After a tumultuous past few months in which investors were left to speculate about the state of Europe’s financial crisis and the U.S.’s financial reform, we are finally starting to get a little bit of clarity. In the United States, at least, a resolution for exchange traded funds could soon be at hand. In Europe, not so much.
In Europe, banks are preparing to undergo stress tests, reports Michael Corkery of The Wall Street Journal. But according to one economist, the tests are merely “comfort tests” and not nearly harsh enough to test the strength of Europe’s financial health in the event of a deterioration of bonds in governments such as Greece, Portugal and Spain.
Corkery reminds us, however, that there was similar criticism to the stress tests that were held here in the U.S., with the critics claiming that the tests were too easy. In the end, though, U.S. banks passed the tests and were able to raise ample capital despite the criticism.
Which brings us to the U.S. front, where financial reform is taking its final shape. Eli Lehrer of Frum Forum gives us five positive consequences the bill will have for the financial industry. [ETF Strategies For Financial Reform.]
- The chances of bailouts will decline, as the bill will limit the mechanism for non-legislatively approved bailouts and implement a strategy to wind down organizations that are considered “too big to fail.”
- Banks will have one regulator, as the Office of Thrift Supervision will be folded into the Office of the Comptroller of the Currency. Binyamin Appelbaum of The New York Times reports that a streamlined banking regulator should be more efficient than the current system.
- The federal government will get some insurance experience through the establishment of the Federal Insurance Office. This is critical as insurance plays a huge role in the U.S. economy.
- Securitization will be more closely monitored, as the new law will require any seller of mortgage backed securities to retain at least 5% of the credit risk. This will reduce the benefits of securitization, but should help prevent the circumstances that destroyed our economy.
- Some of the law’s consumer protection provisions make sense. Consumers will be able to gain no-cost access to their credit scores and “the SEC will have the power to impose a fiduciary duty on brokers” in an effort to prevent things that border on fraud.
SPDR KBW Bank ETF (NYSEArca: KBE) has been a strong performer, up 8.8% in the last two weeks. That’s big news, considering the doubts that have plagued investor sentiment. Not everyone craves big bank exposure, though. For the risk-averse, regional bank funds might be more your speed: iShares Dow Jones U.S. Regional Banks (NYSEArca: IAT) and SPDR KBW Regional Banks (NYSEArca: KRE).
Two international banking ETFs you may be interested in are the SPDR S&P International Financial Sector ETF (NYSEArca: IPF) and the iShares S&P Global Financials (NYSEArca: IXG). You can find all the financial ETFs by going to the ETF Analyzer and entering “financial” in the search box.
For more stories on the banking industry, visit our banking category.
Sumin Kim contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.