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Big banks could have an extra $100 billion in capital to play with if President Donald Trump’s financial regulation plans come to fruition.
After the financial crisis, regulators required banks to build up billions in capital reserves to mitigate “too big to fail” concerns. The Trump administration would like to roll back those demands – and many others – it made clear in a 150-page report from the Treasury Department this week.
Goldman Sachs noted that the five-largest US banks, not including Goldman itself, would have $96 billion in excess capital they could deploy if the Treasury’s plans were enacted, according to Bloomberg.
The Trump administration is hoping its policies will encourage banks to open a floodgate of lending, especially to Main Street for homes and small businesses, thus helping to stimulate the economy.
He may be disappointed.
Bank executives, who have praised the Treasury’s proposals, might have other designs for that cash: A big payday for investors.
If stress tests were scaled back – the Treasury has suggested examinations every two years instead of annually – banks would be liberated to increase dividends, Credit Suisse said in a research note.
“These are shareholder-driven entities, first and foremost,” David Hendler, the founder of New York-based researcher Viola Risk Advisors, told Bloomberg. “They will turn on a little more dividend or buy back stock, mostly.”
Citigroup CFO John Gerspach acknowledged as much this week, saying at a conference that Citi was looking at ways to eventually return some $45 billion in excess capital to shareholders.
Part of the problem is that banks have largely tapped out creditworthy borrowers, and they’re leery of dipping their toes deeper into subprime waters.
Banks, which have seen credit card defaults spike in the past two quarters, have spoken openlyabout tightening consumer lending standards rather than increasing access to credit. Auto loan defaults are also starting to worry Wall Street.
Gordon Smith, CEO of consumer and community Banking at JPMorgan, said at a conference this week that lenders should be tightening their credit standards rather than loosening them – a strategy that credit card issuer Discover said it was embracing, according to Bloomberg.
Perhaps executives like Smith and Gerspach will change their outlook by the time the Trump Administration’s plans become reality.
The smart money, for now, appears to be on banks using their colossal stash of capital to reward their investors.