Banks Are Where The Money Is, For Now

At DealVector we have helped banks with their recapitalizations over the years, particularly in cases where banks were looking for approvals from their Trups liability holders. Commercial Banks have been under stringent rules relating to their capital adequacy ever since the 2008 crisis, and in some cases this has hampered the banks’ ability to grow or heal. In the meantime, innovation from marketplace lenders and other technology companies has galloped ahead. So banks have lost significant share in the provision of credit.

Now comes news that the new administration will loosen bank regulations. The net effect:  $2 trillion in “excess” capital reserves that may be released and unleashed into the economy. Will this capital flow into innovation and fintech? Will it flow into US small business borrowers? Will the mortgage market benefit, or consumers? Will the capital be wasted, putting the banking system at risk again? Bank ETFs have rallied smartly over the last two weeks, so Mr. Market is clearly in favor of the move, but there are many unknowns.

Is the extra lending capacity even needed? “[Q]ualified borrowers have ample access to financing and aren’t demanding more — a slump that bank executives have bemoaned. And delinquencies on credit cards and auto loans already are rising. The loss rate on car loans made to people with good credit and packaged into bonds, for example, was the highest in the first quarter since 2008, S&P Global Ratings said in a recent report.” So, Bloomberg appears skeptical.

One thing seems likely: between the hike in fed interest rates and the loosening of regulations in finance, we are in for more interesting times ahead.