Nøh, Dăăă, Bah ouais — every language has its own version of duh. And the most obvious, biggest story of the financial world in 2024, in every tongue, was the interest rate cut. Duh.

The United States, the Euro Area, the United Kingdom, Singapore, China, India, Mexico, Brazil, Turkey, Argentina, Canada, Kenya … OK, there’s no use naming them all. Those are just some of the places where central bankers slashed rates this year in a bid to stimulate economic growth. In the US, which we’ll focus on because this would otherwise be a PhD dissertation-length newsletter, the beginning of the Fed’s rate-cut cycle in September unleashed a wave of stock market enthusiasm.

End of the Waiting Game

You know the deal. The Fed operates on a pretty straightforward monetary theory that says lower rates mean lower borrowing costs, which entice businesses and consumers to spend more. Good for economic growth. On the other hand, when the economy overheats like it did during the pandemic, the Fed can (and did) raise rates to tamp down inflation before a carton of eggs costs more than a Prada leather handbag.

Once the Fed became satisfied in September that inflation was hovering closer to its 2% target — and after a jittery dip in markets a month earlier — the central bank’s monetary policy committee began cutting rates for the first time in over four years. It started with a jumbo-sized 0.5 percentage-point reduction that month, followed by 0.25 percentage-point cuts in November and December. Hopefully, the impact was that your portfolio did well because the stock market overall sure did. But a signal by the Fed earlier this month that it may be less bullish on future cuts has stymied the elation somewhat: 

• The S&P 500 is still up 25% this year while the tech-leaning Nasdaq Composite has gained 30%, but when Fed chair Jerome Powell said, after the latest cut this month, “It’s a new phase, and we’re going to be cautious about further cuts,” markets took a nosedive. The S&P 500 fell almost 3%, and the Nasdaq dropped 3.5% on his announcement.
• The slower pace of rate cuts could help banks better manage the impact. “Initially, the rate cuts will be credit negative for most US banks,” ​​Moody’s analysts wrote in September. “We expect their deposit costs to reprice downward more slowly than their loan yields, constraining net interest income, which is most banks’ largest revenue source.” But as activity on Wall Street ramps up amid lower rates — think M&A, IPOs, dealmaking — Moody’s said banks would benefit from “higher capital markets volumes” and, if the now lower interest rates continue to bolster economic growth, “it will help banks maintain and improve their asset quality.”

The Question: Will he or won’t he? That’s the political question just about every market stakeholder is asking themselves over President-elect Donald Trump’s promises to slap tariffs on goods from foreign countries, including a 60% levy on Chinese imports and 25% on those from Canada and Mexico. The three are America’s top trading partners and tariffs would drive up the cost of goods imported from them, potentially reigniting inflation. That’s why Fed officials are now signaling they will cut the fed funds rate two times in 2025, rather than the four they previously forecasted. There are signs that foreign officials will try to placate Trump’s concerns about border security — Canada announced a $1.3 billion border security plan earlier this month, for example — to head off the tariffs, which may give the Fed more leeway.

Nothing to shake things up like some Italian bravado. For years, a predicted tidal wave of bank mergers across Europe didn’t happen. In 2024, one CEO tried to change that — he was still going as of last week.

UniCredit chief Andrea Orcel, head of Italy’s second-largest lender, upped his firm’s stake in Commerzbank to 28% shortly before Christmas, three months after he revealed a surprise 9% holding in Germany’s second-largest lender that he’s been increasing ever since. The response to his aggressive merger pursuit: fury among German politicians and implicit support from the European Union’s top bureaucrats.

The Opening Salvo

European governments are still gradually selling off shares in banks that were rescued during the 2008 financial crisis (semi-related: The Big Short is a fun plane rewatch for those travelling home this week). To wit, the UK government cut its stake in Natwest earlier this month to below 10%, from roughly 16% two months earlier. The Dutch government announced in October that it was reducing its stake in ABN Amro to 30% from 40.5%, and the Greek government said that same month that it had sold off a 10% stake in the National Bank of Greece.

