Banking executives have applauded the proposals. Citigroup Inc.’s finance chief, John Gerspach, told investors that “there is a lot of common sense there.” Morgan Stanley Chief Executive Officer James Gorman wrote in the Financial Times that “targeted changes” can preserve the banking system’s strength while promoting economic growth and job creation.
Combining the proposals with Trump’s other policy prescriptions such as infrastructure spending or housing-finance reform could stoke borrower demand, according to Anton Schutz, a bank investor and president at Rochester, New York-based Mendon Capital Advisors. And if it does, you want banks to have the capacity to lend, he said.
“Should they ever get an infrastructure plan in place, should they ever get tax cuts, one might think there would be a demand to borrow money,” Schutz said. It would be counterproductive to “have an infrastructure program and people can’t borrow money.”
Even if banks throw much of their unlocked cash to investors, all is not lost for the economy, he said. Investors will take that money and plow it back into other companies or industries that have better growth prospects, he said. Payouts also prevent banks from wasting capital by making bad loans or poorly considered acquisitions, Schutz said.
“That capital seeks a better place,” he said. “You’re buying that stock back from someone else who can go invest that capital in something else that creates a higher return.”
‘Juicy Businesses’
Brian Kleinhanzl, an analyst at Keefe, Bruyette and Woods, said lenders will choose to increase their balance sheets rather than shrink them, expanding types of lending that are treated more advantageously under the revised capital rules.
That may mean more lending to Wall Street than Main Street. Looser rules for leveraged loans could fuel private equity firms, while changes to some capital ratios would enable banks to make more credit available to hedge funds, according to analysts.
Areas ripe for increased lending, according to the Treasury, include the mortgage market and small businesses, which would help Main Street. The report suggested reducing the amount that banks must keep when selling mortgages for bonds and making underwriting standards more flexible. That would also expand banks’ Wall Street operations, according to Hendler.
“It gets them back in some of the juicy businesses,” Hendler said. “The mortgage-backed securities market is the heart and soul of fixed income,” he said, adding that it makes “the most money.” Indeed, those operations once fueled record profits, before 2008’s financial crisis.