Big six US banks add $170bn to trading firepowerHeat Profit
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Big Wall Street banks have begun to rebuild their trading arsenals under the lighter-touch regime of Donald Trump, who has promised to rip up Obama-era rules designed to rein in risk-taking.
The likes of Goldman Sachs and Morgan Stanley spent the years since the crisis winnowing their inventories of stocks and bonds held for trading, as new constraints on capital, and new rules such as the Volcker ban on proprietary trades, bit hard.
But over the past nine months the trading arsenals of the big six banks have grown by more than $170bn, bringing the total to $1.71tn, the highest level since the end of 2012, according to an FT analysis of public filings.
Gains range from $14bn at Wells Fargo, which has the smallest trading operation of the group, to $48bn at JPMorgan Chase, which runs the world’s largest Investment bank.
Analysts said the gains have several drivers — increased client activity, higher Market valuations and a concerted push by a few banks, such as Bank of America, to court hedge funds through so-called “prime brokerage” businesses. But one common theme is a willingness among the banks to increase their balance sheets, suggesting they are more comfortable with the regulatory climate emerging under Mr Trump.
“Post-crisis . . . capital rules were becoming increasingly stringent with each new proposal,” said Jason Goldberg, analyst at Barclays. “Now you’re at the point where no one expects capital requirements to increase and you’re even starting to see some rollback, with the possibility of more.”
The six banks declined to comment.
Bank stocks in the US are up more than 35 per cent since last November’s election, buoyed by interest-rate increases from the Federal Reserve and the prospects of relief under a new suite of regulators. Last week Jay Powell, President Trump’s nominee to replace Janet Yellen as Fed chairman, told a Senate hearing that post-crisis reforms had solved the problem of some banks being “too big to fail”. Relaxations of rules are now in order, he said, focused on regional and community banks.
Work on reform is already under way. The Office of the Comptroller of the Currency, for example, is ploughing through 60 “substantive” letters on ways to improve the application and administration of the Volcker rule, according to a spokesperson. The rule was designed to prevent banks from holding trading inventories in excess of near-term client demand.
Meanwhile, Randy Quarles, the new lead bank supervisor at the Fed, has said he wants to “change the tenor” of supervision, suggesting that the previous administration was too abrasive towards the banks.
“There is a different mandate now,” said Tim Adams, chief executive of the Institute of International Finance. “How do you ensure the system is safe and sound and resilient, while also ensuring you have balanced growth and that financial institutions can support economic activity.”
On a call with credit analysts in late October, John Gerspach, Citigroup’s chief financial officer, said the bank was seeing “pretty broad-based growth” in debt trading, thanks largely to corporate clients. In equities, meanwhile, the bank was “able to provide more of our balance sheet” to hedge funds seeking assets and leverage.
Across Wall Street there is a mood of guarded optimism, said Mike Mayo, analyst at Wells Fargo. Revenues and profits from trading businesses are still down a lot from the pre-crisis peak, but “there is the potential . . . to get back in business ahead”. he said.