By Zach Scheidt
Today is an important day for big U.S. banks!
We’re about to see some big changes to the way the mega-banks in the United States are regulated. And today, the Fed is set to vote on a new set of rules that govern how these banks do business.
If you’re following along with this vote by watching the news or reading mainstream newspapers, you’re probably in a state of disgust or even horror about the upcoming vote.
That’s because big banks are a favorite target of the media.
Ever since the financial crisis of 2008, reporters have hated the idea of banks making money. And the liberal media has done everything possible to sway opinion towards heavier regulatory burdens for these banks.
But today, the Fed is set to take some a big step towards deregulating the banking industry.
And contrary to common wisdom, this step will actually put more cash in your pocket, and should make the markets easier for investors to navigate.
Let’s take a look at what’s happening!
Revising the Volker Rule
Today’s Fed vote covers a set of rules tied to the Dodd-Frank financial law which was passed in the wake of the financial crisis of 2008.
In particular, these rules prevent big banks from speculating in the market by buying and selling shares or other instruments for their own account. (Banks are allowed to buy and sell to fill orders for clients. But it has been difficult for banks to prove that they are acting on behalf of clients instead of for their own interests.)
These new rules the Fed is voting on should help make it easier for banks to stay in compliance with the financial law, while still making trades that help their customers get in and out of positions.
So why do we care about this new law?
For two reasons.
First, relaxed standards for bank trading should lead to higher profits for banks. While trading desks for the biggest financial institutions still cannot go crazy investing their capital, they will still be able to book huge profits.
Imagine if a mutual fund client came to a bank and wanted to sell one million shares of an illiquid stock.
The big bank could more easily buy the shares to help out its client. (Of course the shares would be bought at a discount to the market in exchange for helping the fund quickly get out of its position).
Then, over the next several weeks, the bank could steadily sell its shares at the market, locking in a profit on the trade.
This scenario would fit well under the new proposed rules. And it would allow banks to lock in much larger profits throughout 2018.
The second reason we care about this change is that banks should help the market become more liquid. Which means we can more easily buy and sell investments. A liquid market is good news for all investors.
Capital Requirements Also On the Table
Another piece of the banking regulations on the table right now is the capital requirements that currently restrict what banks can do with their cash.
Initially, these rules were set to protect the public from big banks taking too much risk with their money and triggering another financial crisis.
But now, those rules have led the big banks to keep way too much cash on their balance sheets — cash that could be put to better use if capital requirements were more relaxed.
This year, as banks are given more flexibility with what they do with their capital, we’ll see some big shifts. And these shifts will help you and me as investors.
For one, the banks will be able to more effectively lend money to individuals and businesses. And as this money is lent for new growth opportunities (and for things like cars, houses and educations), our economy will become more robust.
Also, much of this capital will be sent to investors through higher dividends this year. We’re already seeing banks increase the quarterly dividends paid to investors and those payments are only going to get bigger throughout the year.
That gives us another opportunity to put the cash just sitting on bank balance sheets to work. Because once that cash is paid to investors, it can be used to both cover life expenses and to reinvest in companies with better growth opportunities.
In short, looser regulations — starting with the Fed’s vote today — will lay the foundation for more healthy growth for years to come. Which is why I’m still very bullish on America and on the big U.S. banks as investments.
Here’s to growing and protecting your wealth!
From:: Daily Reckoning