House passes bank reform; banks posted record net income in Q1

Receiving Wide Coverage ...

One step away: By a vote of 258-159, with 33 Democrats siding with the Republican majority, the House passed what the Wall Street Journal calls the “most significant bipartisan revamp of financial rules since Republicans took control of government last year.” The bill, which now goes to President Trump for his signature, sets “off a wave of deregulatory actions by federal agencies that will ease — but not dismantle — the 2010 Dodd-Frank financial law. The bill could encourage deal-making and make it easier for banks to expand,” the Journal adds. Wall Street Journal, Financial Times, Washington Post, American Banker here and here

“The bill stops far short of unwinding the toughened regulatory regime put in place to prevent the nation’s biggest banks from engaging in risky behavior, but it represents a substantial watering down of Obama-era rules governing a large swath of the banking system,” the New York Times comments. “The legislation will leave fewer than 10 big banks in the United States subject to stricter federal oversight, freeing thousands of banks with less than $250 billion in assets from a post-crisis crackdown that they have long complained is too onerous.”

The passage of the legislation “demonstrates how policy makers scaled back their priorities to maintain support for a compromise.”

Here’s a summary of what’s in the legislation.

The Times looks at “three ways in which it potentially leaves the system and taxpayers exposed.”

We'll hit the heights: Even without the legislation, banks are still doing well. The banking industry collectively earned a record $56 billion in the first quarter, up nearly 28% from the year-earlier quarter and $8 billion more than the previous record. A lot of the gain was due to the new tax law, but the Federal Deposit Insurance Corp. said banks would have still earned more than $49 billion without it. Aggregate return on equity was 11.44%, the highest since 2007. Wall Street Journal, Washington Post, American Banker here and here

All of the above could spur consolidation in the banking business.

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Wall Street Journal

Gimme that bitcoin: While their larger brethren shun the business, some smaller banks are embracing cryptocurrencies as a way to differentiate themselves — and to make money. For example, Silvergate Bank, which has three branches in the San Diego area, saw its assets nearly double to $1.9 billion due to business from crypto-related companies. “These banks are taking a calculated risk to embrace an untested new market that is associated with a variety of hazards, itself a striking stance in the staid world of banking,” the paper says.

Wider testing: The Bank of Canada is looking at including smaller financial institutions and mortgage insurers in its stress testing as concerns grow about a nationwide housing slowdown. “The move comes amid concern that new mortgage-financing rules imposed by the Canadian government may be driving more borrowers to alternative lenders such as mortgage investment corporations, which often take on riskier clients.”

Concerned: Skeptics are worried that the European Investment Fund, which is controlled by area governments and some big banks, allows European banks to engage in “opaque trades” that make them look healthier than they actually are, potentially exposing taxpayers to losses, “something post-financial crisis rules were meant to protect against.”

Financial Times

On a roll: Barclays, which has seemed to stagger from one problem or scandal to the next, suddenly has the wind at its back. “A year ago, the problems were coming thick and fast for [CEO] Jes Staley. Roll forward 12 months and Mr. Staley has sailed through relatively unscathed. He can now even claim to be making progress in a central goal of clearing up the big legal issues that have been hanging over the bank for many years.”

The bank is even considering a merger with another international bank, with names including Standard Chartered.

Chicken Little: Hedge fund manager and activist investor Christopher Hohn wants the Bank of England to impose strict rules on how banks deal with climate change risk. “Failing to act risks endangering the long-term stability of the U.K. banking system,” Hohn wrote to the BoE. “It may also expose banks to litigation for inadequate disclosure under existing law. You can lead or be a follower. We are saying the U.K. banking system should be forced to lead.”

Quotable

“After today the major provisions of Dodd-Frank will apply to only 13 U.S. institutions. It’s a good day to be a bank, or a bank shareholder.” — Dan Ryan, banking leader at PwC.