That said, while many investors focus on difficult to pass headline-grabbing issues such as large-scale tax reform and the repeal of the Dodd-Frank Act, many important regulatory initiatives are ongoing behind the scenes. Chief among them, President Trump’s likely appointment of Randal Quarles as the Vice Chairman of Supervision, the Federal Reserve’s top banking regulator.
Mr. Quarles is a Wall Street lawyer who served under both Bush administrations in the early 1990s and 2000s. Quarles has indicated opposition to several key pieces of the Dodd-Frank Act and the way provisions of the regulation have been administered. He will also have broad powers to redesign the annual “stress tests” conducted by the Fed that determine how much banks are able to return to shareholders in the form of dividends and buybacks.
In short, you may have never heard of Mr. Quarles even though he’s a far more important upside catalyst for the banks than any healthcare reform bill.
The last point, is more difficult to dismiss outright: the Fed’s monthly data on the banking industry suggests that loans outstanding have declined since the beginning of the year. As we’ve explained, rising interest rates tend to boost banks’ net interest margins (NIMs). However, if loan balances decline over time this can offset much of that NIM benefit.
Our view is that the decline in aggregate loan balances is temporary and due in part to seasonal factors. For example, mortgage lending activity typically slumps in the first quarter and rebounds in the second due to spring being a homebuying season.