Yesterday, the U.S. House of Representatives approved the new financial reform bill. However, the Senate leaders postponed the bill until mid-July for President Obama’s signature.
The bill was approved with the House members voting 237 to 192. However, the death of Democratic Senator Robert Byrd, some uncertainty regarding the Republican votes and the July 4 week recess have led to a postponement of the Senate vote until the week of July 12.
As per the current bill clauses, tighter regulations would be imposed on banks, resulting in a reduction in their profits. Consumer confidence would be enhanced by establishing an independent consumer bureau within the Federal Reserve to help keep borrowers from abuses by lenders.
Additionally, steps would be taken to supervise the derivatives market and compel banks to decrease trading and investing in risky instruments. Moreover, new government procedures would be established to wind down troubled financial companies.
However, according to the Republicans, such legislation would lead to an environment weighed down by several new regulations. Also questions were raised about how the troubled mortgage finance companies like Fannie Mae (FNM) and Freddie Mac (FRE) would be dealt with in the next year.
It is also expected that the Volcker rule and some of the associated changes would reduce the profit of large firms. The rule as proposed by the White House economic adviser Paul Volcker would ban proprietary trading not driven by the needs of customers.
While it was initially expected that the new rule would totally eliminate proprietary trading activities, the closure of the final overhaul of financial regulations has made it clear that the rules are not as strict as expected earlier. In the final version, specific ban on certain types of proprietary trading were considered instead of a blanket ban.
Additionally, the banks are allowed to invest up to 3% of their Tier 1 capital in private equity and hedge funds but not exceeding the 3% of any individual fund’s total ownership interest. Investments above the new caps need to be divested.
Strict regulations coupled with the impacts of the Volcker rule are expected to diminish the profits at Bank of America Corporation (BAC), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS), Morgan Stanley (MS) and JPMorgan Chase (JPM). Companies such as Goldman, JPMorgan and Morgan Stanley currently have investments in such funds well above the 3% requirement level. Hence, the implementation of this limit would restrict their return.
However, we believe that even if the reform bill is signed into law following President Obama’s signature, it would take several quarters to fully realize its impact.
Read the full analyst report on “GS”
Read the full analyst report on “C”
Read the full analyst report on “JPM”
Read the full analyst report on “BAC”
Read the full analyst report on “MS”
Read the full analyst report on “FNM”
Read the full analyst report on “FRE”
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