The moves heighten the possibility of mergers. What was missing was a move like Orcel’s, which along with the hostile takeover bid from Spain’s BBVA for Banco Sabadell, heralded the “arrival of long-awaited mammoth consolidation deals,” attorneys at White & Case said. To succeed, however, the deals must overcome the one-two snag of politics and national pride:

• Orcel made his initial surprise move by exploiting the governments’ exits from their banking stakes — he bought a 4.5% stake from the German government after previously building up a 4.5% stake of his own. German Chancellor Olaf Scholz was not pleased, calling his move “an unfriendly attack.” Italian Member of the European Parliament Irene Tinagli, who once chaired the European Parliament’s economy committee, noted to Politico the irony that all EU member states, including Germany, have called for “greater financial integration, but when faced with potential takeover of national champions, they start having ‘second thoughts.’”
• While careful not to endorse specific cases, the European Commission, the EU’s executive body, said in an official statement in September that, “mergers could make banks more resilient to shocks due to greater asset diversification. And they would allow European banks to have more efficient business models, pursue growth strategies and invest in digitalization.” European Central Bank president Christine Lagarde also gave an implicit nod to Orcel, calling European bank mergers “desirable” since they would help to challenge much more consolidated US and Chinese rivals.

Putting His Cards on the Table: The outspoken Orcel put all his cards on the table in an op-ed published in the Financial Times last week, arguing that, while the EU has embraced a single market, its financial sector has remained siloed. “Our cherished single market is incomplete and needs work,” he wrote. “We need to focus on an EU-wide strategy for growth. Yet we seemingly cannot agree on simple things such as having a capital markets or banking union to support investment and growth.”

Measured by volume of jaw-dropping details, the Wall Street scandal that eclipsed all others in 2024 came through New Jersey by way of Toronto.

TD Bank (TD for Toronto Dominion), the Cherry Hill, NJ-headquartered subsidiary of the Canadian banking giant, had made an astronomical push into the US market, becoming one of the 10 largest banks by total assets in the country.

Then came a press conference that’s likely to change the trajectory of the US banking industry for years to come.

“You guys really need to shut this down LOL”

In October, TD Bank was fined more than $3 billion by regulators including the Department of Justice after pleading guilty to letting money-laundering networks run rampant under its watch: Some $670 million in illicit funds were funneled through the bank, including by international drug traffickers, the Justice Department said.

Many staff allegedly knew what was up, and how could they not — the details revealed by the authorities revealed flaunting straight out of a Hollywood crime caper. In a red flag the size of the surface area of Mars, one criminal network would dump piles of cash on the bank’s counters. Another network gave TD Bank employees tens of thousands of dollars in gift cards to keep processing shady transactions. It was so glaringly obvious that one TD Bank location manager wrote to another, in 2021, “You guys really need to shut this down LOL” The impact of the case is significant:

• TD Bank’s rapid rise to one of the top 10 banks in the US was fueled by acquisitions — of NJ-based Commerce Bank in the northeast, of South Carolina-based South Financial in the southeast — but any future growth is on hold, after regulators placed a $434 billion asset cap on the bank, keeping it stuck at September 2024 levels for the indefinite future.
• The Office of the Comptroller of the Currency, which oversees the asset freeze, ordered TD Bank to hire an independent consultant to review its anti-money laundering practices and draft an “action plan” — including the recommendations of that consultant — to reform its compliance programs by February. If TD fails to follow through on reforms in the OCC’s judgement, the bureau can start tightening the asset cap by 7% every year.

To put it not mildly, Jefferies analyst John Aiken told the Financial Post that forecasting the earnings of TD Bank’s parent company in the next few quarters will be an “absolute nightmare.” TD Bank Group’s stock, traded on the Toronto Stock Exchange, has fallen over 12% this year — by contrast, Canadian bank rivals RBC and Scotiabank have risen 29% and 21%, respectively.

The Comeback Kid: The TD story resonates in particular because another US banking giant, Wells Fargo, is angling to finally be released from a $1.95 trillion asset cap imposed in 2018 for misdeeds that included creating fake accounts in the names of customers to inflate performance.

Since then, Wells Fargo has missed out on billions in profits and watched rival JPMorgan Chase add nearly the equivalent of Wells Fargo to its balance sheet. Wells Fargo’s asset cap is reportedly likely to be lifted in the first quarter of 2025, which would unleash what is still the fourth-largest bank in the US by assets at a time when dealmaking is on the rise.