Wall Street banks set to profit again when Fed withdraws stimulus
Wall Street banks have been among the biggest beneficiaries of the pandemic-era trading boom, fueled by the Federal Reserve's massive injection of cash into financial markets.
With the central bank nearing the time when it will start winding down its asset purchases, banks are set to profit again as increased volatility encourages clients to buy and sell more stocks and bonds, analysts, investors and executives say.
The Fed has been buying up government-backed bonds since March 2020, adding $4 trillion to its balance sheet, as part of an emergency response to the Covid-19 pandemic.
The strategy was designed to stabilize financial markets and ensure companies and other borrowers had sufficient access to capital.
It succeeded but also resulted in unprecedented levels of liquidity, helping equity and bond traders enjoy their most profitable period since the 2007-09 financial crisis.
The top five Wall Street investment banks - JP Morgan Chase & Co, Goldman Sachs, Bank of America, Morgan Stanley and Citigroup - made an additional $51 billion in trading revenues last year and in the first three quarters of 2021, compared with the comparative quarters in the year prior to Covid, according to company earnings statements.
The trading bonanza, along with a boom in global deal-making, has helped bank stocks outperform the broader market. The KBW Bank index has risen by 40 per cent in the year-to-date compared with a 19 per cent advance in the S&P 500.
Now, banks with large trading businesses are expected to profit a second time as the Fed starts to withdraw the stimulus, prompting investors to rejig their portfolios again.
"As investors look to position based on that volatility, that creates an opportunity for us to make markets for them. And obviously that would lend itself to improved performance," Citigroup Chief Financial Officer Mark Mason told reporters this week.
Fed Chair Jerome Powell signaled in late September that tapering was imminent.