Banks look ahead optimistically after announcement of new rules

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American bankers breathed a sigh of relief Monday after international regulators announced new rules for how much capital banks will have to hold.

Most American banks appear to be well over the new minimum capital requirements included in the Basel III accords, which were hammered out in the Swiss town of Basel by regulators from around the world and announced Sunday.
In the wake of the financial crisis, central bankers hope the new requirements will ensure that banks have high-quality assets to serve as a cushion in bad times and thus avert situations in which governments have to bail out big banks.

The requirements are not binding on individual governments, but most countries have based their regulations on the Basel group’s consensus.

The most immediate winner under the new rules is JPMorgan Chase & Co. which weathered the crisis better than most banks and now appears to have plenty of capital reserves which can be put to use. JPMorgan’s stock jumped 3.4% on Monday to close at $41.12.
Also among the largest institutions, Bank of America and Wells Fargo are the closest to falling under the new capital requirements according to most calculations, but it appears that they will be well above the minimum by the time the requirements go into effect in 2013.

Shares of Bank of America rallied 3% on Monday while Wells Fargo rose 2.9%.

Of the 10 major stock groups in the Standard & Poor’s 500 index, financial stocks led the way Monday, up 2.3%, which was more than double the overall index’s gain of 1.1%.

The capital requirements announced Sunday are less strict than what regulators in the U.S. and Britain had hoped for -- and banks will have more time to phase them in than was expected.

The first requirements will kick in during 2013, but at that point the minimum will be half that of the final regulations that will go into effect in 2019. U.S. regulators reportedly wanted to give banks only five years to fully implement the changes.

“We see this time frame as a generous concession to the banking industry,” Goldman Sachs analyst Richard Ramsden wrote Monday.

The Basel III requirements were considered by many Wall Street firms to be more significant for their bottom lines than the financial reform legislation passed by Congress earlier this year. Now, with both sets of rules laid out for bankers, many analysts were talking optimistically about a new boom in bank stocks.
“We find many stocks attractive in our group today,” JPMorgan’s small- and mid-size-bank analysts wrote Monday.

The most important rule announced Sunday dictates that by 2019, banks must have $7 of high-quality capital for every $100 of assets at risk of being lost -- what is referred to as a 7% core Tier 1 capital ratio. Currently, banks only have to be above a 2% core Tier 1 capital ratio.
JPMorgan is thought to have an 8.8% Tier 1 capital ratio now, according to Keefe, Bruyette & Woods, and Credit Suisse analysts expect the bank to be at 12.2% by 2012.

Bank of America and Citigroup are below 7%, according to analysts at Keefe, Bruyette & Woods, but both banks should be easily above that level by 2013, Credit Suisse estimates.

For bank shareholders, the capital ratios matter because banks that are forced to raise more capital may be less likely to boost dividend payments to investors. Those lenders also are more likely to be careful about making riskier loans that increase the denominator in the Tier 1 capital ratio, the assets at risk.
There is still uncertainty over how this denominator will be calculated, and these calculations could raise the standards for banks that do a lot of risky securities trading, such as Goldman Sachs and Morgan Stanley.

In addition, the regulators said Sunday that systemically important banks such as the big American ones should have to have even higher capital ratios than the 7%, but just how much more has not been decided.
-- Nathaniel Popper