Big banks pulling the strings in Washington, intense lobbying could save them billions

U.S. banks are on the verge of a significant regulatory relief, potentially saving them tens of billions of dollars as regulators consider easing proposed capital reserve requirements. Following intense lobbying led by figures like JPMorgan Chase’s Jamie Dimon, regulators might reduce the initially suggested 19% increase in core capital requirements for the largest banks. This potential revision, favorably received by investors, has already boosted bank stocks. The changes would adjust how banks calculate risk-weighted assets, affecting various activities differently. The new regulations are expected to start in 2025, fully phasing in by 2028, freeing up substantial capital for banks.

The Lobbying Efforts

Recent reports indicate that this reconsideration follows intense lobbying of Congress by the biggest banks, spearheaded by influential figures like JPMorgan Chase’s Jamie Dimon. The proposed changes are expected to significantly reduce the capital requirements initially suggested.

Corporatocracy and Its Influence

Under the concept of Corporatocracy, large corporations wield considerable influence over regulatory bodies, often facilitating the appointments of the regulators themselves. This system, controlled by corporate interests, explains why banks are likely to succeed in their lobbying efforts. Under our system of Corporatocracy, GuerillaStockTrading.com predicts a high probability that banks will achieve their goal of reduced capital holding requirements.

What is Corporatocracy?

Corporatocracy is an economic, political, and judicial system where corporations exert substantial control over policy and regulation. This concept has been used to explain various phenomena, including bank bailouts, exorbitant CEO compensation, and the exploitation of national resources and treasuries. Many believe that the red-line of the U.S. transitioning from a Democracy into a Corporatocracy was the 2010 Supreme Court ruling in Citizens United v. Federal Election Commission (FEC). This landmark decision established that political speech by corporations is protected under the First Amendment, equating corporate speech with that of individuals.

Not everyone agrees with this broad interpretation of corporate rights. In his dissent in Bellotti, Justice William H. Rehnquist argued that corporations are “artificial” rather than “natural” persons, and granting them political expression rights could pose significant dangers in the political realm. Similarly, Justice John Paul Stevens, in his dissent to Citizens United, asserted that corporations are not members of “We the People” for whom the Constitution was established.

Potential Impact of Revised Capital Requirements for Banks

The modifications under consideration could significantly reduce the proposed increase in capital requirements for large banks. Initially, regulatory agencies estimated a 19% rise in core capital requirements for the largest banks, translating to roughly $150 billion more capital for the eight U.S. global systemically important banks: Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street, and Wells Fargo.

Financial Market Reactions

The mere hint of changes to these proposals has already positively impacted bank stocks. The KBW Bank ETF (KBWB) has risen by 10% in 2024, closely trailing the S&P 500’s 11% increase. Investors are optimistic that scaling back the capital requirement increase—potentially by $75 billion—will meet their expectations.

KBW Bank ETF (KBWB) Technical Analysis

Price Trend: The ETF is in a general uptrend since early November 2023, with higher highs and higher lows. The current price is $53.62, and it has recently pulled back from a peak around $56. There is noticeable support around the $53 level, as indicated by the blue 50-day moving average line.

Moving Averages: The 50-day moving average (blue line) is trending upward, currently at $53.03, indicating short-term bullish momentum. The 200-day moving average (red line) is at $46.90, also trending upward, reinforcing the long-term bullish trend. The price is currently above both moving averages, which is a positive signal.

Volume: The volume bars indicate relatively stable trading volumes, with no significant spikes or drops recently. The most recent trading volume was 265,700, which is lower compared to some previous sessions, suggesting a lack of strong buying or selling pressure.

Relative Strength IndexIn the world of technical analysis, the Relative Strength Index (RSI) stands as a cornerstone tool for traders seeking insights into market momentum. Developed by J. Welles Wilder ... More (RSI): The RSI is at 52.72, which is in the neutral range. It suggests that the ETF is neither overbought nor oversold, indicating a balanced momentum without extreme conditions.

On Balance VolumeThe On Balance Volume indicator (OBV) is a technical analysis tool used to measure the flow of money into and out of a security over a specified period of time. It is a cumulative ... More (OBV): The OBV is at -28,612,782, and has been trending downward slightly, indicating that there might be some distribution occurring, meaning more volume on down days compared to up days.

Stochastic RSIIn the realm of technical analysis, the Stochastic RSI (StochRSI) emerges as a powerful tool for traders seeking to navigate market dynamics with precision. Developed by Tushar S. ... More: The Stochastic RSI is at 0.155, which is in the oversold territory. This suggests that the ETF might be due for a short-term rebound as it has been sold off excessively in the short term.

Average Directional IndexThe Average Directional Index (ADX) stands as a cornerstone indicator in the toolkit of technical traders, offering insights into the strength of market trends. Developed by Welles... More (ADX): The ADX is at 24.05, which indicates a weak trend. Values below 25 suggest that the current trend (uptrend) is not very strong. The ADX does not indicate the direction but the strength of the trend.

Chaikin OscillatorNamed after its creator Marc Chaikin, the Chaikin Oscillator stands as a formidable tool in the arsenal of technical analysts. This oscillator is designed to measure the accumulati... More: The Chaikin Oscillator is at 60.853, indicating positive money flow. This suggests accumulation and potential buying interest.

Time-frame Signals

3-month horizon: Hold. The ETF is in a consolidation phase with mixed signals from the indicators. The current uptrend is weak, and the market might need more time to decide the next direction.

