Stock Market Rout Shows Two Sides of Dodd-Frank; Vatican's AML Cop

Peters, Andy, American Banker

 stock market news

Byline: Andy Peters

Receiving Wide Coverage ...

Dodd-Frank's Good and Bad Sides: Monday's stock market meltdown offered up a case study in how Dodd-Frank has helped banks and how it's hurt banks. The market madness also cast serious doubt on the Fed's plans to raise interest rates next month.

On the positive side for Dodd-Frank, banks have been forced to build up their defenses because of the law and they should be much better equipped to weather the storm of the next prolonged downturn. That, at least, was UBS analyst Brennan Hawken's argument in light of the stock market's bloodbath, in which bank stocks didn't fare well.

The KBW Bank Index fell 5.44%, worse than the 3.6% decline in the Dow Jones Industrial Average and the worst day for the Bank Index since November 2011, according to the Wall Street Journal.

Hawken argued banks shouldn't have taken it on the chin in the stock market's collapse. "Banks are meaningfully less risky than they were," he wrote. If the market agrees with Hawken, perhaps bank stocks will rebound, as investors come to the realization that banks have spent the past several years loading up on capital and, ostensibly, derisking their balance sheets.

"The banks are in a much better position than they have been," said Peter Kovalski, a money manager at Alpine Funds who invests in bank stocks.

Some market observers offered up the notion it might even be a good time to buy bank stocks. Five national and regional banks have seen their stock prices fall by more than 13% over the past month, according to Motley Fool. Those are Bank of America, Citigroup, Regions Financial, KeyCorp and BB&T. On top of that, B of A, Citi and Regions all trade at "substantial discounts to their book values," John Maxfield wrote for the Fool.

Then there's the bad. Dodd-Frank's Volcker Rule has made it difficult for banks to take advantage of market volatility, and Monday was all about volatility.

Before Dodd-stock market newsFrank, "banks would be bathing in gold because of all the volatility," banking consultant Mayra Rodriguez Valladares told American Banker.

Instead, banks with large foreign-exchange trading desks likely weren't prepared for China's unexpected devaluation of the yuan and "wouldn't have had their hedges in place," Rodriguez Valladares said. Citigroup, JPMorgan Chase and B of A all have large forex desks.

Just in case you started to have the notion that perhaps Citigroup has turned a corner, Monday's madness should put a stop to those thoughts. Thanks in part to Citi's oversized exposure to China, Citi shares fell 6.1% on Monday, the biggest drop of the six largest banks. Citigroup reported exposure to China totaling $21.1 billion in the second quarter.

As for the Fed's plans to raise rates, Karen Shaw Petrou, managing partner at Federal Financial Analytics, told American Banker it's a foregone conclusion the central bank won't raise rates next month. Other Fed watchers agreed. Ted Truman, a former Fed official who now works for the Peterson Institute for International Economics, told the FT, "if anything, it will cause them to delay.