For Immediate Release
Chicago, IL - December 15, 2011 - Zacks.com announces the list
of stocks featured in the Analyst Blog. Every day the Zacks Equity
Research analysts discuss the latest news and events impacting
stocks and the financial markets. Stocks recently featured in the
blog include
Citigroup Inc.
(
C
),
Bank of America Corp.
(
BAC
),
JPMorgan Chase & Co.
(
JPM
),
Goldman Sachs
(
GS
) and
Wells Fargo & Company
(
WFC
).
Get the most recent insight from Zacks Equity Research with the
free Profit from the Pros newsletter:
http://at.zacks.com/?id=5513
Here are highlights from Wednesday's Analyst
Blog:
Will Capital Standard Be a Big Help?
Learning from the past experience of losing ground due to the
weak capital level of banks, U.S. regulators are now focused on
framing policies and standards at length. The precautionary
measures include setting stricter capital requirements than what is
required in a steady and growing economy. Moreover, the upcoming
international banking regulations require banks to build their
financial muscles. But the question is, how effective will this be
to cure the economic infirmity?
Though many would be in favor of restricting banks through tough
capital standards so that they can successfully combat another
financial crisis, there are several hitches. Before analyzing the
possible consequences, let's have quick look on the requirements
from the banks.
Starting from sales to profit, banks are delimited with a number
of restrictions following the latest recession.
In 2010, the regulatory officials of more than two dozen
countries proposed a set of minimum capital standards for banks,
known as Basel III. The intension was to prevent recurrence of a
global financial crisis and restore public confidence. The
committee mandated banks to hold more than triple the core capital
to make them solvent.
Also, since 2010, the Fed has constantly been seeking higher
capital levels from banks. In order to prove their financial
strength, these banks have been going through the Federal Reserve's
stress-tests since then. The first round, conducted when the
country was teetering under tremendous recessionary pressure, was
aimed at estimating how much the banks would lose if the economic
downturn turned out to be deeper than expected. Since then, the
test rounds are more like precautionary measures amid economic
recovery.
The environment of the last two rounds of stress tests and the
upcoming one are dissimilar to the Fed's first round.
The upcoming round is going to be even tougher. This time, the
top 31 U.S. banks, with assets of $50 billion or more, will have to
undergo stress tests. Big U.S. banks such as
Citigroup Inc.
(
C
),
Bank of America Corp.
(
BAC
),
JPMorgan Chase & Co.
(
JPM
),
Goldman Sachs
(
GS
) and
Wells Fargo & Company
(
WFC
) will have an even higher hurdle as they have significant exposure
to the stressed European countries of Greece, Ireland, Italy,
Portugal, and Spain - known as the PIIGS.
These banks would have to go through a hypothetical market shock
to prove their ability to endure domestic as well as global
recession. The hypothetical stress scenario would assume an
increase in unemployment to above 13% in early 2013, a
decrease in U.S. GDP by as much as 8% plus a significant slowdown
in U.S. and global economic activities. Also, these banks have
to prove their ability to keep their core Tier I common equity
above 5% even under imaginary stress.
The hypothetical environment is even tougher than what these
banks faced at the height of financial crisis in 2008. But the fact
is that these banks were not able to confront the headwinds and had
to implore government bailout. So, how will they face a tougher
environment?
Actually, it may not be an impossible task for these banks as
many of them have already strengthened their capital level to a
great extent in recent years. But raising fresh capital and
offloading assets were the only two ways to do it.
As raising capital is costly and difficult, shedding non-core
assets was the most common way to strengthen capital level. Many of
the big banks are still continuing with their asset-shedding
activities.
But as banks are going asset light due to regulatory pressure,
they are also restricting loan growth - a possible means of
recovery.
In Conclusion
The economic benefits of strict capital standards are
indisputable. It goes without saying that these would keep the
banks on their toes. Banking big-wigs would perform under pressure
and try to build their weak capital levels, which threaten the
economy. The whole exercise could ultimately translate into less
involvement of taxpayers' money for bailing out troubled financial
institutions.
But the most dependable banking names in terms of dividend
payment will have to face tougher tests ahead. Naturally, their
chances of passing the tests and gaining eligibility to enhance
shareholder value are rather dim.
In fact, the challenge is not just contained to the big banks.
The story is much the same for the other financial institutions
that would find it difficult to raise dividends or buy back more
stock.
Moreover, though the government is trying to protect the nation
from another recession by forcing U.S. banks to be strong and
healthy in terms of capital, this could force them to withdraw
their investments from European countries. If this happens, the
crisis in Europe will deepen further and backfire on our economy,
shaping into an economic disaster that no one wants.
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BANK OF AMER CP (
BAC
): 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
WELLS FARGO-NEW (
WFC
): Free Stock Analysis Report
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