Deregulation is back in vogue. The recent congressional vote to overturn the Consumer Financial Protection Bureau’s arbitration rule was arguably the banking industry’s biggest win on Capitol Hill since 2008. At some federal regulatory agencies, industry-friendly appointees have started rolling back the work of their Obama-era predecessors
Banks' stock prices are soaring. And though loan demand remains lukewarm, industrywide profits hit $48.3 billion in the second quarter, while the sector’s return on assets hit a 10-year high. Nearly a decade after the start of the financial crisis, what was once an enormous pile of legal claims against U.S. banks has become much less worrisome.
Still, a year that began with great promise for the industry could end on a downbeat note if Congress fails to make good on its promise to lower the corporate tax rate or if the North American Free Trade Agreement, which most bankers support, unravels. President Trump is openly feuding with leaders within his own party, and there are growing concerns that regulatory relief legislation, once thought a slam dunk, may not happen.
Meanwhile, a long-time nemesis of big banks is thought to be weighing a presidential run, Silicon Valley is increasingly eyeing the banking business, branches are being spurned by millennial customers and worries over data breaches have hit a new peak.
None of these are ghosts and goblins, but with Halloween upon us, here is a look at some potentially frightening developments that should keep bankers up at night.
The death of tax cuts
The White House and congressional Republicans have a lot riding on their tax plan, which is still being developed, but will almost certainly include a substantial cut in the corporate tax rate. So far, the GOP has no big legislative achievements to brag about, and taxes may offer the party’s last chance before next year’s midterm elections.
But the Republicans, who hold a 52-48 advantage in the Senate, have a thin margin for error. They either need to persuade moderate Democratic senators such as Joe Manchin, D-W.V., and Heidi Heitkamp, D-N.D., to vote for the tax plan, or hold the number of Republican defections to two or fewer. As President Trump continues to stoke feuds with GOP Sens. John McCain, Bob Corker and Jeff Flake, the math looks tricky.
Banks, which currently reap fewer benefits from corporate tax loopholes than many other industries, are likely to be big winners if the tax plan becomes law. But if the GOP plan fails, there’s reason for banks to fear that their stock prices will crash.
A monitor displays Equifax Inc. signage on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, Sept. 8, 2017. The dollar fell to the weakest in more than two years, while stocks were mixed as natural disasters damped expectations for another U.S. rate increase this year. Photographer: Michael Nagle/Bloomberg
More data breaches
If there were still any doubt about how disastrous a high-profile data breach can be for a corporation, the recent Equifax hack erased it.
Banks are subject to stricter data security standards than most other companies, but that is hardly a reason to rest easy. It was only three years ago that the names, addresses, phone numbers, and email addresses of 83 million account holders at JPMorgan Chase were compromised.
“I don’t want to throw stones because I also live in a glass house,” the chief information office of a large financial services organization told American Banker after Equifax disclosed its data breach.
During last year’s presidential campaign, President Trump vowed that unless Canada and Mexico agreed to a much more favorable deal, he would withdraw from the North American Free Trade Agreement.
It is not clear how seriously banks and other U.S. corporations took the threat.
In an August interview, Jane Fraser, who heads Latin American operations for Citigroup, expressed optimism that a new trade agreement can be reached. Citi last year announced plans to invest $1 billion in its Mexico franchise.“I think we all feel there is a big win-win opportunity for both countries,” Fraser said.
But more recently, U.S. companies have grown more alarmed about the possibility that the trade talks will fall apart, given the hard-nosed positions being taken by the Trump administration.
“We see these proposals as highly dangerous,” John Murphy, senior vice president at the U.S. Chamber of Commerce, told reporters earlier this month.The fear is that NAFTA will unravel, setting off a trade war between the U.S. and Mexico that damages the economy.
Tech giants get bank charters
Twelve years ago, Walmart was the banking industry’s bête noire. Now it’s Amazon, Apple, Google and Facebook.
The tech behemoths have been nibbling around the edges of the banking business for several years now. For example, Apple Pay has cut into the interchange fees that banks collect, and Amazon has ramped up its lending to small merchants.
If these companies ever managed to obtain a charter, they would pose a formidable challenge even to the largest banks. They not only have a vast amount of data on their users — that’s just about everyone — they also are far better-liked than banks by the general public.
If Warren decides to run for president, she will undoubtedly put an unwanted spotlight on the banking industry. For whatever it’s worth, one Irish betting site lists 10-1 odds on Warren being elected president in 2020, better odds than any other Democrat.
Branch traffic declines faster than expected
The broad trend is clear: bank branches will almost certainly be smaller, more automated and fewer in five years than they are today.
But the pace at which change occurs is important. If it happens gradually enough, the industry should have time to shift its sales efforts into digital channels. Branches get less traffic today than they once did, but they remain vital as a place to sell banking products.
If the changes happen more rapidly, many banks could be caught flat-footed. Sure, they can cut costs by closing branches and laying off tellers, but the more important task is finding new ways to generate revenue, and that effort will take time.
J. Mark McWatters, acting chairman of the National Credit Union Administration, listens during a Senate Banking Committee hearing in Washington, D.C., U.S., on Thursday, June 22, 2017. Top U.S. banking regulators are sprinting to ease the Volcker Rule, stress tests and other constraints on Wall Street after the Trump administration issued a long list of proposals last week for rolling back post-crisis financial rules. Photographer: Andrew Harrer/Bloomberg
Credit unions get more leeway on membership rules
The regulatory scheme for credit unions is a perennial bugaboo for the banking industry, particularly at small banks that compete most directly with the tax-exempt depositories.
One hot-button issue is how broadly credit union membership rules should be drawn, with bankers often opposing efforts to loosen the criteria.
Late last year, the American Bankers Association filed suit over a National Credit Union Administration rule that lets credit unions serve combined statistical areas with as many as 2.5 million people.
More recently, NCUA Chairman Mark McWatters argued that Congress should consider relaxing the membership rules much further by allowing credit unions to serve online communities.
“We need to think about how we can create common bonds, or how we can reflect in the Federal Credit Union Act, what people today use as common bonds,” McWatters told the Wall Street Journal. “I am trying to parallel reality today as opposed to what it was a generation — or two or three or four generations — ago.”
The Marriner S. Eccles Federal Reserve building stands in Washington, D.C., U.S., on Tuesday, Oct. 23, 2012. Federal Reserve Chairman Ben S. Bernanke, who is seeking to spur the economy with a third round of so-called quantitative easing, has said his stimulus works by lowering borrowing costs and encouraging investors to seek higher-yielding assets. Photographer: Andrew Harrer/Bloomberg
A new Fed chief creates market uncertainty
President Trump is expected to make his pick for chair of the Federal Reserve in the coming days. The finalists reportedly include both current Chair Janet Yellen, Fed Gov. Jerome Powell and Stanford economist John Taylor, among others.
Trump has indicated he will make his final choice this week.
The results could be dramatic and unpredictable. Should Trump pick Yellen, who he has praised in recent weeks, banks won't receive much help in their deregulatory efforts but will benefit from a market that is comfortable with her in charge of the central bank. A choice like Powell might be in a similar vein.
But the markets might react badly to other choices, raising questions about how quickly the Fed will raise interest rates and what the impact would be. Given Trump's penchant for unpredictability, bankers have reason to be nervous.