Those hoping for significant regulatory changes this year better not hold their breath.
Bank stocks have rallied considerably since the election with the hope of higher interest rates and the prospect of corporate tax and regulatory reforms coming down the pike. President Donald Trump has maintained that reforms will come, just recently promising a "major haircut" to the landmark Dodd-Frank Act. Still, there is a growing chorus of bank observers who are doubtful that significant change will come out of Washington, D.C., anytime soon, and the lack of action could prove painful for bank stocks.
Isaac Boltansky, senior vice president and policy analyst at Compass Point Research & Trading LLC, likened the current legislative landscape to "bone in mouth disease." Boltansky, speaking at the annual S&P Global Market Intelligence Community Bankers Conference on April 5, referenced the story of the dog that walks up to a pond and sees the reflection of a bone in his mouth. The dog drops the bone in his mouth and instead of having two bones, he ends up with no bones at all. "And that's how I'm thinking about the legislative landscape for the year ahead," Boltansky said at the event. "We have moved from euphoria on the legislative side to a slow reckoning of realities and pains of the legislative process."
Investors have gotten a taste of that reality in recent weeks, with Congressional Republicans withdrawing plans to move forward with healthcare reform. The markets have reacted to the challenge of effecting change, pushing the KBW Nasdaq Bank Index down 5% since mid-March. Boltansky said bankers should be disappointed by the slow pace of the nomination process in financial services positions, including the vice chairman of supervision at the Federal Reserve, who could serve as the regulation czar, leading major policy decisions at the central bank.
The policy analyst expects the head of the House Financial Services Committee, Jeb Hensarling, R-Texas, to move forward with a revised version of his regulatory reform bill, commonly referred to as the Financial CHOICE Act 2.0, but he does not expect material changes from the first proposal. He further noted that the timeline of that legislation has now slipped to June or July when it was previously expected to surface in May. He said the timeline will probably slip again.
Jeremy Dalpiaz, assistant vice president for cyber and data security at the Independent Community Bankers of America, encouraged bankers in attendance at the event to be optimistic but also realistic about possible regulatory reforms. "Congress is a funny beast. They're very good at press releases, they're very good at introducing legislation and they're a little slow on the policy side," he said at the event.
PIMCO's executive vice president and head of public policy, Libby Cantrill, has expressed skepticism over the timing of any regulatory reforms. She recently told us that policy changes could take years to be felt.
There is some expectation that the market could gain more insight into the direction of regulatory reform in June when the U.S. Treasury Department is expected to publish a report detailing Dodd-Frank's effect on American businesses and consumers.
Boltansky believes the details of that report will simply be a "wish list" of what the Trump administration hopes to achieve. He noted that many significant reforms, such as changing the asset threshold attached to the designation of systemically important financial institutions, would have to come with legislative changes. He believes any such changes are unlikely until 2018. Even if it took that long for reforms to come, the impact could be significant and offer a considerable boost to earnings. We have estimated that earnings could jump as much 20% in 2018, assuming that corporate tax and regulatory reforms take effect, beginning in 2018. But some observers are questioning if that timeline is now possible.
With reforms now possibly hanging in the balance, some bank stock watchers suggest that the group might have gotten ahead of itself. Josh Siegel, managing partner, chairman and CEO of StoneCastle Partners LLC, seems to be in that camp. He noted at the Community Bankers Conference this week that bank stocks might have run up "too far, too fast," adding that a notable correction could lie on the horizon.