US Banking new era: Mega Caps vs Fintech?
About one year ago on 23 August 2023, I had a post about buying bank stocks, then. (click here ! to refresh memory !)
The warning came post fallout from US’s March 2023 banking debacle that saw 3 US regional banks went belly up.
Still remember who they were ?
Silicon Valley Bank (SVB): Known for serving technology startups & venture capital firms, failed on 10 Mar 2023.
Signature Bank: New York-based bank with a significant presence in the cryptocurrency industry, it was closed by regulators on 12 Mar 2023.
First Republic Bank: While not as immediate as the failures of SVB and Signature Bank, First Republic Bank faced significant financial challenges following the crisis. It was eventually acquired by $JPMorgan Chase(JPM)$ in May 2023.
Post mortem (5 months later - around July / August 2023) saw regulators seeking to:
Further “fortify” the banking sector by raising capital requirements for US “too-big-to-fail” financial institutions.
Further tighten of banking policies with more severe penalties to be imposed when a financial institution dips below revised capital requirements.
Thankfully, the Fed worked with other regulatory agencies, eg the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), while seeking feedback from US financial institutions.
The comment period deadline was initially set at 30 Nov 2023, after the proposals were mooted in July 2023.
It was extended to January 2024:
Following letters submitted by banks (to the Fed), listing the many problems they had with the rules.
Along with aggressive lobbying efforts.
Fast forward to September 2024, there’s a preliminary policy framework, post January 2024 feedback received.
The Latest.
The Fed has decided to make the new capital requirements for banks less strict.
This is because politicians and banks complained that the original plan would hurt lending and the economy.
New & revised plan:
Will increase capital levels for bigger US banks like JPMorgan Chase and $Bank of America(BAC)$, by only 9% in total.
This is -10% lower than the original plan of increasing capital by +19%.
Smaller banks (eg. $Wells Fargo(WFC)$ , $Goldman Sachs(GS)$ , Citibank) with assets between $100 billion & $250 billion will also no longer have to follow the same strict rules as the bigger banks.
However, they will still have to report their unrealized gains & losses on their investments.
This is a major change after several regional banks failed last year.
The Federal Reserve believes that higher capital requirements can make it more expensive for banks to lend money.
This can lead to higher costs for people and businesses, said Fed member Michael Barr on Tue, 10 Sep 2024 at an event hosted by the Brookings Institution.
The Federal Reserve also decided to exclude smaller banks from the stricter capital requirements.
This is because these banks are already safe enough, and the extra rules would not make them any safer.
The new plan is part of the Basel III endgame, an international agreement on bank capital standards, with the goal to make banks stronger and safer.
The Federal Reserve is now accepting comments on the new proposal.
This time round, the feedback period will last 60 days.
After that, the Fed will finalize the rules and banks will then have one year to implement the new requirements.
Many banks are still concerned that the new capital requirements will make it more expensive for them to lend money. This could lead to higher interest rates for borrowers.
Mr Barr said the Fed is also looking at the agency’s large bank stress tests.
The stress tests are used to assess how well banks would perform in a severe economic downturn.
My viewpoints : (mine only)
Is there a possibility that Wall Street has caught winds of the new capital requirements policy before it was announced?
Explaining the possibility of US banks stocks behaving poorly for the past days and week, in addition to market nervousness over impending CPI inflation report due on Wed, 11 Sep 2024 morning? (see below)
With the new capital requirements almost a done deal (leaving the final details to be firmed up), next comes the one-year implementation window.
Even if the big banks decide to max out the implementation period, they would still have to begin “accumulating” the additional “frozen” capitals, sooner or later.
New capital requirements will likely (a) have a significant impact on bank earnings and (b) how much banks can return to shareholders.
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Do you think the bigger US banks will remain as attractive given the additional burden - going forward?
Do you think the US banking landscape will begin to evolve, with attention shifting to fintech bank like $SoFi Technologies Inc.(SOFI)$ going forward? I think so especially when it comes to loans…
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