New banking rules were proposed by the FDIC and other regulators.
Andrew Harrer/BloombergBanks will soon have to comply with tougher capital requirements, but stocks appear to be taking the changes in stride even as Wall Street wonders what the rules will mean for profits.
On Thursday, U.S. bank regulators unveiled new rules that could raise capital requirements at the largest U.S. banks. It is part of an effort to make sure banks comply with international standards requiring they hold more capital to avoid losses in a downturn.
While the rules were expected, they now subject banks with assets in excess of $100 billion to stricter requirements, while also ratcheting up standards for banks that have already been subject to similar regulations.
So far, bank stocks are shrugging off the expected changes, with the SPDR S&P Bank ETF (ticker: KBE) and the SPDR S&P Regional Banking ETF (KRE) both up more than 1% in Friday’s trading.
The feeling on Wall Street appears to be banks will have ample time to make the changes. There will be a comment period on the proposed rules until Nov. 30, in which there may be tweaks to the new standard. And banks will have a three-year phase in beginning July 1, 2025.
Still, Wall Street has been worried. Banks easily passed the Federal Reserve’s stress test this year, but the 1,000 page document may impact how they think about returning capital to shareholders.
“This will definitely have a chilling impact on near-term buyback plans, and with banks up 7% between the beginning of earnings and end of day July 27, this could have a chilling effect on the rally,” UBS analyst Erika Najarian wrote in a note.
Others on Wall Street questioned the fairness of the new regulations. One of the rules suggests that banks that derive revenue from fee-based businesses such as wealth management and investment banking will be penalized, even though the wealth management business has historically been more stable for banks.
“We fail to see the justification for imposing a capital tax on firms’ fee income businesses,” said Kenneth E. Bentsen, Jr., chief executive of trade association Securities Industries and Financial Markets, on Thursday. “Many firms have grown their wealth management businesses to meet strong customer demand. The businesses provide steady income that offsets the more cyclical nature of other businesses.”
For other banks, there is a concern that even though they have years to comply with the new standard—and many are already on their way to doing so—the overhang of rule-making will affect operations today.
“The new standards won’t be fully effective until mid-2028, but business-line decisions will happen far before that, which will be a central point as the debate evolves,” wrote Isaac Boltansky, managing director at BTIG.
That may prove to be a boon for nonbank lenders that aren’t subject to the same rules, as traditional banks have to dial back their involvement in certain business areas to meet the requirements.
“While it will take years for these changes to be finalized and implemented, we believe the ramp in regulatory requirements for banks >$100B in assets is unquestionably positive for nonbank lenders,” Boltansky wrote.
While Wall Street doesn’t seem to fear the new rules, they are also not celebrating them.
Write to Carleton English at carleton.english@dowjones.com
