In March 2008, Bear Stearns nearly collapsed. Then the financial crisis happened. Then financial regulation was heightened. A decade later, and the Senate Banking Committee is already trying to relax those very same regulations with a new bill that is headed to the Senate for a vote.
Of course, it’s all with the intention of helping those small and midsize banks, not the dangerous “too big to fail ones.” Yet, despite intentions, a number of larger banks are also well-poised to benefit, including Bank of New York Mellon Corp. (BK), State Street Corp. (STT) and Northern Trust Corp. (NTRS), according to the Wall Street Journal.
Since the start of the year New York Mellon is up nearly 2%, State Street is up more than 8% and Northern Trust is up almost 7%, as of the close of trading on Wednesday. In contrast, the S&P 500 is up nearly 3% on the year. (To read more, see: Famous ‘Big Short’ Bank Trader Now High on Big Banks.)
Deregulation for Custodial Banks
To understand why these banks should enjoy the benefits of a bill that, if passed, would raise the threshold for stricter oversight of banks from $50 billion in assets to $250 billion, it helps to know that all three of them are considered custodian banks. That is, they specialize in safeguarding the assets of institutional investors.
Under the bill, such banks will be able to exclude from total leverage calculations the assets held in the form of reserve deposits at the Federal Reserve or other central banks. Being able to exclude those reserve assets from leverage calculations would free up more space for custodian banks to acquire higher yielding assets, giving a boost to profits.
It is argued that since reserve deposits are essentially risk-free, banks should not be required to hold capital against them. Interestingly, custodian banks “hold a disproportionate share of Federal Reserve deposits,” yet no other bank, regardless of size, will enjoy the same exemption, according to the Journal. (To read more, see: How 7 Bank Stocks Could Win Big From Financial Reform.)
A Step at a Time
Also interesting, is the fact that banks such as JPMorgan Chase and Citigroup, which also provide custodial services, are being excluded from the exemption. It appears the exclusion is a bit of a PR move, keeping banks whose reputations are still somewhat sullied from their roles in the financial crisis from enjoying laxer regulatory oversight, to increase the likelihood the bill will pass the Senate’s vote.
Finicky little details like this one demonstrate the kind of tip-toeing needed to get as much deregulation as possible passed in a political climate that is still, at least somewhat, capable of remembering the events that took place only ten years ago.