When the Trump administration announced its intention to roll back banking regulations, which they believe slows economic growth, the reaction was delight and disappointment. How will shareholders fare? Not very well, says one economics and financial expert.
James Saft, a columnist for Reuters, recently opined that exempting many banks from stress tests and the “Volcker Rule,” which prohibits some speculative trades and holdings, “will do shareholders no favors.” Saft predicts that such a regulatory reform blueprint, as laid out by Treasury Secretary Steven Mnuchin this past June, would create the foundations for an unstable “boom and bust” future for Wall Street, translating to “volatile, low-quality earnings” that shareholders want no part of and respond to with lower valuations. Saft says:
“What the administration can accomplish is unclear, but history shows investors neither like nor highly value free-wheeling big banks.”
While insiders do well with looser regulations and unleashed banks, investors do not. Investors prefer stability or, as Saft put it, a “quiet life and a steady return.” He cites the example of Citigroup as exhibiting big banks’ dangerous habit of “almost blowing themselves up every few years by taking on too much risk.”
Bottom line, Saft isn’t buying the benefits of looser regulations on banks and says shareholders won’t, either.