When smooth waters cause ripples


It is proving to be a healthy quarter of results for US banks and the outlook is fine, regardless of what might or might not happen about regulation.

The banks have decent economic growth to thank for much of their own health. Higher interest rates have been good for bank lending and net interest margins are continuing to expanding as loan growth, particularly in commercial and industrial and commercial real estate, improves. Default and delinquency rates remain low and consumer spending is holding up.

Meanwhile, the large US banks have made good progress on increasing capital levels. 18 months ago they had to increase their Total Loss Absorbing Capital, an amount of debt intended to stop banks from needing taxpayer funded bailouts in the future, by issuing new debt. This was widely expected to be a challenge: it’s hard to justify buying the first tranche when you know that the bank has a huge amount more to issue. But the banks have done better than was expected. This, and their ongoing deleveraging efforts, have meant that risk weighted assets at US banks have come down.

All of this means that US banks are in decent shape regardless of the fact that Donald Trump was elected last year. What remains to be seen is whether the roll back of banking regulation that he promised will occur.

The wider question is whether such a roll back is even desirable. Bank bosses want it but this is obvious and definitely doesn’t mean it’s a good idea. The point of the post-crisis regulation was to make banks less risky. So it stands to reason that rolling some of the regulation back could increase their risk profile. To a creditor, this should be a concern.

What is critical is that any removal of regulation doesn’t hinder oversight of banking activity. A major cause of the financial crisis was a complete lack of oversight within banks and from regulators and investors.

The market certainly seems more live to the risks than they might have been ten years ago.

The market certainly seems more live to the risks than they might have been ten years ago. We can see that in the way that banks have reacted to worries about auto loans by curtailing some of their lending activity. So there is evidence that lessons may have been learned. It’s this receptiveness to risks and a willingness to do something about them that is most important, whether President Trump’s roll back happens or not.


The article above was previously published on Aberdeen Asset Management’s ‘Thinking Aloud’ blog on 18th July 2017