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The surprise winners of the bank regulation roll-back

Congress just passed a bank deregulation bill to help tiny community lenders drowning in rules. But some of the bigge...

Posted: May 23, 2018 1:47 PM
Updated: May 23, 2018 1:48 PM

Congress just passed a bank deregulation bill to help tiny community lenders drowning in rules. But some of the biggest winners aren't small at all.

The legislation, which garnered bipartisan support, will benefit thousands of community banks that had little to do with the 2008 financial crisis. Wall Street firms like JPMorgan Chase and Goldman Sachs, on the other hand, are not helped.

But the bill will also free large regional banks like Fifth Third Bancorp and SunTrust Banks from tough scrutiny that forced them to build giant rainy-day funds. Wall Street is betting these lenders will be able to return tens of billions of dollars of extra cash through greater share buybacks and dividends.

"They're wrapping themselves in the apple pie of community banking," Neel Kashkari, the president of the Minnesota Federal Reserve Bank, said at an event on Monday. The former Goldman Sachs banker has emerged as an outspoken critic of big banks.

Related: American banks had their most profitable quarter ever

Banks are minting money

Large regional banks, like their mega-bank cousins, are not exactly starving these days. American banks hauled in a record-setting $56 billion of profits during the first quarter, according to the FDIC. Just $6.1 billion of those blockbuster earnings were from community banks.

"They're making record profits. I'm not sure what the problem is there that needs to be solved," said Kashkari.

The American Bankers Association, an industry group, said, "Lawmakers from both parties have chosen to right-size financial rules that were not working as intended and holding the economy back."

The largest financial institutions to get regulatory relief from the bill are State Street and Bank of New York Mellon. These custody banks, which have a combined $624 billion on their balance sheets, are charged with safeguarding the assets of mutual funds and other institutional investors.

By exempting State Street and Bank of New York Mellon from certain capital rules, the legislation frees these large firms up to generate greater profits.

Related: Wells Fargo altered documents about business clients

$53 billion reward?

If the deregulation bill becomes law, large regional banks could ramp up shareholder payouts by as much as $53 billion, according to an April report by S&P Global Market Intelligence.

That's because the legislation would allow more than a dozen banks to escape the scrutiny that comes with being labeled a "too big to fail" bank. The trigger for that dreaded distinction would jump to $250 billion in assets, up from just $50 billion today.

Regional banks in the $50 billion to $100 billion would immediately escape the extra regulatory scrutiny, while banks in the $100 billion to $250 billion would have to wait 18 months.

That means banks with healthy balance sheets could crank up their share buybacks and dividends. Lenders may also attempt to do more wheeling and dealing by acquiring smaller banks.

The banks with the most firepower to return cash to shareholders are CIT Group, Zions, Citizens Financial and Comerica, according to research by investment bank KBW.

"Banks are flush with capital," said Brian Gardner, KBW's Washington policy analyst.

Wall Street is already looking forward to bigger payouts, bidding shares of these four banks up by 12% to 16% apiece this year. By comparison, the KBW Bank Index is up by a more pedestrian 4% this year.

Markets will pressure banks to return cash

KBW cautioned that it may take years for the large regional banks to fully deploy their extra cash.

Others doubt the windfall for shareholders will ultimately be that massive.

"I don't think there will be a sudden release of capital, although investors and the market may pressure them to do so," said Cliff Stanford, who leads the bank regulatory team at the law firm Alston & Bird.

"The institutions will be thoughtful about it," said Stanford, a former Atlanta Fed official who now represents small and large banks.

The biggest regional banks, PNC and US Bancorp, won't be helped because they already sit on more than $250 billion in assets, making them subject to the tougher oversight.

Gardner said that banks hovering near the $50 billion level will no longer be discouraged from crossing that too big to fail threshold. Two examples include New York Community Bancorp and People's United Financial.

"Banks in that range will want to start growing again. They won't be afraid of the compliance costs," he said.

--CNNMoney's Donna Borak contributed to this report

Indiana Coronavirus Cases

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Cases: 601937

Reported Deaths: 9593
CountyCasesDeaths
Marion831111322
Lake44972678
Allen32498545
Hamilton29039315
St. Joseph27133380
Elkhart24291343
Vanderburgh19160246
Tippecanoe17799130
Johnson14871292
Porter14631167
Hendricks14188247
Madison10851219
Vigo10636178
Clark10520137
Monroe9299110
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Howard8134142
Kosciusko800382
Warrick665197
Hancock6575103
Bartholomew637999
Floyd6322109
Wayne6076161
Grant5937113
Dubois552578
Boone544967
Morgan530594
Henry503464
Marshall499884
Cass478663
Dearborn470745
Noble468357
Jackson420747
Shelby410781
Lawrence387478
Clinton370642
Gibson365559
DeKalb344264
Montgomery340754
Harrison340544
Knox333139
Miami317344
Steuben311545
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Scott221838
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Washington182022
Starke174443
Jay166322
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Carroll155415
Rush153318
Perry151227
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Parke13018
Pike115626
Blackford110522
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Ohio Coronavirus Cases

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Cases: 849704

Reported Deaths: 10518
CountyCasesDeaths
Franklin100046706
Cuyahoga845231068
Hamilton63092447
Montgomery42660405
Summit34405754
Lucas31041611
Butler30546229
Stark25443429
Warren19436140
Lorain18767223
Mahoning17163337
Lake15882153
Clermont15697110
Delaware1422678
Licking13067137
Trumbull12680313
Fairfield1262180
Greene11915136
Medina11439167
Clark10802265
Wood10230158
Allen9774126
Portage9163107
Miami907373
Richland9035117
Marion7420113
Tuscarawas7280179
Columbiana7263124
Pickaway719550
Wayne6954169
Muskingum690741
Erie6090127
Hancock547590
Ross543487
Scioto533664
Geauga501155
Darke465591
Ashtabula449373
Lawrence447053
Union444928
Sandusky433062
Mercer432088
Huron423541
Seneca423465
Auglaize419662
Shelby419421
Jefferson415469
Belmont411240
Washington383340
Athens37379
Putnam372674
Madison349929
Knox347922
Ashland342538
Fulton335243
Defiance327782
Crawford319472
Preble318437
Brown307121
Logan304132
Ottawa289243
Clinton286643
Williams275866
Highland271818
Jackson261345
Guernsey249825
Champaign249328
Fayette234429
Morrow23014
Perry228318
Holmes222864
Henry216849
Hardin210133
Coshocton203521
Van Wert200545
Gallia194726
Wyandot193851
Pike172417
Adams172015
Hocking169824
Carroll153216
Paulding143221
Noble119940
Meigs106823
Monroe100331
Harrison87821
Morgan82229
Vinton68913
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