Forget The Comey Soap Opera… The House Passed This CRUCIAL Banking Law

“So what do you think about the new bank legislation?” My new friend Emily asked the question from across the table.

I was getting some research done at a local Starbucks and had made the mistake of saying hello to a “Chatty Kathy” when she sat down. Now she was peppering me with questions about the financial markets.

“I actually think repealing the Dodd-Frank rules could be good for America” I told her. She rolled her eyes and I could tell I had touched on a nerve.

“Hold on….” I said as she started to pack up her things to leave. But I was too late. She mumbled something about needing to get lunch and walked out. It was clear I had offended her and she wanted no part of any further conversation.

Hopefully you’ll hear me out today, as I explain why new banking legislation will actually help consumers, will grow the U.S. economy, and will give you a chance to grow your retirement wealth…

House Passes “Financial Choice Act”

If you missed the news on the house banking legislation passed last week, it’s not surprising. The media was so focused on the Comey testimony that other important issues were simply skipped over.

On Thursday, the House voted in favor of a new set of rules focused on loosening regulations for financial companies. There bill — dubbed the Financial Choice Act — has five main parts:

Relieve healthy banks of some regulatory requirements — The bill sets a higher standard for how much capital banks should hold. This should discourage leverage issues that helped cause the financial crisis in 2008. Banks that keep this higher level of capital will have fewer regulations.

Force failing banks through a bankruptcy process — Having a true bankruptcy process should put the responsibility back on the banks to make wise choices. This way banks cannot simply count on another bailout. Consumers with deposits can still count on FDIC insurance to protect their savings.

Require a cost / benefit analysis for new banking rules — Future regulations will certainly be necessary as the banking industry evolves. But rather than arbitrarily restricting banks, new rules have to be able to prove some benefit to consumers or the country as a whole to be passed.

Boost penalties for wrongdoers — Just as parents teach their children about actions and consequences, banking regulators need to be able to add consequences for banks that do not follow new rules. Giving regulators the ability to punish banks for non-compliance will help establish more order in the industry.

Scrap Volcker rule restricting banks from trading — Today, banks have strict limits on how they can invest their capital. Scrapping the Volcker rule will allow banks to participate in financial markets. This will help improve liquidity and drive more accurate “free-market” pricing for securities.1

The bill divided the House almost exactly along party lines. In other words, every democrat voted against the bill, and nearly every republican voted for the bill. The main reservation that democrats had was that the bill had the potential to harm consumers by giving banks too much power.

But there’s a different perspective that the biased media won’t tell you about. One that could benefit consumers and actually create a more level playing field for the banking industry.

How Loosening Bank Restrictions Could Benefit You

There are two ways that I expect these new banking regulations to actually help consumers across America.

First, the new rules should be particularly helpful for small and mid-sized regional banks.

This is important, because local banks are much more likely to offer loans to small and mid-sized businesses in rural America. And these are exactly the types of companies that will grow quickly, hire more workers, and boost our grass-roots economy.

You see, the big mega-banks already have teams of lawyers and accountants employed to help find loopholes around the current Dodd-Frank rules. With offshore accounts, separate business entities and other “tricks,” the large banks still pretty much do what they want.

But small banks don’t have the same legal and accounting resources. And so the banking restrictions have weighed more heavily on these companies. By loosening banking restrictions, these integral financial institutions will be more competitive and will be able to help boost U.S. economic growth.

That’s great for consumers in the long-run and should help drive employment higher.

A second benefit for consumers comes in the form of household wealth.

At the end of 2016, financial stocks represented 14.8% of the S&P 500.2 That puts the financial sector as the second largest industry in the index — behind Information Technology.

A popular Wall Street phrase is “as go the banks, so goes the market.” That’s because bank stocks typically lead the broad market higher or lower. And as bank stocks trade higher, consumers with IRAs, 401(k) accounts, and regular brokerage accounts should benefit from growth in the broad market…

What Happens Now?

While I don’t trust the banks to “do good” by themselves, and I certainly support responsible banking regulation, this bill is a step in the right direction.

  • It paves the way for a more even playing field in the industry.
  • It requires banks to hold adequate amounts of capital
  • It punishes banks who do not comply with rules.
  • And it gives banks an opportunity to invest their capital for growth

These provisions should drive bank stocks higher. And they should allow small and mid-sized banks to boost profits while supporting local and regional businesses.

The bill still needs to be voted on by the Senate before it can be passed into law.

It is more likely that the Senate will come up with proposed changes to the bill, and there will be some negotiation between the House and Senate as to what the final bill will look like.

Of course Washington can move at a snail’s pace sometimes, and there are plenty of other issues that the Senate is currently grappling with. But this House bill gives us a good view into what the final piece of legislation will look like, and who will benefit from the new regulatory environment.

Bank stocks are already trading higher on the news, and will likely continue to move higher as the legislation process continues.

I’m particularly fond of small-cap and mid-cap bank stocks, as these companies have more to gain from a looser regulatory environment. I’ll keep you updated as I watch to see how this situation unfolds.

Here’s to growing and protecting your wealth!

Zach Scheidt

Zach Scheidt
Editor, The Daily Edge

1 House Passes Bill Rolling Back Wall Street Rules, WSJ, Ryan Tracy
2 S&P 500 Sector Weightings 1979 – 2017, Siblis Research

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