Even without the Republican tax cuts, United States banks would have made $49.4 billion in the first three months of 2018 alone. But thanks to their reduced tax bill, they got an extra $6.6 billion, bringing in $56 billion in total. And there are plenty of signs the banking industry’s tax-bill boom is on track to continue — take Bank of America, which saw its tax bill fall to $1.7 billion in the second quarter of this year from $3 billion last year, a 43 percent drop.
It’s not a bad time to be in the banking industry, and the GOP tax bill has made it even better.
The legislation, passed in December, cut taxes for most Americans, including the middle class, but it heavily benefits the wealthy and corporations. According to estimates from the Center on Budget and Policy Priorities, the top fifth of earners get 70 percent of the bill’s benefits, and the top 1 percent get 34 percent. The new tax treatment for “pass-through” entities — companies organized as sole proprietorships, partnerships, LLCs, or S corporations — will mean an estimated $17 billion in tax savings for millionaires in 2018. American corporations are showering their shareholders with stock buybacks this year, thanks in part to their tax savings.
The banking industry has been a major winner in all of this. The tax cuts have reduced what they owe the federal government significantly. (To be sure, there are multiple other factors boosting their earnings as well — the sustained strength of the US economy, for example, and rising interest rates.)
Sen. Ron Wyden (D-OR), ranking member of the Senate Finance Committee, this week released a report examining the ways the tax bill is delivering a boost, specifically, to Wall Street and the banking industry. The report points to the Federal Deposit Insurance Corporation’s (FDIC) estimates that the some 5,606 banks it insures made $56 billion in profits in the first quarter of the year alone, with some $6.6 billion of that amount being owed to the tax cuts.
You stretch that out across all of 2018, and that could mean a $26 billion windfall to FDIC-insured banks by the end of December. Wyden’s office estimates that the amount “could have given a $160 tax cut in 2018 to every single one of the 162 million middle class taxpayers earning under $200,000.”
“While CEOs are cashing in on stock buyback schemes and raking in tax cuts, hardworking Americans are left with Trump’s broken promise to increase wages by $4,000,” Sen. Wyden said in a statement accompanying the report.
The big banks are some of the biggest winners
The biggest banks in the United States — Wells Fargo, JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley — are poised to be among the biggest beneficiaries of the GOP tax bill. JPMorgan made $8.7 billion in the first quarter of the year — it was the largest one-quarter profit by any American bank ever. Morgan Stanley and Bank of America had record earnings, too.
In his annual letter to shareholders, JPMorgan CEO Jamie Dimon lauded the tax bill as “historic” and applauded Congress for showing “we can take on tough issues that have been holding us back.”
In the second three months of the year, the trend of tax cuts boosting banks continued: Five of the six biggest banks beat profit estimates. The only one that didn’t was Wells Fargo, which has been dragged down by a series of scandals and regulatory breaches in recent months, including a $1 billion fine from the Consumer Financial Protection Bureau in April. (Don’t feel too bad for Wells, the tax bill benefits still greatly outweigh that CFPB fine.)
Stephen Gandel at Bloomberg estimates that the GOP tax cuts contributed to the vast majority of bank earnings growth in the second quarter. According to his calculations, 9 of every 10 dollars in the increase banks were making this year compared to last were attributable to the tax cuts. Just a dollar was from actual improvements to their operations and more business. Per Gandel:
That small gain, just $413 million out of an estimated $3.5 billion increase, is odd given how strong the economy appears to be. Just last year, investors seemed certain that a mixture of Trump’s deregulation and then proposed tax cuts would boost corporate America and banks in particular. And yet those tax gains haven’t translated into much more business for the banks.
In other words, banks appear to be making more money because they owe less in taxes, but not because of the economic growth proponents of the GOP tax bill said it would bring.
All the while, many of the big banks are on track to buy back billions of dollars worth of their stock. And even before the tax bill passed, they were handing their CEOs their best paydays since before the financial crisis.
One of the biggest pieces of legislation Congress has passed this year is one that helps banks
To be sure, the banking industry is not inherently evil, and it makes sense that banks, like most corporations, would benefit from a steep cut in the corporate tax rate. But the tax cut is just the start. It seems as though Washington can’t help but keep helping the banking industry.
The Trump administration has undertaken a broad deregulatory effort, much of which is aimed at loosening the reins on financial institutions. Acting CFPB director Mick Mulvaney has rolled back and halted multiple consumer protection and enforcement actions at the agency, including letting some payday lenders off the hook and disbanding consumer advisory boards and councils. The agency, created as part of the legislative response to the 2008 financial crisis, is supposed to be the government’s top consumer watchdog. Federal regulators last year released AIG from special government oversight mandated after the financial crisis; they also set aside a legal fight with MetLife.
In March, Congress passed a bill with both Republican and Democratic votes that would rewrite parts of the 2010 Dodd-Frank Act, the landmark financial regulatory overhaul enacted in response to the 2008 financial crisis. The bill adjusted the size at which banks are subject to certain regulatory scrutiny and exempted small banks from some requirements for loans, mortgages, and trading, among other measures.
Proponents of the bill, including the 16 Senate Democrats and Sen. Angus King (I-ME) who voted for it, said it was squarely aimed at helping community banks unnecessarily harmed by Dodd-Frank. Detractors said it went too far and purports to help small banks while in reality benefiting the largest financial institutions.
There’s a clear impetus to continue boosting the banking industry, whether it needs it or not.