This week Republican politicians successfully won control of the U.S. Senate and maintained their majority in the U.S. House of Representatives. Armed with full control of Congress, how will this Republican win impact banks? Less than you might think.
Changing tides, but only to a certain degree
In the aftermath of the financial crisis, President Obama led Democrats in producing a series of legislative changes that had significant a impact on the banking business, most notably, the Dodd-Frank Act. With Democratic control of the Senate and White House, these reforms ended up more left-leaning than Republicans would have preferred.
Since that time, so-called pro-business Republicans have fought to undo or ease many of the restrictions created by this legislation. These individuals have argued that the Consumer Financial Protection Bureau, created in 2011, is too powerful, is stymieing lending, and is an example of overreaching government bureaucracy. Others claim that the reforms have given too much power to the Federal Reserve, which now centrally regulates all of the nation's largest financial institutions.
As a result, banks today face challenges created solely through the enactment of these reforms. Banks now face stress tests, expanded reporting requirements, and increased disclosure burdens to ensure that borrowers and clients fully understand the financial products being sold. Bank's have argued that these requirements increase administrative costs, which in turn inhibit the bank's ability to make loans to businesses and individuals.
With Republicans in control, should bank investors anticipate reform?
At first blush, it would seem that today's Republican Congress would be able to go to work and push forward reforms to these laws.
The reality, though, is that this Congress is likely struggle to make any changes at all, even on the margins.
The first and arguably largest obstacle for Republican reforms is the man still sitting in the Oval Office. While Republicans did gain a majority in the Senate, they were unable to take control of the 60 seats necessary to override a filibuster and well short of the 67 seats necessary to override a presidential veto.
That means any reforms that do come out of Congress will require President Obama's signature to become law. That signature will be hard to come by.
Further still, the window of opportunity to pass meaningful legislation is realistically only about nine months, as the 2016 presidential campaign will soon take center stage. When that process begins in 2015, the collective focus will once again return to politics instead of proactive governance.
Are banks doomed as investments?
If you pay attention to the talking heads, all of this talk about reform (or lack thereof) paints a picture of an industry on the decline.
The truth is far from that.
This deserves repeating. These two banks each earned over five and a half billion dollars in just the three months from July to September of this year. Comparing these results to the same quarter 10 years ago, Wells and JPMorgan have increased their quarterly profit by 221% and 235%, respectively.
But what about all those increased expenses and the burden of the new regulatory landscape? JPMorgan Chase CEO Jamie Dimon thinks that banks will adapt and overcome.
In his 2013 annual letter to shareholders, Dimon made a compelling argument that even with new capital requirements, stress tests, and regulatory costs, it's reasonable for banks to produce the same returns they did in the old world.
He said, "All things being equal, returns will be reduced... but all things are not created equal" (emphasis added). Dimon goes on to outline exactly how JPMorgan will adapt and change to overcome the macro challenges.
The financial crisis changed the game for the financial industry -- from the individuals buying products from these banks, to the companies themselves operating in this new regulatory environment, to the investors buying shares in those firms.
Any reforms to the Dodd-Frank Act are unlikely to materially change the day-to-day reality of banks today, even with the Republican majority in Congress. The best bank investors will recognize that and find the banks that are proactively tweaking their businesses to win in this new reality. Like Dimon said, all things are not created equal.