When Can We Learn from Our Lessons?

US banks are set for a tasty week ahead of deregulation, with Trump alleviating banks with deregulation.

A potential of $2.6 trillion can be unlocked if the US government decides to loosen rules related to the capital buffer, which was introduced post-2008 financial crisis. Capital buffer consists of assets and cash, used to absorb losses immediately.

Latest research forecasts that US banks will see a 35% increase in EPS and a higher rate of return for shareholders. Why is this the case?

The loosening of rules and regulations invites banks to reallocate resources for profit maximisation. It can increase investments in AI, data centres or the workforce. This form of supply-side policy can stimulate the economy, given that the US hosts the majority of the global banking in its economy. This is a benefit of deregulation; however, the systemic risks that it carries with this move are immense.

A key reason why banks were asked to hold higher amounts of capital buffer was to prevent another scenario of a financial crisis. Clearly, if banks decide to reallocate this resource, they will hold less buffer to absorb losses, which could lead to a shock to the financial system, inevitably rippling through households’ pockets.

On the other hand, the increase in lending capital, which is provided from this policy, can benefit households. Banks can create price wars where borrowing rates can be lower, which will benefit households.

It is a tight balance – on one side, opportunities are created that can stimulate the economy, on the other, vulnerability in the form of defaults for borrowers.