Small-cap and community bank exchange traded funds may find support from this election season as Democratic presidential nominee Hillary Clinton outlines a plan to cut down the red tape for smaller banks.
Clinton plans to require regulators to issue “straightforward” statements explaining how small institutions are exempt from post-financial-crisis rules that were intended for big banks and prevent regulators from enforcing those rules when they don’t apply, reports Gabriel T. Rubin for the Wall Street Journal.
Moreover, the Democratic front runner is proposing to eliminate duplicative state and federal examinations and for simplifying capital requirements, which have both bogged down smaller banks with compliance and record-keeping.
The proposal comes after she promised to improve access to capital for small businesses.
House Financial Services Committee Chairman Jeb Hensarling has also drafted a Republican financial overhaul proposal that calls for many similar changes, such as requiring regulators to tailor rules to fit a lender’s business model and risk profile, along with small-lender regulatory relief bills that are seeing support from Democrats in the House.
Federal Reserve officials, including Chairwomen Janet Yellen, have also commented that regulations are putting undue burden on small lenders.
“While big banks have gotten even bigger since Dodd-Frank became law nearly six years ago, community financial institutions are disappearing at an average rate of one per day,” Hensarling said when he introduced his plan earlier this year. The “avalanche of Washington’s postcrisis regulations” has harmed small lenders and their customers.
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However, Clinton’s proposals explicitly call for no changes under Dodd-Frank for large financial institutions.
In either case, a Republican or Democrat sitting in the White House will be a boon for the small-cap banking industry and sector-related ETFs.
For instance, the First Trust NASDAQ ABA Community Bank Index Fund (QABA) tracks a group of community banks, including top components like Signature Bank 3.4%, TFS Financial Corporation 2.8% and East West Bancorp 2.7%. The PowerShares S&P SmallCap Financials Portfolio (PSCF) targets smaller financial companies from the broader S&P SmallCap 600 Index, including a 40.1% tilt toward small-cap banks. The PowerShares KBW Regional Bank Portfolio (KBWR) targets regional banks.
QABA market-cap weights include small-cap 46.6% and micro-cap 34.8%. PSCF holds small-cap 66.7% and micro-cap 31.9%. KBWR includes small-cap 74.5% and micro-cap 6.0%.
For more information on the banking sector, visit our financial category.