The House of Representatives voted along party lines to erase a number of core financial regulations put in place after the 2008 financial crisis. Republicans moved a step closer to delivering rules they believe are affecting banks, restricting consumer growth and stagnating the economy.
The Republican bill, better known as the Financial Choice Act, would free up banks by giving more power to banking authorities and spurring lending activities. This development has not only helped banks’ shares move north, possibility of a June a rate hike will further drive profits for such companies .
Hence, investing in sound bank stocks will be judicious.
House Votes to Kill Dodd-Frank
House lawmakers passed the “crown jewel” of the GOP-led regulatory reform act, which effectively gutted the Dodd-Frank regulations of the Obama administration. The Financial Choice Act passed the house with a 233-186 majority despite objections by Democrats. It is aimed at replacing economic stagnation with healthy growth.
Crafted by the House Financial Services Chairman Jeb Hensarling, the bill will allow the President to fire heads of the Consumer Financial Protection Bureau and the Federal Housing Finance Agency, which oversees the functioning of mortgage giants Fannie Mae and Freddie Mac. It also gives Congress the authority to influence the Consumer Financial Protection Bureau’s (CFPB) budget, which means lawmakers could defund the agency entirely. The GOP proposal also restricts the Federal Deposit Insurance Corp from supervising the so-called living will process that requires banks to present plans on how safely they would unwind in the event of a collapse.
The bill still requires Senate approval to overhaul the Dodd-Frank regulations. The GOP senators, led by chairman Mike Crapo intends to take a bipartisan approach to create the regulatory relief bill for the Wall Street. Crapo vowed to work closely with the White House and regulators to strike a balance in achieving better regulations to bolster the U.S. economy.
Senate Republicans in order to dismantle the Dodd-Frank law could pass a regulatory relief bill through reconciliation, which requires a 50-vote majority or leave the 2010 regulatory reform law unbroken and put the onus on regulators.
How Will Banks Benefit from the Financial Choice Act?
Here are some of the benefits banking organizations can expect if the GOP begins to unravel Dodd-Frank:
Under the Financial Choice Act, Congress will have ultimate authority to repeal the CFPB’s supervisory authority. This in turn will eliminate its ability to investigate bank practices and instead return power to banking regulators. The CFPB, on the other hand, will be more accountable to the government as well as the Congress.
Uptick in Business Lending & Innovation Prospects
Under the new bill, banks will be in a position to maintain higher levels of capital reserves in exchange of less stringent regulations. With more capital in the economy, Republicans believe that it will increase lending, mostly among community banks. The Financial Choice Act also repeals certain sections of the Dodd-Frank law, including the Volcker Rule. Such a rule is believed to have prevented the net accumulation of new assets, which dint go down well with banks. Needless to say, now with more capital in hand, businesses are more likely to take greater risks and innovate.
Stress Test Consistency, Fed Transparency
Federal stress test would be conducted once every two years, under the new law; a reform that J.W. Verret, former chief economist at House Financial Services Committee said would further increase lending activities and invoke a more “consistency” for financial institutions.
The Financial Choice Act also stated that it intends to “demand greater accountability and transparency from the Federal Reserve, both in its conduct of monetary policy and its prudential regulatory activity”. It also instructs the Fed to obey the FORM Act that requires policymakers to be held more accountable for their monetary policy decisions, a move that will provide more information to investors and help banks in their decision making.
Bank Stocks Are Flying High
Bank stocks gained traction after the bill to erase some Dodd-Frank banking rules was passed in the House. Speculation that the Fed will raise interest rates, in the meanwhile, also helped propel bank stocks. Higher interest rates can boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities. The spread between long-term and short-term rates also expands during interest rate hikes because long-term rates tend to rise faster than short-term rates. (read more: Fed Minutes Hint at Rate Hike in June: Top 5 Gainers).
Shares of banking behemoths like Citigroup Inc (NYSE:C), Goldman Sachs Group Inc (NYSE:GS), Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM) increased 2.1%, 1.4%, 1.6% and 1.2%, respectively, on Jun 8. The broader SPDR KBW Bank (NYSEARCA:KBE) advanced 2.6%.
5 Solid Bank Stocks to Buy
Given such positive trends, investing in fundamentally sound banking stocks seems to be prudent. We have, thus, selected four such stocks that flaunt a Zacks Rank #2 (Buy) and a VGM score of ‘B’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics.
Such a score allows you to eliminate the negative aspects of stocks and select winners. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
East West Bancorp, Inc. (NASDAQ:EWBC) is a bank holding company. The company’s principal business is to serve as a holding company for East West Bank and other banking or banking-related subsidiaries. The company’s expected growth rate for the current year is 15.9%, higher than the Banks – West industry’s projected gain of 11.6%.
Summit Financial Group, Inc. (NASDAQ:SMMF) is a financial holding company. The company provides community banking services primarily in the Eastern Panhandle and South Central regions of West Virginia and the Shenandoah Valley, and Northern region of Virginia. The company’s expected growth rate for the current year is 11.8%, higher than the Banks – Southeast industry’s expected gain of 11.6%.
1st Source Corporation (NASDAQ:SRCE) is a bank holding company. The company, through its subsidiaries, provides a range of financial products and services. The company’s expected growth rate for the current year is 12.4%, higher than the Banks – Midwest industry’s expected gain of 7.8%.
First Bancorp (NYSE:FBP) operates as the bank holding company for FirstBank Puerto Rico that provides a range of financial products and services to retail, commercial, and institutional clients. The company, which belongs to the Banks – Southeast industry, is expected to gain at a steady 4.7% this year.
People’s Utah Bancorp Inc. (NASDAQ:PUB) operates as the bank holding company for People’s Intermountain Bank that provides commercial and retail banking products and services in the U.S. The company, which belongs to the Banks – West industry, is expected to gain a solid 7.7% this year.
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