The big rally in bank shares driven by the Trump Rally may finally be dead. In a worrying sign for investors, new data shows that top bankers are selling their own company’s shares. So far this year, insiders at big banks have been selling, with sales of shares at the six largest US banks outnumbering purchases 14 to 1. The trend is unusual and a stark contrast to behavior from last year. Such insider selling or purchases are sometimes taken as powerful signaling mechanisms, such as Jamie Dimon’s purchases last year. Butt in 2017 there have been no such faith-inducing buys.
FINSUM: This is not a good sign, especially because insiders see how changing scenarios are impacting their own businesses. That said, all of 2017 is not exactly a great timeframe by which to judge the market right now. The last month would be much more elucidating.
So one of the things that was very hard to figure during the Trump Rally, especially in bank stocks, was to what degree banks may actually benefit from the deregulation that Trump’s administration was proposing. Well, that may now be starting to change as Bloomberg has just put out a comprehensive set of new estimates for how much each bank would benefit from various types of deregulation. JP Morgan and Morgan Stanley would be the biggest beneficiaries, seeing their pretax profits jump a whopping 22%. Goldman Sachs would see the smallest percentage increase, up 16%. The calculations are based on conversations with banks as well as their own disclosures.
FINSUM: These are pretty big gains. Frankly, they are larger than we would have anticipated. Now to the pesky part about actually enacting deregulation.
Here is an eye-opener. Investors have for years been buying bank stocks in the expectation of rising rates. That idea was a major component of the Trump rally. However, the view from the inside appears to be changing, as banks don’t think rates are going up. According to the Wall Street Journal, banks have given up on rising rates and are buying up all manner of loans that have low rates locked in for long periods, a sure sign they do not expect rates to move higher. Overall, the percentage of bank assets whose rates will not rise in the next five years hit a new high in the second quarter.
FINSUM: After all the hopes of increased profitability from higher rates, everything seems to have returned to the “lower for longer” post-Crisis paradigm.
The Republican party has been pushing to overturn one of the most hated of all the hated CFPB rules. The Consumer Financial Protection Bureau currently has a rule (poised to be implemented) which makes it easy for consumers to sue banks. The Republican party is trying to overturn the rule disallowing arbitration, allowing for banks and credit card companies to settle matters outside of court. However, momentum towards overturning it seems to be waning despite Republican backers pushing for a vote when they return from recess. The Senate needs to pass the measure in September when it returns, but the vote is looking tight.
FINSUM: This would be a big victory for financial companies, but we suspect that in the current political environment there will not be enough Senate votes to overturn this.
One of the crowning achievements of Dodd-Frank has been the Volcker Rule, or the rule which bars banks from undertaking trading on their own account. The US’ OCC this week took the first step to loosening the rule, which is hated by those on Wall Street. The leader of the OCC, appointed by President Trump, has opened a request for comment, which is a prelude to a possible loosening or overturning of the rule. Consensus has apparently been formed in Washington, across parties, that the Volcker Rule needs to be simplified in order to be more effective.
FINSUM: The devil has always been in the details with regards to the Volcker Rule, because the difference between trading one’s own account, and building up inventory for future client trades can become very blurry, especially in bond markets. The rule has certainly hollowed out corporate bond liquidity.