Earlier this week in the US, the House of Reps voted in a Bill (S.2155) to roll-back certain elements of banking regulation/protection for systemically unimportant financial institutions.

Apparently, the thought is that you are no longer a systemically important financial institution (SIFI) unless you have 5 times the assets that would have designated you important, prior to Tuesday.

What?

This and two other worrying changes under the legislation include:

1. SIFI Threshold - increased threshold for designation as a systemically important financial institution, from $50 billion to $250 billion in assets. 

2. Stress Tests - the end to company run stress tests entirely for banks with under $250 billion in assets and changes to the frequency of supervisory stress tests to “periodic” for banks from $100 to $250 billion in assets.

3. Volcker Rule - non-application of section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which prohibits insured depositary banks and institutions from proprietary dealing in risky assets and acquiring, investing in or sponsoring private equity and hedge funds) to banks with assets of up to $10 billion.

A summary of the further changes can be accessed here.

According to the National Information Center, as at the end of 2017, only 122 financial institution holding companies had assets of > $10 billion (even though the top 4 banks control >50% of the industry assets).

But in total, there are a little less than 5,000 commercial banks in the US, meaning the Volcker rule will not apply to 97% of them.

I agree with Elizabeth Warren and Bernie Sanders that this roll-back is problematic, to say the least.

Still, it was voted in by a large majority and may be just the start of an incremental roll-back - only time will tell. 

There is little doubt that this kind of roll-back in the current environment of low interest rates will add more rocket fuel to equities and other risk assets, particularly if there is a subsequent roll-back of the Volcker Rule for banks with > $10 billion in assets, 

The US small to medium size financial institution sector is, again, risk-on.

Mike

NextLevelCorporate is focussed on independent and transformative corporate finance advice and transaction arranging solutions for clients looking to reshape their competitive landscapes, in and out of Australia. Our ability to do this comes from ~30 years of sector-specific intel plus the freedom to independently originate and advise on customised Mergers & Acquisitions, Growth Capital, Special Situation and bespoke Corporate Strategy designed to capture advantage.