Bank Stocks Just Got Some Very Good News
Key Points
Relaxed capital requirements will give the banks more capital to lend and generate profits.
Banks may also use some of the additional capital to buy back shares and issue dividends.
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If you're a bank or a shareholder of one, last week brought good news.
On March 19, the major regulators of U.S.-based banks -- the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency -- proposed several regulatory changes that, if approved, will reduce banks' capital requirements, giving them additional funds to lend, buy back shares, and issue dividends.
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A bit of context is in order here. After the 2007-2008 financial crisis, when the federal government bailed out many banks, capital standards for banks in the U.S. were tightened significantly in an effort to fend off another such crisis.
The Fed sees the banking system as safer today
But nearly two decades later, the Fed has come to believe that the banking system overall is safer and that capital requirements can be relaxed a bit. Fed Chair Jerome Powell said last week that after two decades, "we have come to understand that certain elements of the post-crisis regulatory regime may warrant recalibration."
The new capital requirements are expected to reduce tier 1 capital requirements for the biggest banks by 4.8%, for midsize banks by 5.2%, and for smaller banks by 7.8%. Thus, banks will be allowed to hold billions of dollars less in capital on their books, which they can put to use generating profits. The proposals will likely be approved after a 90-day consultation.
Image source: Getty Images.
Most analyses of the new rules are calling them a big win for the banking industry, which has been lobbying for years to ease the capital requirements.
The day after the new proposals were unveiled, bank stocks rose while the market fell. The S&P 500 index lost about 1% on the day, while in late-day trading Morgan Stanley (NYSE: MS) climbed 2.4%, and Goldman Sachs (NYSE: GS) and Wells Fargo (NYSE: WFC) each gained 1.4%. JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), and Bank of America (NYSE: BAC) were all up, though less than 1%.
And on Monday, as the the stock market rose on hopes of a possible de-escalation in the Middle East war -- as well as a pullback in the price of crude oil -- bank stocks were among the biggest gainers in the S&P 500 index.
If you own shares of these banks, the new rules are definitely a reason to cheer, as they should boost earnings in the sector. And as we know, share prices ultimately follow earnings.
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Citigroup is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Wells Fargo is an advertising partner of Motley Fool Money. Matthew Benjamin has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and JPMorgan Chase. The Motley Fool has a disclosure policy.
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