The government unveiled a plan to cover the cost of rescuing the financial system which involves charging banks a 15 basis point fee on various covered assets. A relatively healthy commercial bank might make only a 1% return on assets, so 15 basis points could be a substantial levy, depending on exactly what assets are covered and what is excluded. The fee is expected to raise $90 billion dollars over a 10-year period.
Regardless of what you may think of this plan, it illustrates an investment risk not often discussed in finance textbooks: political risk. Usually when we talk about political risk, we are thinking about a coup in Venezuela or a sovereign debt default in Zimbabwe. We don’t necessarily think about how much a domestic industry can be affected by legislation that radically unbalances the status quo. From a fundamental point of view, such a fee could reduce bank earnings by a significant amount for the next decade, leading to lower assumed valuations by spreadsheet jockeys.
From a relative strength point of view, life goes on. If bank stock prices are affected for better or worse, relative strength will change. But actual prices will need to change before anything can be assumed. It may be that some type of fee or punitive operating restrictions were already anticipated by the market—and sometimes when the news is not as bad as expected, the stocks actually rally. Whether it’s political risk or any other exotic risk, price is the final arbiter.
