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Will Banks Benefit From the Easing of Dodd-Frank Rules?


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The long-time demand of banks to scale back stringent regulations is finally a reality. The House passed a crucial bill easing some provisions of the 2010 Dodd-Frank Act that were put in place as safeguard against repeat of the 2008 financial crisis.

The House passed the bill on Tuesday backed by majority voting of 258 to 159, promising it to be beneficial for small and mid-sized banks. It would now be presented to President Donald Trump for signing, with the Senate already having passed the legislation in March.

Highlights of the Bill

Perhaps the most significant relief from the bill is the reduction in the number of banks labeled as systemically important financial institutions (SIFI). The bill will eventually raise the threshold for SIFI to $250 billion in assets from the current $50 billion.

Banks with assets in the range of $50-$100 billion will get immediate relief while those with assets between $100 billion and $250 billion will be exempted 18 months later. This will lower the number of SIFI banks to just around a dozen from the present 38.

Therefore, banks including SunTrust STI , BB&T Corporation BBT , Citizens Financial Group, Inc. and Zions Bancorporation ZION , which are presently under stringent supervision, will heave a sigh of relief. These banks will not be required to undergo annual stress tests or submit so-called 'living wills,' both necessitated as measures to plan for financial disaster. So, this will eventually lower regulatory compliance costs.

Further, the move will likely lead to a wave of M&As for the banking industry. At present, consolidation in the industry is few and far between as banks try to put off crossing the threshold levels that trigger tougher rules.

Other than this, the bill will lower the amount of capital required to be held by the custodian banks. The bill will allow these companies to set aside the money they received from clients and immediately send it to the Fed or some other central bank for safety. Thus, the Zacks Rank #2 (Buy) custodian banks - State Street STT , BNY Mellon and Northern Trust NTRS - will be the major gainers.

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Further, banks with less than $10 billion in assets will be exempted from complying with the Volker Rule, which prohibits proprietary trading. The bill also eases mortgage loan data reporting requirements for several banks and credit unions as well as relaxes rules on what type of real estate loans smaller community banks can make.

Additionally, the legislation will add new safeguards for student loan borrowers and necessitate credit reporting companies like Equifax and TransUnion to provide free credit monitoring services.

Is Dodd-Frank Hurting Banks' Financials?

The Dodd-Frank Act has been criticized by small and medium banks for tougher rules that have made it difficult of them to do business and remain profitable. But in reality, did the law actually hurt their profitability?

Well, if we go by the figures, banks have continued to earn significant profits. Federal Deposit Insurance Corporation ("FDIC")-insured commercial banks and savings institutions reported record earnings of $56 billion in first-quarter 2018, up 27.5% year over year. Notably, community banks, constituting 92% of all FDIC-insured institutions, reported net income of $6.1 billion, 17.7% above the prior-year quarter level.

While one can say that improving economy and higher interest rates have supported banks, strict rules have also played their part to some extent in aiding the financials.

Monitoring by regulatory bodies has helped banks to keep a check on their operations and maintain sufficient capital cushion to avoid another financial crisis. By establishing the Consumer Financial Protection Bureau ("CFPB") to oversee credit cards, mortgages and other financial products as well as other regulatory bodies to check for signs of instability, the Dodd-Frank Act provided stability to the banking industry.

Road Ahead

The bill is not as aggressive as expected by many large banks and not enough to make sweeping changes in the regulations. Still, it is the most important step to fulfill President Trump's election promise of lessening banking regulations, which are stifling economic growth (as seen by many) and lending activities.

But the legislation is of little help to some of the nation's biggest banks (in term of assets) like JPMorgan JPM , Bank of America BAC , PNC Financial, Goldman and Wells Fargo. Notably, further discussions seem to be going on about lowering capital requirements and easing other restrictions on these banks.

Later this month, the banking regulators are expected to release a proposal to weaken the Volker Rule for big banks. Further, the CFPB interim head has significantly scaled back the agency's activities and stopped probes into finance companies.

Thus, in the coming days, more regulatory easing is expected. These will definitely help the banks to further improve profitability. Also, shareholders might expect more returns in the form of buybacks and dividends.

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JPMorgan Chase & Co. (JPM): Free Stock Analysis Report

BB&T Corporation (BBT): Free Stock Analysis Report

SunTrust Banks, Inc. (STI): Free Stock Analysis Report

State Street Corporation (STT): Free Stock Analysis Report

Bank of America Corporation (BAC): Free Stock Analysis Report

Northern Trust Corporation (NTRS): Free Stock Analysis Report

Zions Bancorporation (ZION): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Business , Stocks
Referenced Symbols: JPM , BBT , STI , STT , BAC


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