6-month horizon: Buy. Given the overall uptrend in both short-term and long-term moving averages, and the ETF being above both these averages, the medium-term outlook appears positive.

12-month horizon: Buy. The long-term uptrend is intact with the 200-day moving average trending upward. Despite some short-term consolidation, the ETF is likely to continue its upward trajectory over the long term.

In summary, while there is some short-term uncertainty, the medium to long-term outlook for the KBW Bank Invesco ETF remains positive, and it is recommended to hold in the short term and buy for the 6-month and 12-month horizons.

Mechanisms of the Proposal Changes

The revised proposal would alter how banks calculate their risk-weighted assets, affecting them differently based on their mix of activities like consumer lending, trading, or wealth management. Despite the anticipation of new standards, banks have already begun to retain capital well beyond their current requirements. Barclays analysts estimate that these global U.S. banks collectively are just about $8 billion shy of the original proposal’s demands.

Timeline for Implementation

The proposed regulations are slated to start in 2025 and fully phase in by 2028. A revamped proposal would free up substantial capital that banks could utilize in other ways. Banks typically generate additional capital by retaining more earnings, which involves limiting share buybacks—a move that affects shareholders eager for more returns.

Broader Implications

Higher capital requirements influence the balance of debt and equity that banks use for funding. Equity capital is generally more expensive than debt, significantly more so than deposits. Consequently, banks might need to increase income, possibly by raising charges, to maintain similar returns on equity.

Stability vs. Profitability

Proponents of the original, stricter capital requirements argue that the increased costs to shareholders, counterparties, or borrowers are justified by the resultant stability and resilience of the financial system. In extreme scenarios, banks’ equity would absorb losses first, protecting taxpayers from bearing the brunt through bailouts.

Insights

• Major U.S. banks may soon benefit from reduced regulatory capital requirements.
• Lobbying efforts have played a crucial role in swaying regulatory decisions.
• The revisions could result in substantial savings and increased flexibility for banks.
• The proposed changes have already positively impacted bank stock prices.
• This scenario illustrates the influence of corporatocracy on regulatory frameworks.

The Essence (80/20)The Origins and Evolution of the 80/20 Principle The Discovery by Vilfredo Pareto In 1897, Italian economist Vilfredo Pareto uncovered a striking pattern in his study of wealth and... More

1. Regulatory Relief: U.S. banks may see significant reductions in proposed capital reserve requirements, initially estimated to increase by 19%.
2. Lobbying Influence: Intense lobbying by major banks and figures like Jamie Dimon has influenced regulatory reconsideration.
3. Financial Impact: Potential savings of tens of billions of dollars for banks, boosting stock performance.
4. Implementation Timeline: New regulations expected to start in 2025 and fully phase in by 2028.
5. Stability vs. Profitability: Debate over balancing stricter capital requirements for stability versus easing them for profitability.

The Action Plan – What Banks Should Do

1. Monitor Regulatory Developments: Stay updated on the final decisions regarding capital reserve requirements.
2. Assess Financial Strategies: Banks should evaluate how potential changes will impact their capital allocation and risk management strategies.
3. Engage with Stakeholders: Communicate with shareholders and stakeholders about the implications of the regulatory changes and strategic adjustments.
4. Optimize Capital Utilization: Plan for the potential release of capital, considering investments, lending, and shareholder returns.
5. Balance Stability and Profitability: Develop strategies to maintain financial stability while optimizing profitability under the new regulatory environment.

Blind Spot

• The broader economic impact of reduced capital requirements on financial stability might be underestimated, particularly in the event of another financial crisis. Balancing short-term gains with long-term stability is crucial.

Looking Ahead

The ongoing debate over capital requirements highlights the delicate balance between regulatory measures intended to ensure financial stability and the lobbying efforts of powerful banking institutions. As regulators reconsider the proposal, the outcome will significantly impact the financial landscape, affecting banks’ operational strategies, shareholder returns, and the overall stability of the financial system. The interplay of corporate influence and regulatory oversight continues to shape the future of the banking industry.

Book Recommendations and Connections to the Article

1. “Too Big to Fail” by Andrew Ross Sorkin

• Description: This book provides a detailed account of the 2008 financial crisis, focusing on the key players and decisions that shaped the response to the collapse. It offers an inside look at the actions of bankers, regulators, and government officials during one of the most tumultuous periods in financial history.
• Connection: The article discusses potential regulatory changes and the influence of major banks, similar to the dynamics explored in “Too Big to Fail.” Understanding the events of 2008 helps contextualize the importance of capital requirements and the potential consequences of easing them.

1. “The Bankers’ New Clothes” by Anat Admati and Martin Hellwig

• Description: This book argues for higher capital requirements for banks, criticizing the existing financial system’s vulnerabilities. It presents a strong case for why more equity in banking is essential for financial stability and why the arguments against it are often misleading.
• Connection: The article highlights the debate over capital reserve requirements, which is central to “The Bankers’ New Clothes.” Admati and Hellwig’s arguments support the original proposal for higher reserves, offering a counterpoint to the banks’ lobbying efforts described in the article.

1. “Capital in the Twenty-First Century” by Thomas Piketty

• Description: Piketty’s book explores the role of capital and wealth inequality in modern economies. It provides a historical analysis of capital accumulation and its effects on economic and social systems, advocating for policies that address inequality.
• Connection: The article touches on the influence of corporatocracy and the financial industry’s power over regulatory bodies. Piketty’s exploration of capital’s role in society provides a broader context for understanding how regulatory decisions can impact wealth distribution and economic stability.