Trump's Treasury Department's First Crack At Banking Reform Looks Pretty Positive, If You're A Bank

The U.S. Treasury has issued its first of four reports on the state of financial regulations in the U.S. Tuesday, and the report sheds some light on just how favorably the Trump administration intends to treat the banking sector.

The Treasury made a number of recommendations of ways to modify current regulations that could provide a major tailwind for bank earnings.

Treasury Recommendations

While the Treasury didn’t recommend major changes to the current capital and liquidity requirements for big banks, it did recommend raising the asset threshold of banks qualifying for the annual Dodd-Frank Act Stress Test from $10 billion to $50 billion. This change would allow banks with less than $50 billion in assets to avoid the test all together.

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In addition, the Treasury recommended that Congress also raise the threshold for classification as a systemically important financial institution, which currently stands at $50 billion in assets. Institutions deemed systemically important must face a higher degree of regulatory scrutiny.

The Treasury also recommended a handful of changes to the Comprehensive Capital and Analysis Review stress test. Including tailoring the test more to each individual institution and extending the time between tests from one year to two years.

“These recommendations, if enacted, would reduce the amount of capital that banks need to maintain to pass CCAR,” Height Securities analyst Edwin Groshans wrote on Tuesday.

Treasury recommended that all banks with less than $10 billion in assets be exempt from the Volcker rule, which prevents commercial banks from certain types of proprietary trading. In addition, the Treasury said that banks with more than $10 billion in assets that do not have large trading businesses should be exempt from the Volcker rule as well.

Finally, the Treasury recommended dialing back the power of the Consumer Financial Protection Bureau, which was created to identify abuses in the financial industry. The Treasury said the president should be able to replace the CFPB director, the CFPB should be subject to the Congressional appropriations process and that any CFPB enforcement actions should be brought to federal court rather than being subject to administrative review.

While the Treasury report didn’t contain any bombshell surprises, banking investors reacted positively, sending the Financial Select Sector SPDR Fund XLF higher by 0.4 percent on Tuesday morning. _____ Image Credit: By Vice President Pence @ twitter - Caption, Picture URL, Public Domain, via Wikimedia Commons