The last time big U.S. banks made
so much money, the financial world was heading toward the brink of collapse.
This time, it’s stiff regulation that’s in danger.
Ten of the nation’s biggest
lenders including JPMorgan Chase & Co. and Bank of America
Corp. together made $30 billion last quarter, just a few hundred million
short of the record in the second quarter of 2007, according to data compiled
by Bloomberg. The achievement comes just as the industry’s long campaign
against post-crisis rules finds traction with the Trump administration.
Banks have been decrying
regulations aimed at curbing risk, blaming them for hurting capital markets and
discouraging lending to consumers and companies. President Donald Trump,
echoing those complaints, has asked regulators to find ways to ease off. But in
this year’s second quarter, banks saw their profits propped up by lending
operations even after a surge in revenue from more volatile trading units
subsided.
“It shows that the legislation we
passed in no way retarded the ability of the banks to make money,” said Barney
Frank, the former congressman whose name is on the 2010 law tightening industry
oversight. Banks are supporting the economy, he said. And “very specifically,
it refutes Trump’s claim that we cut into lending. How do banks make record
profits if they can’t lend -- especially when they’re down in trading?”
The second quarter wasn’t a
fluke. Even looking at the past 12 months, profits are still near the same
level as 2007.
The 2007 figure includes profits
from Wall Street giants that were independent at the time, such as Merrill
Lynch & Co. and Bear Stearns Cos., but were acquired by larger rivals while
succumbing to the meltdown. The 10 firms on the list for this year are U.S.
banks with the highest net income that hold at least $100 billion of
loans.
That group now generates more
than $57 million of profit per working hour.
The Dodd-Frank Act ushered in
sweeping changes that included reining in banks’ ability to bet their own money
on market prices, setting up a new system to seize and wind down failing firms,
and streamlining derivatives dealings. Meanwhile, regulators around the world
overhauled capital rules, requiring banks to build bigger buffers to absorb
losses in an economic downturn. They also unveiled liquidity rules, seeking to
ensure lenders have enough cash or easy-to-sell assets to stay afloat if
outside funding flees in a panic.
The industry has argued the rules
went too far and were piled on without enough consideration for how they’d
interact with each other.
JPMorgan Chief Executive Officer
Jamie Dimon said July 14 that banks would have made $2 trillion more in loans
in the past five years if the rules had not been so tight. Small businesses are
struggling to access capital markets, Dimon told analysts on a conference call
to discuss earnings.
While lending has increased in
the past six years, it doesn’t match the growth rate before the crisis. Net
loans from U.S. banks climbed 31 percent between 2011 and the first quarter of
this year, according to data from the Federal Deposit Insurance Corp. They grew
54 percent between 2001 and 2007.
Even if the big banks make as
much money as they did before the crisis, they’re not as profitable as they
once were by several measures. Among firms that survived the crises, return on
assets is about 35 percent lower than before the crisis. That measures how much
they earn on each dollar of their portfolios.
Return on equity, which looks at
net income per dollar of shareholder equity, is less than half of what it was.
The latter is much worse than pre-crisis levels because the banks were allowed
to have very little capital then, which multiplied the number of failures when
the housing market crashed. Higher capital required by post-crisis rules lowers
the return on that capital, even if assets earn the same margin.
When return on equity is below 10
percent, banks can’t attract new investors, said Wayne Abernathy, executive
vice president of the American Bankers Association, the sector’s largest
lobbying group. Without new capital from outside, they can’t grow as fast and
lose market share, he said.
“The industry is recovering, but
we’re not where we were before the crisis,” Abernathy said. “There was overkill
in regulation because many were written in a hurry. We’re just talking about
rationalizing and refining the rules.”
Bottom of Form
Share prices of Goldman Sachs
Group Inc., JPMorgan and Wells Fargo & Co. have hit record highs this year.
Stocks of banks that suffered more severe damage in the crisis, such as
Citigroup Inc. and Bank of America, remain well below their pre-crisis levels.
And fixed-income trading operations that once fueled epic profitability are
mired in a long slump, forcing banks to rely more on less volatile businesses.
The absolute profit figures for
the big banks also don’t tell the full story because the nation’s economic
output is much bigger than it was before the crisis, Abernathy said.
Last month, all 34 banks in the
Federal Reserve’s annual stress tests passed, the first time that’s happened
since the exercises began in 2009. Industry advocates said it shows banks are
strong enough to weather a crisis, and that it’s time to ease regulation.
But rule proponents argue the
opposite: The near-record profits posted this month show lenders can make money
for shareholders, fuel the economy and do so safely.
“That’s all good news for Main
Street -- continued economic growth and ultimately more broadly shared
prosperity,” said Dennis Kelleher, president of Better Markets, a Wall Street
watchdog. “However, that is also what is directly threatened by the mindless
deregulatory zeal of too many in Washington, who are baselessly attacking
Dodd-Frank for almost every ill in America.”
Click
here for the original article from Bloomberg.