Why GOP Debate Was a Bad Sign for Big Banks

WASHINGTON — There were at least two bad signs for large banks in the Republican debate held late Tuesday — even the most business-friendly candidates felt free to sharply criticize them and many seemed ill-informed about the current system.

Former Florida Gov. Jeb Bush repeatedly — and wrongly — asserted that bank capital levels had declined since the 2010 Dodd-Frank Act, while Sen. Marco Rubio erroneously claimed big banks openly brag about their "too big to fail" status. Meanwhile, the retired neurosurgeon Ben Carson, the No. 2 GOP candidate in the race, offered a view on financial regulation that most analysts found hard to follow, much less understand.

Taken together, these signs do not bode well for big banks' fate should one of these candidates win the White House, though they are still liable to win substantial support from the industry for fear of the Democratic alternative.

"Nobody is going to win a single vote by standing up for the big banks," said Edward Mills, an analyst with FBR Capital Markets. "For the banking industry, instead of being able to count Republicans as their allies, they are looking at what is the lesser of two evils. They will take the establishment candidate from the Republican Party knowing that the major reforms for the banking industry are already in place."

To be sure, what a candidate says on a debate stage is a long way away from actual policymaking.

"It's a no-brainer to back higher capital levels for banks," said Brian Gardner, an analyst with KBW. "Nobody is going to hold that against you. What happens when he gets into office is another matter."

Being a perennial punching bag may be frustrating for the financial industry, but the format of the primary debates and the nature of campaign season help drive the instinct. There's often little time for more than a sound bite or rehearsed stump speech that lacks the context needed for a nuanced policy debate on complex issues like banking.

"If you're explaining and defending, you're on your back foot as a campaign — it's much easier to take a populist tack," said Tony Fratto, a partner at Hamilton Place Strategies.

Still, Fratto noted several instances where the candidates were "not just marginally, but directionally wrong" on key banking issues.

Bush, for example, said that he would avoid another financial crisis by forcing the banks to hold more capital.

"What we ought to do is raise capital requirements so banks aren't too big to fail," he said. "Dodd-Frank has actually done the opposite, totally the opposite, where banks now have higher concentration of risk in assets and the capital requirements aren't high enough."

But Gardner said Bush's remarks were "wrong by any stretch of the imagination."

Financial institutions are now holding more and higher-quality capital than before the crisis — thanks in large part to the Dodd-Frank Act.

"It was sophomoric at best and actually incorrect at worst," said Isaac Boltansky, an analyst at Compass Point Research & Trading. "That comment betrayed a lack of complete understanding of the impact of capital and liquidity rules on the nation's banks."

Rubio, meanwhile, insisted the biggest financial institutions are proud of their "systemically important" status.

"We have actually created a category of systemically important institutions, and these banks go around bragging about it," he said. "You know what they say to people with a wink and a nod? We are so big, we are so important that if we get in trouble, the government has to bail us out. This is an outrage."

The statement is line with some conservative lawmakers and pundits who argue that big banks will have implicit government backing until an institution is actually allowed to fail, but it disregards that most of the industry deeply opposes the label. The insurer MetLife is suing the government over that designation and many banks under $50 billion of assets are struggling to stay small to avoid additional rules and their associated costs.

Rubio's comment "was not dissimilar from Bush's commentary — there was a grain of truth in a broader rice bag full of inaccuracies," quipped Boltansky.

Several candidates, including Sen. Ted Cruz of Texas and businesswoman Carly Fiorina, also raised concerns about cronyism in Washington and the special treatment Wall Street receives from government — another characterization that the big banks flatly deny in the wake of numerous new rules and restrictions.

"The truth is, the rich do great with big government. They get in bed with big government. The big banks get bigger and bigger and bigger under Dodd-Frank and community banks are going out of business," Cruz said.

Carson, meanwhile, opined in detail for the first time about his views on "too big to fail," but his comments were viewed as confusing.

He started out clear — "we should have policies that don't allow them [banks] to just enlarge themselves at the expense of smaller entities" — but his comments drifted off course. He suggested that the financial crisis was caused by the Federal Reserve's monetary policy and warned more generally about the dangers of overregulation.

The comments suggested Carson did not have a grip on the details of financial policy.

"It's a repeating pattern that when it comes to serious policy questions, he has these very high-level, 30,000-foot views of things but he can't talk specifics," said Gardner, who described Carson's response as "rambling."

Some other GOP candidates escaped without laying out their views. Donald Trump was not asked about his views until after the debate in an interview on Fox Business, in which he just criticized Fed Chair Janet Yellen as too "political."

Overall, analysts said the Republican debate was a sign that seven years after the crisis, banks remain deeply unpopular among politicians and the electorate — and that financial institutions' future under either major political party is dim.

The debate "reinforces our view that when it comes to cracking down on the megabanks, the far left and the far right are united," Jaret Seiberg, an analyst at Guggenheim Securities, wrote in a note to clients. "It is why we continue to see the policy environment as negative for the biggest banks."