Rosalind Evans
The commencement of the earnings season presents an opportunity for the CEOs of America’s leading banks to inform the public about their firms’ status and economic projections. To date, the banking leaders are primarily leveraging this moment to express dissatisfaction with the current regulations governing their sector.
The start of the second quarter corporate reports saw the central banks mostly exceeding analysts’ earnings expectations, relieving investors concerned about the economic climate and recent regional banking failures. Over the last week, the banking section of the S&P 500 has seen a 6.3% increase, marking a notable shift, although the sector is still 3.4% down this year, as per FactSet data.
Despite a challenging environment characterized by the Silicon Valley Bank’s collapse, tightening credit, and rising interest rates, the CEOs interpreted their robust earnings reports as evidence that further industry regulation is unnecessary. During the bank’s Friday earnings call, JPMorgan Chase’s Jamie Dimon expressed concerns over non-bank financial competitors who are delighted by the prospect of increased bank capital requirements.
Dimon mentioned that the proposed regulations favour hedge funds, private equity, private credit, Apollo, and Blackstone. JPMorgan’s CFO, Jeremy Barnum, described the proposed capital increases as excessive, leading to strain on returns, which could eventually increase prices and negatively impact the real economy.
US regulators are gearing up to introduce a long-awaited revamp of banks’ capital requirement rules, the Basel III Endgame, next week. The officials have suggested that banks may need to retain up to 20% more capital, strengthening the financial system’s resilience, especially after three regional banks failed earlier this year.
However, banking executives disagree, including Dimon, Barnum, and others. They express concern that the globally applicable standards may be higher for US banks, potentially hampering their international competitiveness.
Bank of America CEO Brian Moynihan stated in his company’s earnings call that the current capital in the industry is adequate, and officials need to reconsider the negative aspects of the new regulations. He added that these rules could undermine the competitiveness of banks and potentially decelerate the economy.
Furthermore, in a recent interview, outgoing Morgan Stanley CEO James Gorman criticized the “intellectual inconsistencies” in the proposed regulations, promising to challenge them during the commentary period.
This matter is crucial as Senate Democrats, including Senators Elizabeth Warren, Richard Blumenthal, and Tammy Duckworth, assert that strengthening capital requirements is vital for the resilience and security of the US banking system. In a letter to regulators, they argued that requiring banks to maintain more cash and liquid assets will safeguard consumers and ensure the banking system’s smooth operation.
Federal Deposit Insurance Corporation Chairman Martin Gruenberg also highlighted that undercapitalized banks could lead to negative economic consequences, so increasing their capital would provide long-term economic benefits.
The US stands on the verge of a conflict between bank regulators and banking executives. The result of this clash will significantly influence the future scope of the US banking industry.
Only 1% of US homes have changed ownership this year, as per Redfin, marking the weakest home buying and selling activity in the first half of the year in a decade.
According to a new Redfin report, only 1.4% of homes changed ownership in the first six months of 2023, compared to 2% during the same period in 2019. Prospective homebuyers now have 28% fewer choices than pre-pandemic.
Mortgage rates have reached nearly 7% as US home prices approach record highs in June, while housing inventories are nearing historical lows, per the report.
US retail sales have risen in June for the third consecutive month, despite a looming financial crunch among consumers. The Commerce Department reported a 0.2% increase in June, slower than the previous month’s 0.5% increase and below economists’ 0.5% gain expectations. However, analysts point out that this slowdown in growth isn’t alarming as consumer spending remains strong.
As the regulatory tussle heats up, the eventual direction of the banking sector is likely to impact both the national and global economy significantly. On one hand, more robust capital requirements aim to make the financial system more robust. Conversely, bank executives believe they could limit growth and competitiveness. Meanwhile, market conditions continue to evolve, with sluggish activity in the housing market and a continuous increase in retail sales. The way these economic threads intertwine will undoubtedly define the financial landscape shortly.
