It’s a brave new world for megabanks like Bank of America Corp (NYSE:BAC). And it’s one in which their historically high profits (absent the financial crisis, of course) could very well be in jeopardy.
Earlier today, the Federal Reserve released the latest version of its proposed rules governing capital requirements under the international Basel III accords. The new framework narrows the definition of what counts as capital and increases the amount that must be held as a buffer against future losses.
“This framework requires banking organizations to hold more and higher quality capital, which acts as a financial cushion to absorb losses, while reducing the incentive for firms to take excessive risks,” Fed Chairman Ben Bernanke said. “With these revisions to our capital rules, banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy.”
Make no mistake about it: This is a positive development from the perspective of financial stability. But at the same time, it will cut into the profits of banks, which use leverage to juice their returns.
And this is particularly true for the nation’s too-big-to-fail banks, including Goldman Sachs Group, Inc. (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), and Citigroup Inc. (NYSE:C). According to Daniel Tarullo, the Fed governor in charge or regulation, the central bank could soon propose even higher capital ratios for banks like these, as well as Bank of America Corp (NYSE:BAC), that are considered “systematically important.”
As Tarullo noted (emphasis added), “Along with the stress testing and capital review measures we have already implemented, and the additional rules for large institutions that are on the way, these new rules are an essential component of a set of mutually reinforcing capital requirements.”
The article Bank of America Stock Is Headed Higher Despite Ominous Regulations originally appeared on Fool.com and is written by John Maxfield.
John Maxfield owns shares of Bank of America Corp (NYSE:BAC). The Motley Fool recommends Bank of America and Goldman Sachs Group, Inc. (NYSE:GS). The Motley Fool owns shares of Bank of America, Citigroup Inc. (NYSE:C), and JPMorgan Chase & Co. (NYSE:JPM).
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