Banks to Face Tougher Regulations - Analyst Blog

By
A A A

On Tuesday, the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) proposed stricter borrowing rules for most systemically significant U.S. banking organizations. The tougher rules intend to make banks more dependent on equity capital as compared with its reliance on debt and riskier assets.

The regulators are contemplating proactive measures to ensure that the world's largest banks strengthen their capital and liquidity positions to confront another financial meltdown. Alongside, they are set to carry out on-site assessments of the financial condition of the banks.

A weak capital level is always a threat to the global economy. Needless to say, meeting new rules would act as building blocks for the still shaky global economy, with fewer bank collapses and less involvement of taxpayers' money for the bailout of troubled financial institutions.

New Rules

The proposed rule directs bank holding companies (BHCs) with more than $700 billion in consolidated total assets or $10 trillion in assets under custody (covered BHCs) to maintain a tier 1 capital leverage ratio of 5%. The new requirement exceeds the minimum leverage ratio of 3% recommended by international banking regulators as part of the Basel III standards. However, failure to achieve the requirement would restrict BHCs for discretionary bonus payments and capital distributions.

Additionally, the proposed rule requires insured depository institutions of covered BHCs to maintain a 6% supplementary leverage ratio to be considered as a "well capitalized" institution for prompt corrective action purposes. The proposed rule is open for public comments over the next 60 days.

The rule, which takes into consideration off-balance sheet items such as derivatives and loan commitments, is expected to be effective in a phased-in-manner as on Jan 1, 2018. This rule will impact 8 most systemically significant U.S. banking organizations, which include Citigroup Inc. ( C ), JPMorgan Chase & Co. ( JPM ), Bank of America Corporation ( BAC ), The Bank of New York Mellon Corporation ( BK ), The Goldman Sachs Group, Inc. ( GS ), Morgan Stanley ( MS ), State Street Corporation ( STT ) and Wells Fargo & Company ( WFC ).

Moreover, the tougher capital rules, which were approved by the Federal Reserve on Jul 2, 2013, got the consent of FDIC and OCC as well. These rules suggest that U.S. banks would need to set aside more capital as buffer to tide over unexpected losses. Banks will be required to maintain a new minimum common equity tier 1 ratio of 4.5% of risk-weighted assets (RWAs) and a common equity tier 1 capital conservation buffer of 2.5% of RWAs applicable to all supervised financial institutions.

Our Viewpoint

These rules might limit the flexibility of the banks with respect to investments and lending volumes. Moreover, such stringent capital rules may considerably slacken the pace of a worldwide economic recovery in the near term.

Overall, structural changes in the sector will continue to impair business expansion and investor confidence. Several dampening factors -- asset-quality troubles, mortgage liabilities and tighter regulations -- will decide the fate of the U.S. banks in the quarters ahead. However, foraying into the new capital regime will ensure long-term stability and security for the industry.

Though the improving performance by the banks seems already priced in and there remain significant concerns, the sector's performance in the upcoming quarters is not expected to disappoint investors.



BANK OF AMER CP (BAC): Free Stock Analysis Report

BANK OF NY MELL (BK): Free Stock Analysis Report

CITIGROUP INC (C): Free Stock Analysis Report

GOLDMAN SACHS (GS): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

MORGAN STANLEY (MS): Free Stock Analysis Report

STATE ST CORP (STT): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: BAC , BK , C , GS , OCC

Zacks.com

Zacks.com

More from Zacks.com:

Related Videos

Budgeting for Baby
Budgeting for Baby                  
A Home to Retire In
A Home to Retire In                 

Stocks

Referenced

72%
100%
74%
60%
50%

Most Active by Volume

86,692,048
  • $16.82 ▼ 1.35%
66,073,054
  • $13.30 ▼ 6.27%
54,801,491
  • $14.59 ▼ 1.35%
54,305,010
  • $76.55 ▼ 3.15%
53,982,567
  • $3.42 ▼ 2.01%
53,146,472
  • $97.21 ▼ 1.60%
50,334,521
  • $99.18 ▼ 1.56%
44,049,276
  • $25.03 ▼ 0.56%
As of 10/1/2014, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com