Shareholders in U.S. banks may receive a windfall of up to $120 billion in capital as President Trump moves to deregulate the industry. After years of solidifying their balance sheets, big banks find themselves with significantly more capital than regulators require, and are poised to return the excess to investors through dividend increases and share repurchases, the Wall Street Journal reports.

Returning capital through share buybacks would have the added effect of shrinking the share base, increasing earnings per share (EPS) and thus possibly increasing share prices, which already have surged since Trump's election. Additionally, banks have struggled in recent years to achieve returns greater than their cost of capital, creating an added imperative to decrease their capital bases, the Journal notes in the same February 5 article. (For more, see also: The Incredible Shrinking Stock Market.)

Big Capital Cushions

Excess capital held by the 18 largest U.S. banks is about $120 billion, per analysis by Morgan Stanley (MS) cited by the Journal. Over $100 billion is at the six largest banks, according to research by RBC Capital Markets, a division of Royal Bank of Canada (RY), the Journal says.

Individual banks have sizable amounts of excess capital, according to RBC. Citigroup Inc. (C) has $27.5 billion; JPMorgan Chase & Co. (JPM), $20.3 billion; Wells Fargo & Co. (WFC), $16.4 billion; Bank of America Corp. (BAC), $14.1 billion; Goldman Sachs Group Inc. (GS), $12.4 billion; and Morgan Stanley (MS), $10.9 billion.

Banks have continued to hold excess capital largely to ensure that they pass annual stress tests conducted by the Federal Reserve. Banks have criticized these tests as too subjective while regulators justify these large capital cushions as protection against future banking crises, the Journal says. On Friday Fitch Ratings warned that, by reducing equity capital, banks would increase risk and thus raise their cost of debt, the Journal reports. (For more, see also: Dodd-Frank: How Bank CEOs Want It Changed.)

Actions by Trump

On Friday, President Trump ordered a review of the Dodd-Frank Act, with the intent of eliminating many of its rules, the Journal reports. The KBW Nasdaq Bank Index gained about 2.2% on Friday, bringing its post-election surge to about 24%, the Journal indicates. (For more, see also: Trump's Vow to End Dodd-Frank Faces Big Hurdles.)

Dodd-Frank does not specify bank capital requirements. Instead, the Journal notes, these are set by various regulators such as The Fed, as well as by international banking agreements. Trump can influence the process through his appointments to key regulatory bodies, including ones that supervise bank stress tests. For example, the Journal says, he is expected to appoint a new head of bank supervision for The Fed, a position created by Dodd-Frank but not filled under the Obama presidency.

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