The last time big U.S. banks made so much money, the financial world was heading toward the brink of collapse. This time, it's stiff regulation that's in danger.
Ten of the nation's biggest lenders including JPMorgan Chase & Co. and Bank of America Corp. together made $30-billion last quarter, just a few hundred million short of the record in the second quarter of 2007, according to data compiled by Bloomberg. The achievement comes just as the industry's long campaign against post-crisis rules finds traction with the Trump administration.
Banks have been decrying regulations aimed at curbing risk, blaming them for hurting capital markets and discouraging lending to consumers and companies. President Donald Trump, echoing those complaints, has asked regulators to find ways to ease off. But in this year's second quarter, banks saw their profits propped up by lending operations even after a surge in revenue from more volatile trading units subsided.
"It shows that the legislation we passed in no way retarded the ability of the banks to make money," said Barney Frank, the former congressman whose name is on the 2010 law tightening industry oversight. Banks are supporting the economy, he said. And "very specifically, it refutes Trump's claim that we cut into lending. How do banks make record profits if they can't lend – especially when they're down in trading?"
The second quarter wasn't a fluke. Even looking at the past 12 months, profits are still near the same level as 2007.
The 2007 figure includes profits from Wall Street giants that were independent at the time, such as Merrill Lynch & Co. and Bear Stearns Cos., but were acquired by larger rivals while succumbing to the meltdown. The 10 firms on the list for this year are U.S. banks with the highest net income that hold at least $100-billion of loans.
That group now generates more than $57-million of profit per working hour.
The Dodd-Frank Act ushered in sweeping changes that included reining in banks' ability to bet their own money on market prices, setting up a new system to seize and wind down failing firms, and streamlining derivatives dealings. Meanwhile, regulators around the world overhauled capital rules, requiring banks to build bigger buffers to absorb losses in an economic downturn. They also unveiled liquidity rules, seeking to ensure lenders have enough cash or easy-to-sell assets to stay afloat if outside funding flees in a panic.
The industry has argued the rules went too far and were piled on without enough consideration for how they'd interact with each other.
JPMorgan Chief Executive Officer Jamie Dimon said July 14 that banks would have made $2-trillion more in loans in the past five years if the rules had not been so tight. Small businesses are struggling to access capital markets, Dimon told analysts on a conference call to discuss earnings.
While lending has increased in the past six years, it doesn't match the growth rate before the crisis. Net loans from U.S. banks climbed 31 per cent between 2011 and the first quarter of this year, according to data from the Federal Deposit Insurance Corp. They grew 54 per cent between 2001 and 2007.
Even if the big banks make as much money as they did before the crisis, they're not as profitable as they once were by several measures. Among firms that survived the crises, return on assets is about 35 per cent lower than before the crisis. That measures how much they earn on each dollar of their portfolios.
Return on equity, which looks at net income per dollar of shareholder equity, is less than half of what it was. The latter is much worse than pre-crisis levels because the banks were allowed to have very little capital then, which multiplied the number of failures when the housing market crashed. Higher capital required by post-crisis rules lowers the return on that capital, even if assets earn the same margin.
When return on equity is below 10 per cent, banks can't attract new investors, said Wayne Abernathy, executive vice president of the American Bankers Association, the sector's largest lobbying group. Without new capital from outside, they can't grow as fast and lose market share, he said.
"The industry is recovering, but we're not where we were before the crisis," Abernathy said. "There was overkill in regulation because many were written in a hurry. We're just talking about rationalizing and refining the rules."
Share prices of Goldman Sachs Group Inc., JPMorgan and Wells Fargo & Co. have hit record highs this year. Stocks of banks that suffered more severe damage in the crisis, such as Citigroup Inc. and Bank of America, remain well below their pre-crisis levels. And fixed-income trading operations that once fueled epic profitability are mired in a long slump, forcing banks to rely more on less volatile businesses.
Read more: Banks' asset managers embrace calm markets that hurt traders The absolute profit figures for the big banks also don't tell the full story because the nation's economic output is much bigger than it was before the crisis, Abernathy said.
Last month, all 34 banks in the Federal Reserve's annual stress tests passed, the first time that's happened since the exercises began in 2009. Industry advocates said it shows banks are strong enough to weather a crisis, and that it's time to ease regulation.
But rule proponents argue the opposite: The near-record profits posted this month show lenders can make money for shareholders, fuel the economy and do so safely.
"That's all good news for Main Street – continued economic growth and ultimately more broadly shared prosperity," said Dennis Kelleher, president of Better Markets, a Wall Street watchdog. "However, that is also what is directly threatened by the mindless deregulatory zeal of too many in Washington, who are baselessly attacking Dodd-Frank for almost every ill in America."