US banks could see profit jump 20% with Trump deregulation

Bloomberg

The deregulation winds blowing through Washington could add
$27 billion of gross profit at the
six largest US banks, lifting their annual pretax income by about
20 percent.
JPMorgan Chase & Co. and Morgan Stanley would benefit most from changes to post-crisis banking rules proposed by Donald Trump’s administration, with pretax profit jumping 22 percent, according to estimates by Bloomberg based on discussions with analysts and the banks’ own disclosures. Goldman Sachs Group Inc. would have the smallest percentage increase, about 16 percent.
Bloomberg’s calculations are based largely on adjustments banks could make to the mix of securities they hold and the interest they earn from such assets. The proposed changes would allow the largest lenders to take on more deposits, move a greater portion of their excess cash into higher-yielding Treasuries and municipal bonds, and issue a lower amount of debt that costs more than customer deposits.
Of the changes proposed in June by Treasury Secretary Steven Mnuchin, the one that would probably have biggest impact on profit is allowing banks to buy US government bonds entirely with borrowed money. Three others could also boost income: counting municipal bonds as liquid, or easy-to-sell, assets; requiring less debt that won’t have to be paid back if a bank fails; and making it easier to comply with post-crisis rules.

Fischer Warning
Regulators appointed by Trump could make these changes without congressional approval.
Doing so would reverse their agencies’ efforts since 2008 to strengthen capital and liquidity requirements for US banks beyond international standards. While bringing US rules in line with global ones probably wouldn’t threaten bank safety, some analysts and investors worry the pendulum could swing even further.
“Since the crisis, we’ve had the luxury of excess capital buildup in the banking system and regulators reining in risky activities,” said William Hines, who directs fixed-income investments in US financial firms for Standard Life Aberdeen Plc, which manages about $750 billion. “If there’s too much pullback on minimum capital requirements, too much relaxation of restraints, we’re concerned there’ll be more risk-taking by banks, and the system will become vulnerable.”
Any regulatory changes would be subject to due diligence, and a number of appointments have yet to be approved or even made. There could also be pushback. Federal Reserve Vice Chairman Stanley Fischer, whose board term runs to 2020, signaled such resistance when he warned against peeling back rules too much. On the other hand, Gary Cohn, a former Goldman Sachs executive and deregulation proponent, is the leading contender for the top Fed job.
The Fed has led efforts to tighten regulation, including subjecting some US banks to higher capital and liquidity standards than mandated by the Basel Committee on Banking Supervision. Mnuchin has called on regulators to strip away that extra padding, known as gold-plating, which would reduce capital requirements of the six biggest firms by as much as 2 percentage points.
That would allow them to return an additional $63 billion to shareholders, theoretically doubling the amount they said they would use to buy back shares over the next four quarters after results of the annual stress tests were announced in June.
Most banks don’t disclose how much they spend to comply with regulations. Gerard Cassidy, an analyst at Royal Bank of Canada, estimates that the administration’s proposed changes could cut post-crisis compliance costs by about 30 percent for big banks.