One of the paradoxes of the financial crisis—in which subprime American mortgages played a central role in the global market turmoil—is that many US banks came out the other side even more dominant. The panic was so acute, especially after the collapse of Lehman Brothers in 2008, that officials in Washington acted quickly (pdf) by cramming US lenders with emergency capital. The subsequent recession was deep, but the US economy came out of it more quickly and in better shape than Europe’s.
These days, the Trump administration is helping make American banks great again. US financial stocks are rallying, and their net income as a percentage of total assets reached 1.4% in 2016, compared with 0.4% for France, 0.5% for Japan, and 0.2% for the UK, according to the Bank for International Settlements (pdf). RBS and Deutsche Bank, the biggest banks in the world by assets in 2007, have fallen off the map. JPMorgan has added $1 trillion in assets over the past decade. Changes in market capitalizations for the five largest banks since 2007 in both Europe and the US shows their diverging fortunes:
Most recently, American banks got an extra boost from Trump’s tax cuts, which could save the industry $30 billion annually. Even more stimulus is on the way: US agencies are prepared to loosen restrictions that limit how much risk they can take with their own money, according to Bloomberg News.
The so-called Volcker rule put a crimp in banks’ trading profits, and lobbyists point out that these restrictions have made buying and selling in vital markets, like corporate bonds, more difficult. But it’s hard to pinpoint how and whether this has hurt the actual economy. Companies appear to have more than enough financing options available. The most vibrant, innovative tech companies prefer to raise money in private markets that are highly illiquid. Bank trading desks seem to be the ones most bothered by the rule.
During his presidential campaign, Donald Trump touted a populist message about breaking up big banks. Instead, his administration has been very hospitable to them. Maybe that’s fitting, as the White House and Wall Street may face the same adversaries: The world’s four biggest banks by assets are now Chinese. China’s Ant Financial reportedly has more than 600 million customers and is perhaps the world’s most valuable financial startup.
And when Trump isn’t dueling with China, he’s often taking shots at Amazon, which finance executives warily expect to butt in on their industry at some point. Perhaps the enemies of Trump’s enemies are his friends.
The future of finance on Quartz
Jack Dorsey joined a hackathon at Square. His team’s goal was to buy a cappuccino (in US dollars) using Square’s Cash Card loaded with bitcoin. Twitter and Square CEO Dorsey has a longstanding fascination with the cypherpunk movement, and believes bitcoin is the internet’s native currency.
Bitcoin is a form of steroids for fintech startups. TransferGo, a remittance company, is hoping crypto will give the same boost to its business that companies like Revolut, Robinhood, and Square (see above) got from it. Big banks are still afraid to touch the likes of ethereum and litecoin.
Credit algorithms are making the same mistakes humans do. Academics who study algorithmic decision making say there’s a risk of “weblining,” where new-breed credit scores reproduce the same old credit inequalities.
Passive investing may be the future of finance, but not this year. The benchmark S&P 500 is down 0.4%, while hedge funds have gained 0.8%. Whether actively managed funds are still worth their fees will still be debated, but at least fund managers have provided an actual hedge.
The biggest ever crypto-related IPO is underway. Canaan Creative, the world’s second-largest maker of bitcoin mining rigs, filed to go public in Hong Kong. While authorities in China have cracked down on bitcoin mining, companies there can still sell the picks and shovels to prospectors in the crypto gold rush.
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PayPal made its largest-ever acquisition. The payment company is buying Stockholm’s iZettle for about $2.2 billion. This will up the stakes between PayPal and Dorsey’s Square, which, like iZettle, caters to small businesses. The Swedish company had been planning an IPO but, you know, plans change.
Coinbase is prepping for high-frequency traders. The chance to trade against hapless retail investors is too good for computerized HFTs to pass up. That said, their participation on crypto exchanges could bring much needed rigor when it come to limiting trading disruptions and manipulation.
JPMorgan exec Daniel Pinto says the tokenization of the economy is real. Anonymous digital currencies, however, are not going to last, Pinto told CNBC. As for Amazon making a play in banking: “You have to assume in some way or another, they will get involved.”
Ant Financial has more than 600 million users. Information in documents circulated (paywall) to potential investors underscores the company’s dominance in China and its threat to traditional banks. Ant’s wealth-management business has assets under management of about $345 billion.
In other payments news, Amazon partnered with coin-counter Coinstar. The move is a new way for customers to get physical coins and bills into their Amazon accounts. India’s regulators, meanwhile, are reportedly concerned about WhatsApp’s sharing of payment app information with the Facebook mothership. Digital bank Monzo, beloved by London’s hipsters, now supports Apple Pay. And Square Cash is growing faster than Venmo.
What to watch for next week
- Tuesday: If you didn’t get enough “cool techie people” and “greedy assholes”at Consensus (paywall) in New York, head to Moscow for Crypto Expo.
- Thursday: Viva Tech in Paris will feature speakers like Alphabet board member Eric Schmidt, IBM CEO Ginni Rometty, and Uber boss Dara Khosrowshahi.