Bank Shares Tumble after Rep. Waters Says Easing Banking Regulations ‘Will Come to an End’ When She Takes Charge
The major U.S. equity markets finished lower on Wednesday as shares of Apple continued to lead the charge to the downside. Steep losses in bank stocks also contributed to the declines. Heightened volatility was the theme in the market with the benchmark S&P 500 Index closing lower for a fifth straight session. The blue chip Dow posted a more than 600 point range before closing nearly 206 points lower. The tech-driven NASDAQ Composite also suffered another loss.
For a third straight session, Apple dominated the selling, falling 2.8 percent and briefly sending shares into bear market territory after dropping 20 percent from its 52-week high. The catalyst behind the selling pressure was worry over future iPhone sales. These concerns escalated after Guggenheim downgraded the stock and UBS cut its iPhone estimates.
Political Threat Sinks Bank Shares
Bank shares fell sharply, led by the SPDR S&P Bank ETF ( KBE ) which dropped 1.6 percent. The selling was triggered by comments from Democratic Representative Maxine Waters, who is poised to take over the powerful House Financial Services Committee when the new Congress convenes in January.
Speaking ahead of remarks of Randal Quarles, the Federal Reserve’s vice chair of oversight for the banking industry, Waters said efforts to loosen the reins on Wall Street financial institutions won’t be tolerated should she be committee chair, as expected.
“Make no mistake, come January, in this committee the days of this committee weakening regulations and putting our economy once again at risk of another financial crisis will come to an end,” Waters said.
Rep. Waters to Enforce Dodd-Frank Safeguards
Representative Waters seemed to focus her comments specifically on the bigger financial institutions, particularly the too-big-to fail banks that helped trigger the financial crisis in 2008.
“It is essential that the Fed keeps a watchful eye on the financial institutions it supervises and makes strong use of its existing enforcement tools to crank down on institutions that break the law,” she said. “I must say that I am concerned about proposals the Fed has put forth this year to reduce capital and liquidity requirements for the largest financial institutions which would weaken strong safeguards established by Dodd-Frank to protect the U.S. economy from another costly financial crisis.”
FOMC Member Quarles: The Anti-Maxine Waters
After Waters issued her stern warning about the dangers of easing strong safeguards designed to protect the economy from a financial crisis, Federal Reserve Vice Chairman for Supervision Randal Quarles downplayed the possibility that a financial crisis could result from the central bank’s latest efforts to overhaul supervision of big banks.
“The changes do not materially affect the resilience of the financial system,” Quarles said Wednesday in testimony before the House Financial Services Committee, referring to recent rulemaking by the Fed to tailor oversight of banks to specific banks’ activities and size, while lessening the burden of some regulations for banks.
Quarles also insisted banks would still maintain liquidity even in a disaster.
“There’s still trillions of dollars more liquidity in the system than there was before the crisis,” he said.
While Rep. Maxine Waters, a democrat from California seemingly insists the President, Republicans and the Fed have plans to lower the standards for capital that apply to the six U.S. banks considered potential threats to the global economy, the Fed’s Quarles tends to differ.
“I wouldn’t characterize that as a weakening of regulation, just different regulation,” Quarles said of the recent rulemaking to ease regulatory burdens for banks that are smaller than the six largest ones.
Clash or No Clash between Democrats and Republicans?
As far as a potential clash between the Fed and the House Financial Services Committee, Quarles said, “I do expect there to be joint rulemaking.”
Waters said the press and even some of her colleagues have wrongly portrayed her relationship with Republicans, and she hopes they can cooperate. “I look forward to working with you in any and every way that I can,” she said.
Looking at Wednesday’s bank stock slaughter, it looks as if investors are concerned enough about tighter regulations to dump their shares. They would rather sell first, ask questions later.
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