It's been ten years since the financial crisis, and the big banks in the U.S. look healthy. But their leaders are about to get grilled on Capitol Hill this week.
On Wednesday, the big bank CEOs — including Citigroup's (C) Michael Corbat, Bank of America's (BAC) Brian Moynihan, JPMorgan Chase's (JPM) Jamie Dimon, Goldman Sachs’s (GS) David Solomon, and Morgan Stanley's (MS) James Gorman — will testify for several hours before the House Financial Services Committee's 59 members in a hearing entitled, "Holding Megabanks Accountable."
Even though the banks look strong and there hasn’t been a major adverse industry event lately, the hearing is arguably justified.
"There has been moaning among bank stock investors about the need for banks to testify given the range of other topics that Congress can consider,” Wells Fargo analyst Mike Mayo said. “Indeed, where were the hearings before the crisis when they were needed and when we were getting shut out of meetings from banks and prohibited from publicly speaking about the pending collapse?”
“On the other hand, there is a justified look back given both the scale of the crisis and hangover that still exists today given [Quantitative Easing]-induced low interest rates,” he added.
Mayo argues that everyday American savers are still feeling the "one lasting penalty for the financial crisis" in the form of low interest rates due to Quantitative Easing. He estimates that savers have forgone $500 billion in interest on their savings because of lower rates.
In a memo to the committee’s members, the Financial Services Committee staff point to the banks' record profits even amid recent slip-ups.
"The U.S. [Global Systemically Important Banks], along with the rest of the banking sector, have made record profits in recent years. In 2018, the six largest U.S. banks made more than $111 billion in profits. However, these institutions have faced a long list of compliance breakdowns since the financial crisis. According to a 2018 report, financial institutions have paid at least $243 billion in fines since the financial crisis. U.S. G-SIBs accounted for roughly $167 billion, representing more than two-thirds of all fines since the financial crisis."
What’s next for bank regulation
The hearing will likely be more or less a political show, but it could provide hints into the future for regulation.
"To us, the biggest insight should be the possible tone toward the banks into next year’s presidential election,” Mayo said. “More investors are asking what the treatment of banks could be like with a change in administration and/or Congress. Topics that have come up include safety and soundness; taxes based on size, transactions, and other metrics; mergers; the ability to pursue buybacks; more tailored regulation; and credit allocation (or lack thereof) to different industries, groups, and segments of society.”
"Our view is that there will be little change of legislation before the presidential election (easy call). Also, the new heads of regulatory agencies have only recently taken their posts, meaning that harsher regulation before next year’s election seems unlikely."
Mayo is bullish on all five banks’ stocks.
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.