How Looser Banking Regulations Could Affect Investors

The U.S. Senate recently passed a bill that would loosen regulations on certain U.S. financial institutions and make it easier for Americans to protect their identity from thieves. Here's a rundown of which companies could be the biggest winners of the legislation.

A full transcript follows the video.

This video was recorded on March 19, 2018.

Michael Douglass: Alright, so, winners and losers. Let's talk first about community banks, because those are a pretty clear winner here. As I mentioned before the break, they've been on the decline. There's been a lot of mergers and acquisitions activity because they've had so much, in terms of regulatory stuff that they've had to respond to, that they've had to comply with, that it just hasn't made sense for these really tiny banks with five and seven and nine branches to stay on their own. It makes better sense for them to combine their operations, which can have drawbacks for consumers, as they grow bigger and become more corporate. This will definitely help with their competitive positioning in the market, assuming the bill in its current form is passed.

Matt Frankel: Yeah. What this does is level the playing field between the community banks and the big banks. You mentioned they have the big advantage of scale. Now the community banks would have the advantage of lower regulatory expenses, and it would help them compete a little bit better with companies that, right now, are not competing very effectively. Like you mentioned, there's a third fewer today than there was a decade ago. It's also, at this point, worth mentioning that there is nothing in this bill that specifically would roll back regulations on the biggest banks. So, if anything, I would call them one of the losers.

Douglass: Yeah, I think that's fair to say. When you think about the totally opposite ends of the spectrum -- your tiniest banks are beneficiaries, your very largest banks, at least not beneficiaries. And since everyone else is getting a boost on some level, probably consider them losers. I think that's fair.

Let's talk about banks from $50-100 billion in assets. Now, this is an interesting group, because they are subject to severe requirements. But, if this bill in its current form passes, then they won't be anymore, immediately. And that is going to make their lives a lot easier. Because right now you have -- and this is a well-documented thing across financials -- once a bank starts getting into the upper $40 billion area for its balance sheet, it starts really thinking hard about whether it wants to cross that $50 billion mark. And you've seen plenty of banks raise their dividends and do things, basically, to prevent themselves from growing across that limit. Well, suddenly, if that limit is doubled, that calculus changes, so you may see a lot of these banks that are kind of in that, for lack of a better term, danger zone, start really aggressively investing for growth again.

Frankel: Yeah. One of my favorite banks is a great example of this, New York Community Bank. In New York, they lend on primarily rent-controlled apartment buildings, and they've grown aggressively over the years in terms of acquiring other banks. That had to come to a halt as soon as they started to approach the $50 billion mark. They've been paying something like a 5-6% dividend yield for a few years now and have been preparing for these excessive regulatory expenses. And now, if this passes, that just won't be an issue for them anymore. They can pursue growth as usual. I would actually call this group the biggest winner of this legislation if it passes.

Douglass: Yes. It simply removes a big overhang for them. And it's funny, if you ever check out New York Community Bancorp's 10-K and you look at the last few years, you'll notice, they've really kept their assets right at or below $50 billion as much as possible. Just a high-level look shows you that they have very clearly chosen not to grow, when you compare that to where they were 10 and 15 years ago.

The other thing is, that could encourage some mergers and acquisitions in that group, that $50-100 billion in assets group, because suddenly, if you're a $48 billion bank and you've been eyeing this $20 billion bank, but you didn't want to go over the SIFI limit, well, suddenly you won't. So, that could be an interesting opportunity for banks that are, I would say less than half that amount, so your sub-$25 billion banks, so that some of these bigger banks may finally be able to use their elephant guns to go ahead and choose some significant acquisitions for themselves.

Frankel: Yeah, definitely. Another group is the one that this doesn't automatically happen to overnight big banks with $100-250 billion in assets. I want to say a BB&T would fall into this category, I'm pretty sure.

Douglass: Yeah.

Frankel: I would call these winners, just because I definitely wouldn't put them in the losers category here. But we don't know how much of winners they're going to be just yet. We don't know what the Fed is going to be required to do with these banks, how quickly the regulations would actually roll off of them, and what would trigger the Fed's discretionary oversight. So, while these are winners, I wouldn't rush in and buy these banks stocks hand over fist just yet.

Douglass: Yeah. The way I think of it is, they are uncertain winners. The fact is, their competitive positioning will probably get a little bit better. But how much better is very unclear. I think what we'll probably see is a very muted reaction as a lot of these banks say, "Yes, this is probably a net benefit, but we'll have to wait and see as the rubber meets the road and really understand what that benefit looks like."

Now, aside from the largest banks, I think the only other folks you could argue, from a business standpoint, are clear losers, are Equifax and the other credit bureaus, because they have to offer those free credit freeze services. But to be honest, it's not really that big of a downside for them. So, credit freeze services, among other things, are offered in Equifax's Global Consumer Solutions business, which was about 12% of Equifax's top line last year. But it's not clear how much of that business was related to these discretionary credit freezes. Frankly, it's probably not material to them. So, if you're trying to find a formal loser in the bill, you could argue that Equifax and the other credit bureaus fit that bill, but it's really probably not going to be a material difference to them.

Frankel: Yeah, this could actually turn out to be a blessing in disguise to the credit bureaus. Right now, people are of the mindset, Equifax let hackers steal all my data and it's going to cost me $30 to freeze my credit? So now it gives consumers a little bit more power and takes the heat off of the credit bureaus, in some respect. Consumers are actually what I would add to the winners list here. A credit freeze is by far your best line of defense against your identity being stolen. There's credit fraud alerts and credit freezes, and freezes are by far the most effective. And now they'll be free, if this goes through.