Easing Bank Rules: Negative in the Long Term?

The House of Representatives passed a bill that rolls back regulations on small banks and custody banks. President Trump is expected to sign the bill soon. The legislation will exempt some institutions from stress tests and living wills—both acted as safety valves after the global financial crisis.

Fitch Ratings says that easing the Dodd-Frank Act for smaller and custodial banks could be negative for some banks’ credit profiles in the long term if it leads to significantly reduced capital levels. Fitch considers strong regulations and capital levels as a prerequisite of banks’ creditworthiness.

According to the FDIC, US banks’ (XLF) profits rose 27.5% to $56 billion in the first quarter mainly due to higher net operating revenues and a lower effective tax rate. The net interest income rose 8.5% to $131.3 billion.

Morgan Stanley (MS) and Bank of America (BAC) posted record quarterly earnings, while Goldman Sachs (GS) saw its earnings hit a five-year high. JPMorgan Chase (JPM) reported $8.7 billion in earnings—the largest quarterly profit by any US bank ever.

Joseph Otting, the head of the Office of the Comptroller of the Currency, urged US banks to take a more flexible approach and do more unsecured lending to cash-strapped customers.