The days of increased regulatory scrutiny are over for U.S. financial stocks. The Congress approved a plan on May 22 to scale down stringent banking regulations or the Dodd-Franck act undertaken in the height of the 2008 financial crisis.
While the move sounds great for the entire banking industry, small-cap banks should actually jump in joy. SPDR S&P Regional Banking ETF (KRE - Free Report) gained 0.6% on May 22 while SPDR S&P Bank ETF (KBE - Free Report) advanced 0.4%. Direxion Regional Banks Bull 3X (DPST - Free Report) gained about 1.53% on May 22.
Inside the Dodd-Frank Laws
The Dodd-Frank Act is a U.S. federal law that entrusts the government with the regulation of the financial industry. The focus of the law was to cut back on uncontrolled lending and avoid the situation where tax-payers' money is needed to bail out large financial institutions. The Act increased the operating expenses of financial institutions given the rise in compliance costs. Further, stringent capital requirements led banks to curb investments.
Why Is the New Rule Especially Beneficial for Small Banks?
From his campaign days, President Trump addressed the Dodd-Frank regulatory revamp as needlessly strict on smaller banks.The bill lowers federal oversight of banks between $50 billion and $250 billion in assets, and “eases lending, capital and trading rules for smaller lenders,” per Reuters. Now, since the days of increased regulatory scrutiny seem to be phasing out, regional banking stocks are likely to be performing at peak levels.
But big bank lobbyists and analysts are of the opinion that the latest easing will do little to comfort the stringency pertaining to the nation’s largest lenders. Large banks lobbied a lot to increase that oversight limit to $500 billion, or resort to a more lenient approach to big bank scrutiny, but small banks strived to cap the threshold at $250 billion, according to Reuters (read: Play Banking Bonanza with These ETFs in Trump World).
Most importantly, the new bill relaxed capital, lending and trading rules of the banks on the basis of asset-size limits, not by firm type or activities. As a result, big banks, many of those that have size to tune of $10 billion, failed to qualify for the rule.
Against this backdrop, investors can surely dip their toe in regional and community bank ETFs and stocks.
ETFs to Buy
SPDR S&P Regional Banking ETF (KRE - Free Report)
The fund looks to track the S&P Regional Banks Select Industry Index. SVB Financial (2.26%), Texas Capital Bancshares (2.04%) and Cullen/Frost Bankers (2.03%) round out the top three sports of the fund (read: ETF Strategies to Play the 7-Year High Benchmark Yield).
iShares U.S. Regional Banks ETF (IAT - Free Report)
The fund follows the Dow Jones U.S. Select Regional Banks Index. US Bancorp (13.3%), PNC Financial Services Group Inc (11.7%) and BB and T Corp (7.10%) take the top three positions of the fund.
PowerShares KBW Regional Banking Portfolio (KBWR - Free Report)
The fund gives exposure to 50 mid-cap banking companies. East West Bancorp (4.02%), Cullen/Frost Bankers (3.53%) and Signature Bank (3.31%) are at the top three spots (read: Is "Sell in May" An Overstated Adage? Play 4 ETFs).
PowerShares S&P Smallcap Financials Portfolio PSCF
The fund tracks S&P SmallCap 600 Capped Financials and Real Estate Index. FirstCash (2.41%), First Financial Bankshares (1.99%) and Green Dot Corp (1.87%) take the top three spots of the fund.
First Trust NASDAQ ABA Community Bank Index Fund (QABA - Free Report)
The underlying index includes a subset of banks and thrifts or their holding companies listed on NASDAQ. East West Bancorp Inc. (3.57%), PacWest Bancorp (2.43%) and Commerce Bancshares (2.42%) are the top three holdings.
Stocks to Buy
Comerica Inc (CMA - Free Report)
The Zacks Rank #2 (Buy) financial services company is strategically aligned by three business segments. The stock comes from a top-ranked Zacks industry (top 15%).
M&T Bank Corporation MTB)
This is a regional financial services company. They provide banking, insurance, investments, mortgage and commercial financial services.
State Street Corporation (STT - Free Report)
State Street Corporation is one of the world's leading providers of financial services to institutional investors. It has a Zacks Rank #2.
Northern Trust Corporation (NTRS - Free Report)
The Zacks Rank #2 company is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals.
Civista Bancshares Inc. (CIVB - Free Report)
It is a bank holding company. The company is involved in the business of community banking, through its subsidiaries. The Zacks Rank #1 (Strong Buy) company belongs to a top-ranked Zacks industry (top 18%).
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