With the Republicans expanding their House majority and gaining control of the Senate for the first time in eight years, financial services exchange traded fund investors may see the midterm election results as a boon for banks. However, a renewed debate on regulation in the banking space could cause more harm than good, fueling potential uncertainty and volatility.
Some argue that the Republican win could mean changes to financial regulation that would benefit medium-size banks, writes John Carney and David Reilly for the Wall Street Journal.
Specifically, bankers would like to see a change in the status of banks as systematically important – the Dodd-Frank act requires greater scrutiny for banks with $50 billion or more in assets. Some have argued that this minimum is arbitrary or too low.
Additionally, stringent regulatory requirements, such as restrictions on trading, requirements to hold more capital, stricter oversight and the need to submit stress tests, have all pressured banks’ bottom line.
Any changes to the regulatory designation would help ease the burden costs on mid-sized banks and potentially bolster related-bank stocks and ETFs, including the SPDR S&P Regional Banking ETF (NYSEArca: KRE), iShares U.S. Regional Banks ETF (NYSEArca: IAT) and PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR). The three regional bank ETFs all have sizeable exposure to medium- and small-capitalization bank stocks. [Regional Bank ETFs Might Be Ready to Shine]
However, renewing the dialogue on financial reform or easing the burden on smaller banks could also revive the debate for too-big-to-fail banks and calls to break them into smaller parts.