The election of Donald Trump as America’s 45th president dismayed most of New York: Trump’s home city had voted overwhelmingly for another local candidate, Hillary Clinton. Wall Street cheered, though.
Between Election Day on November 8 and March 1, the S&P 500 sub-index of American banks’ share prices soared by 34%, and finance was the fastest-rising sector in a fast-rising market. At the time of the election, only two of the six biggest banks, JP Morgan Chase and Wells Fargo, could boast market capitalizations that exceeded the net book value of their assets. Now all but Bank of America and Citigroup are in that happy position.
Banks’ shares were already on the way up, largely because markets expected the Federal Reserve to raise interest rates after a long pause. It obliged in December and March, with three more hikes expected this year. That should enable banks to widen the margin between their borrowing and lending rates from 60-year lows.
Trump’s victory added an extra boost by promising to lift America’s economic growth rate. He wants to cut taxes on corporations, which would fatten banks’ profits directly as well as benefiting their customers. He also has pledged to loosen bank regulation, the industry’s biggest gripe, declaring on the campaign trail that he would “do a big number” on the Dodd-Frank Wall Street Reform and Consumer Protection Act, which overhauled financial regulation after the crisis.
So have the banks at last put the crisis behind them? Many of them are in much better shape than they were a decade ago, but the gains are not evenly spread and have further to go. That is particularly true in Europe, where the banks’ recovery has been distinctly patchy. The Stoxx Europe 600 index of bank-share prices is still down by two-thirds from the peak it reached 10 years ago. European lenders’ returns on equity average only 5.8%.
America’s banks are significantly stronger. In investment banking they are beating European rivals hollow. They are no longer having to fork out billions in legal bills for the sins of the past, and at last they are making a better return for their shareholders. Mike Mayo, an independent bank analyst, expects their return on tangible equity soon to exceed their cost of capital—which he, like most banks, puts at 10%—for the first time since the crisis.
Financial crises cast long shadows, however, and even in America banks are not fully back in the sunshine yet. Despite the initial Trump rally, the S&P 500 banks index is still about 30% below the peak it reached in February 2007. Debates about revising America’s post-crisis regulation are only beginning, and the biggest question of all has not gone away: Are banks—and taxpayers—now safe enough?
Plenty of Americans, including many who voted for Trump, are still suspicious of big banks. The crisis left a good number of them—though few bankers—conspicuously poorer, and resentment easily bubbles up again.
Last September Wells Fargo, which had breezed through the crisis, admitted that during the past five years it had opened more than 2 million ghost deposit and credit-card accounts for customers who had not asked for them. The gain to Wells Fargo was tiny, and the fine of $185 million was relatively modest—but the scandal cost CEO John Stumpf and some senior executives their jobs, as well as $180 million in forfeited pay and shares. Wells Fargo has been fighting a public-relations battle ever since, and mostly losing.
The origins of the 2007-2008 financial crisis lay in global macroeconomic imbalances as well as in failures of the financial system’s management and supervision: a surfeit of savings in China and other surplus economies was financing an American borrowing and real-estate binge. American and European banks, economies and taxpayers bore the brunt.
Banks in other parts of the world, by and large, fared far better. In Australia and Canada returns on equity stayed in double figures throughout. It helped that Australia has only four big banks and Canada five, which all but rules out domestic takeovers and keeps margins high. As commodity prices have sagged recently, so has profitability in both countries, but last year Australia’s lenders returned 13.7% on equity and Canada’s 14.1%, results that banks elsewhere can only envy.
Japan’s biggest banks, which had been reckless adventurers in the heady 1980s and 1990s, did not remain wholly unscathed. Mizuho suffered most, writing down about $6.8 billion. The Japanese were able to pick through Western debris for acquisitions to supplement meager returns at home, but some chose more wisely than others: MUFG’s stake in Morgan Stanley was a bargain, whereas Nomura’s purchase of Lehman Brothers’ European business proved a burden. Chinese lenders mostly were bystanders at the time, remaining focused on their domestic market.
Ask bankers what has changed most in their industry in the past decade, and at the top of their list will be regulation. A light touch has been replaced by close oversight, including “stress tests” of banks’ ability to withstand crises, which some see as the biggest change in the banking landscape.
Before the crisis, the chief financial officer of an international bank said, his bank—and others like it—carried out internal stress tests, for which it collected a few thousand data points. When his bank’s main supervisor started conducting tests after the crisis, the number of data points leapt to the hundreds of thousands. It is now in the low millions and still rising.
The number of people working directly on “controls” at JP Morgan Chase, America’s biggest bank, jumped from 24,000 in 2011—the year after the Dodd-Frank act, the biggest reform to financial regulation since the 1930s—to 43,000 in 2015. That works out to one employee in every six.
© 2017 Economist Newspaper Ltd., London (May 6). All rights reserved. Reprinted with permission.