2018 shaping up to be a good year for banks
The US banking industry is in an upbeat mood as it looks ahead in 2018, following a year of policy and regulatory uncertainty under the Trump administration, including an announced changing of the guard at the Federal Reserve.
Overall, the banking and finance sector performed well in 2017 - stocks have appreciated in the last 12 months - but the sector also suffered setbacks with reports of misdeeds by companies like Wells Fargo, while others, such as UBS and Deutsche Bank, received waivers on restrictions imposed on them after they pled guilty to currency manipulation in the LIBOR scandal of a few years ago.
In the year ahead, the banking sector will be bolstered by the fact that the Trump administration is favorably disposed towards Wall Street, and it will benefit from the latest tax reforms as U.S. corporations bring back profits held overseas. In addition, the new Fed chair, Jerome Powell, who takes over on February 3, is expected to continue raising rates and maintain the steady pace of his predecessor, Janet Yellen. At the same time, lingering consumer distrust - a fallout from the recent scandals - and more competition from fintechs are potential hurdles for banks this year, according to Wharton legal studies and business ethics professors Peter Conti-Brown and David Zaring.
An easing of regulatory scrutiny seems to be the most important gain banks are looking forward to in 2018. According to Zaring, the deregulation that banks expected in 2017 but didn't materialize could become reality this year. "[A] lighter touch by regulators over banks may be beginning to happen," he said.
Conti-Brown noted that amid much lobbying by the banking industry, the House of Representatives last year passed The Choice Act 2.0, the second version of the overhaul of the Dodd-Frank act that came into place as a response to the 2008 financial crisis. The Choice Act is still pending in the Senate. "But what we've seen in the Senate, too, is a dramatic proposal of some bipartisan buy-in to redo the way that we regulate big banks, but not the biggest banks," he added, noting that banks are "cheering that move." He also sensed "a lot of sympathy coming from the Trump treasury" on how banks and systemic risks are regulated.
Conti-Brown didn't expect a wholesale rollback of the main aspects of Dodd-Frank, such as consumer financial protection, regulation of derivatives, and the regulation of systemic risk as an alternative to bankruptcy in case of failure of large institutions. But the big change will be in how they are implemented, he said. "I think all of those big blocks are here to stay.
Both Zaring and Conti-Brown expected relaxations in the Volcker Rule that prohibits banks from conducting specific investment activities on their own account. Smaller banks have complained about not being able to trade on their own account, said Zaring. Conti-Brown noted that "even [former Fed chair Paul] Volcker himself wasn't pleased with the complexity of the implementation [of the rule] and these definitional exercises."
"Wall Street has found a lot to like about Trump-era bank regulation," said Zaring. However, he pointed out that the Trump administration has not exactly done much to help community banks so far. "It hasn't been opposed to them, but certainly everything that they've done has been great for the really largest banks and not particularly great yet for community banks." At the same time, the smaller banks would have reason to celebrate if the Volcker Rule goes away, he noted. The Tax Cuts and Jobs Act of 2017 will also benefit banks greatly, said Zaring. Thanks to the incentives in that legislation, banks are expecting their corporate clients to bring back money held overseas - and that could find its way into M&A deals and fees for bankers, he explained.