Why the big banks are weighing down Wall Street
Just like that, the market’s optimism after last week’s “no hike” decision from the Federal Reserve has faded. Some of the broad market weakness, no doubt, reflected apprehension over the Donald Trump vs. Hillary Clinton presidential debate Monday night, with big-time policy implications for the future of the market and the economy as polls suggest the race is now a dead heat.
But a bigger catalyst for Wall Street’s stumble has been the reappearance of regulatory risk for big banks at a time when the sector has already been hit on concerns over profit margins and possible trouble for long-term government bonds (related to the Bank of Japan plans to lift long-term interest rates).
Here’s why it matters -- and why the selling could continue.
Deutsche Bank (DB) started things off in overseas trading on Monday and was slammed 7.1 percent to fresh record lows in the New York session after German Chancellor Angela Merkel was reported to have ruled out state assistance to the bank.
DB is struggling amid a still slow eurozone economy, pinched net interest margins from the European Central Bank’s ongoing bond-buying stimulus, risks from the looming U.K. Brexit and reports the U.S. Department of Justice may seek up to $14 billion in sanctions related to sales of residential mortgage backed securities.
The stock is in free fall just months after management was forced to publicly defend its capital position. Evidence of the vulnerability and fragility of the global banking system can be seen in the way European and Japanese banks have pushed back strongly against suggestions of tighter capital requirements.
U.S. banks are feeling the pain as well. Wells Fargo (WFC) shares fell 1.9 percent on Monday to test their February/June lows given the rising political pressure against the bank and its management team amid the fallout from the scandal over fake accounts to boost metrics and executive pay (charging customers extra fees in the process).
Congressional hearings are expected to last until 2017, according to Keefe, Bruyette & Woods analysts, resulting in higher compliance costs for the entire industry and clawbacks of executive pay.
Also weighing on shares are reports the Fed will seek higher capital reserves from the largest U.S. banks and that it may toughen its current balance sheet “stress tests” to include downside scenarios like funding shocks, liquidity shocks, fire-sale dynamics and failures of trading partners.
Bank of America (BAC) fell 2.8 percent on Monday, crossing below its 50-day moving average for the first time since July, after the U.S. Securities and Exchange Commission confirmed that BofA’s Merrill Lynch division had agreed to a $12.5 million penalty for causing “mini-flash crashes” in a number of markets.
If all this wasn’t enough, Cowen analysts noted that regardless of who wins the White House on Nov. 8, political risks are rising for the entire financial industry.
Trump and his party support the restoration of Depression-era legislation separating commercial and investment banking activities -- essentially calling for a breakup of Wall Street’s largest institutions.
Clinton and the Democrats have called for tougher enforcement of the Dodd-Frank financial reform act and higher taxes on things like carried interest. Moreover, Senator Elizabeth Warren, D-Massachusetts, has been an antibank firebrand within her party and would likely influence a Clinton presidency.
Over the near term, headline risks for Wells Fargo will reappear on Friday, Sept. 30, as the House Financial Services Committee holds its hearing on the bank’s festering controversy.