Today, the US stock market soars as Trump is expected to deregulate the banking sector that the Goldman Sachs stock (GS) rises by around 4.5% and the JPMorgan stock rises by over 3%. Trump has ordered to review a 2010 financial reform law that force investment advisers to act in the best interests of their clients, the purpose of the possible deregulation is to increase the possibilities of companies borrowing from banks and other financial institutions, in Trump's words "I have so many people, friends of mine, that have nice businesses and they can't borrow money. The banks just won't let them borrow becuase of the rules and regualtions in Dodd-Frank".
Such possible deregulation action will increase the banks' and other financial institutions' equities and they could increase their revenues and profits when they are able to lend more money. The banks may be even able to increase their leverage ratios. This can improve the profitability of the banking sector; however, this could also increase the risk in the banking sector. The leverage could increase the potential profits but also increase the potential losses, it is a great advantage when the economy is in a good shape; however, it will be a disaster when there is a financial crisis and this is a very important reason that why the Obama administration introduced the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Currently, some large companies have already relatively high leverage ratios, given the continuing low interest rate environment. The deregulation of the banking sector will increase the high yield bond markets, as the companies with lower credit ratings are able to borrow more than the previous level.
Overall, I think that under the current situation, the possible deregulation is made based on the optimal expectation of the US economy in the future.
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