U.S. Regional Banks Poised To Benefit From Any Financial Deregulations - Here's Why

As the first months of the new administration unfold, one sector that seems poised to benefit from both lighter regulation that the Trump administration promises, as well as the Federal Reserve’s (Fed’s) path toward higher interest rates, is...regional banks...due to their simplified, lending-focused business models.

Written by Heidi Richardson (BlackRockBlog.com)

As the name suggests, regional banks are depository institutions that operate across groups of states but below the national level. These organizations could see potentially significant regulatory relief under the new administration if they are legally differentiated from larger, more complicated bulge bracket banks, which represent the country’s largest multinational investment banks.

For example, there are proposals to raise the $50 billion threshold for “Systemically Important Financial Institutions”, a Dodd-Frank designation for 33 banks whose failure could trigger a financial crisis. With many regional banks at present grouped alongside bulge brackets under the current minimum, increasing the threshold could grant regional banks more operational freedom than their larger peers.

Broadly speaking, regional banks earn revenue from lending and pay fees on deposits. When interest rates edge higher, the spread between income from loans and payments on deposits typically widens, which can help increase bank profitability through higher net interest margins. Although the low interest rate environment over the past decade has compressed bank NIMs, we expect U.S.-led reflation—rising nominal growth, wages and inflation—to accelerate. Refer to the chart below.


Markets could also be underpricing the possibility of more and larger rate hikes in 2017, given the Fed’s apparent increasing confidence in job and wage growth. This has paused further steepening in the U.S. Treasury curve, but yields could rise when the Fed signals more aggressively.

Due to their lending-focused business models, regional banks may be among the best-positioned financial firms to capitalize if, or when, Fed action causes interest rates to increase.

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Moon Kil Woong 3 years ago Contributor's comment

Get rid of it all and implement Glass-Stegal. It is absurd to saddle small banks with added regulations when its the big banks that are at fault.