would eliminate part of the exam based on qualitative measures. And it would change rules affecting the mortgage market, small lenders and leveraged loans -- the risky financing that banks arrange to help buyout firms acquire companies with relatively little money up front.
Read more: Trump administration calls for overhaul of Wall Street rules