U.S. Banks Seen Freezing Payouts as Harsher Leverage Rules Loom
"This new heightened requirement would only impact certain U.S. institutions, potentially resulting in these banks being put at a global competitive disadvantage,” Goldberg wrote yesterday in a note. U.S. regulators probably will follow with further capital measures in coming months, he said.
Fed Governor Daniel Tarullo, who's in charge of bank supervision, said last week that new rules would be forthcoming on how much long-term debt the largest firms would need to hold and extra capital charges on short-term funding.
Hitting the new leverage ratio targets would be easier if safer holdings such as cash and government debt were excluded from the tally of assets. Bankers say this would be fair as those holdings aren't likely to sour and have less need for a backstop. Yesterday's proposal doesn't grant such an exclusion.
Without it, Morgan Stanley and BNY Mellon have the lowest ratios of capital to assets, analysts at New York-based Goldman Sachs estimated in a report last month. The industry has been lobbying for the exclusions and may renew efforts to narrow the definition of assets before the rule becomes final.
“The banks will keep fighting until the last moment to soften this proposal,” Rodriguez Valladares said. “But there's considerable political backing for tougher rules on big banks, so they probably won't win.”
Eoin Treacy's view The prospect of tighter capital controls on some of the world's larger banks is to be welcomed if it curtails their ability to leverage up in the shadow banking sector. They can be expected to fight such efforts but if they are eventually implemented we can conclude that banking regulation is beginning to improve after a long decline.
Banks have generally been one of the most promising sectors for dividend growth since their payouts are coming from such a low base. Tighter capital controls may act as a headwind for some of the larger institutions for as long as it takes to raise the required capital but this is unlikely to be as daunting a prospect for the regional banking sector. This may be part of the reason that the diversified financials have lagged the regional banks over the last few months.
The KRX Regional Banks Index bottomed in 2009 and has held a progression of higher reaction lows since 2011. It broke successfully back above the 60 area for the first time since 2008 in February and is now rallying away from that area. While it is becoming increasingly overbought in the very short-term, a sustained move below the 200-day MA would be required to question medium-term recovery potential.
This table of US banks ranked by dividend growth rates highlights the relative attractiveness of the regional banks sector from the perspective of a yield investor.