Guru watch: good times for banks, says Steve Eisman

Steve Eisman of Neuberger Berman Group (and of The Big Short fame) is generally happy about the banking sector, at least for now. In his view most banking problems centre on poor credit quality and at the "moment credit quality has never been better", so it is "harder to make mistakes". The only trouble spot is subprime car loans, but this sector is "too small" to pose "a systematic risk" as subprime housing loans did in 2007. Bank shares have also been cushioned by low interest rates, since "in a zero-rate world sins are forgiven".

In the longer run, there might be a gradual relaxation of standards after US president Donald Trump appoints a replacement for US Federal Reserve governor Daniel Tarullo, a key regulator who did a "great job of deleveraging and derisking the banks". Even then, the first impact will only be felt next summer when the next round of stress tests are due to take place. The need to get 60 votes in the Senate to pass legislation should also stop the Trump administration embarking on more substantial deregulation. Indeed, Eisman is confident that it's "going to be very hard" to repeal, or even change, Dodd-Frank.

Of course, zero rates won't last forever. Eisman predicts a total of three rate rises this year, and another three in 2017. So by the end of next year they should be "a lot closer to normal levels". But while this will make life a bit more difficult for banks, it's good news for asset managers. "Low interest rates have made active management much harder since it is not obvious how to allocate capital in a zero-rate world." While the long-term trend toward passive management won't stop, higher rates will "make active management a bit easier".

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