Banks have been under pressure from shareholders and regulators alike. Something has got to give.
Once again, it's shaping up to be a bad year for big banks.
They're almost certain to not get as many interest rate hikes as they had hoped for at the beginning of the year. Trading desks started 2016 by catching a beating, and investment banking teams are losing a growing portion of market share to boutique upstarts, when regulators aren't killing their biggest deals . Big banks are so strapped they had to switch from cutting jobs to cutting pay.
Maybe — just maybe — it's time for Wall Street to catch a break.
What that entails (and whether big banks deserve it) is a separate debate.
It remains to be seen whether bank managers will be given a free pass from analysts, whose return-on-equity targets face the growing likelihood of going unmet, or from regulators, whose stress tests may have been eclipsed earlier this year by the realities big banks faced (successfully) in Europe and the U.K.
"There's all sorts of ways they can back off the banks," Dick Bove, equity research analyst at Rafferty Capital Markets, said of regulators.
Allowing banks to free up more capital for things like home loans would be a boost for banks, and for the U.S. economy, he added. Many market watchers have expressed concern that big banks are being regulated into utilities — that is to say, saddled with enough requirements and boxes to check that they would face low margins in virtually any economy.
But regulators, for now, look determined to head in the opposite direction, which would create additional pressure on Wall Street.
It isn't clear how the Federal Reserve will approach stress testing for Wall Street banks in 2017; it already integrated negative interest rates into banks' capital plans and, based on financial services' firms responses to the Brexit vote and the expectations of ongoing fallout, it seems many have already set up effective stop-gaps to stave off crisis. At the same time, Fed Governor Daniel Tarullo, who oversees the banking system as chairman of the Federal Financial Institutions Examination Council, said he wants to make stress tests stricter by 2018.
But not everyone thinks banks deserve a break. Christopher Whalen, senior managing director at the Kroll Bond Rating Agency, said the banks are in a mess of their own making.
"It's puzzling why banks and nonbanks have positioned for higher interest rates," he said. "The notion you should position for higher rates is downright reckless."
From the looks of it, Wall Street won't have its expectations met in the way of higher rates in 2016. It isn't even clear a rate hike is coming this year at all. If one doesn't happen, that likely would mean big banks will miss projected return-on-capital estimates.
Bove said it's not the bankers who need the breaks, it is ordinary Americans, who make up the overwhelming majority of investors (be it directly, or indirectly) in Wall Street's biggest institutions. On top of that, restrictions on big banks ultimately become restrictions on average Americans' purchasing power.
"The end person who gets hit with this is not the management of banks ... it is the American people," he said. "The stocks are not keeping pace with the market."