Investors are on tenterhooks as they wait to see whether US President Donald Trump's move to loosen the financial shackles clamped on Wall Street in response to the 2008 global financial crisis sparks a worldwide push towards relaxing bank regulations.
US banks staged a massive rally on Friday – Morgan Stanley jumped 5.5 per cent and Goldman Sachs was up 4.6 per cent – after Trump ordered a review of the 2010 Dodd-Frank financial reforms, on hopes the more clement regulatory environment would clear the way for financial firms to boost their earnings through riskier trading, while reducing their compliance costs.
Perpetual's head of investment strategy, Matthew Sherwood, said "reduced banking regulation in the United States could create an expectation of flow-on effects across the global financial system". But he noted the reaction of regulators in key markets such as Europe and Japan would be critical.
"There is no doubt that the 1100 pages of Dodd-Frank regulation went too far, and its partial reduction will be a net positive for US banks and, given the market share and market power of our big four domestic banks, any regulation reduction will see a very positive sharemarket reaction."
But, he cautioned: "I doubt that APRA [the Australian Prudential Regulation Authority] will do anything like what is proposed in the United States."
US bankers have long loathed the Dodd-Frank regulations, which included the "Volcker rule" that stops them using taxpayer-guaranteed deposits to place huge financial bets, as well as a requirement that banks write so-called "living wills" that spell out how they can go through bankruptcy without requiring a taxpayer bailout.
Independent economist, Saul Eslake, said that if Trump decides to reverse the Volcker rule banning proprietary trading, "that's likely to increase liquidity in bond, commodity and currency markets. So that might be great for FICC (fixed interest, currencies and commodities).
"Although Australian banks aren't as dependent on earnings from FICC as some of the big US banks, there might be a little bit in that for them."
But Eslake cautioned that Australian regulators are likely to be unwilling to follow the US lead in watering down bank rules. "I'm not sure that regulators outside the United States have much appetite for reversing changes that they've spent the last eight years putting together," he said.
Trump's assault on the Dodd-Frank came a day after he ordered a review of a separate Obama administration "fiduciary rule" that would have forced investment advisers to act in the best interests of their clients, rather than steering them into products which pay the adviser high commissions.
Gary Cohn, the former Goldman Sachs senior executive who Trump appointed to run the National Economic Council, argued the post-crisis regulations had failed to solve the problems they were supposed to be addressing – such as how to rescue banks that are "too big to fail" – but had saddled banks with "literally hundreds of billions of dollars of regulatory costs every year".
Scrapping the regulations, he told the Wall Street Journal, meant that "the banks are going to be able to be able to price product more efficiently and more effectively to consumers".
But US banks won't be the only ones celebrating the demise of Dodd-Frank. Australian banks, particularly the big four and Macquarie, have also had to step up their record-keeping and reporting in their US operations, and whenever they do transactions with US banks to comply with the tough Dodd-Frank regulations. This means that they stand to benefit from lower compliance costs as regulations are scaled back.
Aussie bankers will also be cheering signs that the enthusiasm for tougher global banking rules appears to be ebbing, with a Republican lawmaker putting the US Federal Reserve on notice not to enter into any further binding agreements with "global bureaucrats in foreign lands".
A week ago, Patrick McHenry, the vice-chairman of the US House Financial Services Committee, sent a letter to Federal Reserve chair Janet Yellen, telling her that it was "unacceptable" that the US central bank should be involved in talks about global bank rules, and that the Fed should pull out of talks until Trump has had time to put his candidates on the Fed board.
Unless Yellen follows the directive, it will be difficult for global regulators to reach agreement on a proposed global standard for calculating capital, aimed at making it harder for banks to avoid the tougher Basel III capital requirements that were introduced after the financial crisis.
Local bankers are hoping that a failure to reach agreement on the proposed reforms will mean that they will come under less immediate pressure from APRA to boost their own capital as a buffer against future shocks.
They're also keeping their fingers crossed that Trump's attack on Wall Street regulation will set off a global trend of waning political interference in the financial sector, and that this might erode support for Labor's call for a royal commission into the banks.
But amid the celebrations, Australian bankers will be slightly disappointed that Cohn's comments suggest that the Trump administration will support the principle that banks should be required to hold hefty levels of capital.
"I'm not sitting here saying we want to go back to the good old days," Cohn told the WSJ. "We have the best, most highly capitalised banks in the world, and we should use that to our competitive advantage."
Even if the Trump administration does decide to water down capital adequacy rules for US banks, Eslake warned that they're unlikely to be copied. "I can't see Australian and other regulators being willing to ape any changes the US might make in that regard," he said.
