Wells Fargo & Co (WFC), JPMorgan Chase & Co. (JPM) & Citigroup Inc (C): Headwinds Never Stop for the Too Big to Fail

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Banking stocks are not bought for their dividends. Still, dividends form a large part of the total return investors are looking for. Since the start of the current quarter, Wells Fargo & Co (NYSE:WFC) has gone up 21%, while its current dividend yield is 3%. I believe this yield is safe considering the bank has sufficient capital.

On the other hand, the yields offered by Citigroup Inc (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM) might get hurt. JPMorgan Chase is currently offering a dividend yield of 2.9%, while Citigroup offers a negligible yield of 0.08%. These dividends are highly regulated by the Fed, which might force both these banks to reduce their shareholder distributions further so that more capital can be retained by the banks.

Scrapping the risk-based regulations

There has been a debate going on with regards to the risk-based rules being followed in the U.S. government. FDIC Vice Chairman Thomas Hoeni has proposed against the risk-based regulations and recommends a simple leverage ratio of 10%. If the rule is implemented, JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc (NYSE:C) would have to suspend their shareholder distributions for another 5 years. A bill in this regard has already been introduced it the U.S. Senate which will require banks to maintain a simple leverage ratio of 15%. However, I believe the bill will not be passed by the senate amid violent reactions by the largest banks.

My opinion

I believe it’s important to make the banks safer if they are not broken into parts. I also believe the larger the banks, the larger the requirement to enable them to withstand another severe crisis with the assistance of the government.

However, the regulations, which require complete scrapping of the current risk-based regulations and demand as high as a 15% simple leverage ratio, will be a nightmare for Citigroup Inc (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM).

It’s not only the largest banks, but the entire economic growth will be hampered when these institutions reduce their lending. Therefore, its important to consider the trade-off between making the banking system safer and hampering economic growth. The 6% simple leverage ratio requirement seems reasonable, and Wells Fargo & Co (NYSE:WFC) is the only large bank that meets this requirement.

Adnan Khan has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Citigroup Inc (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), and Wells Fargo & Co (NYSE:WFC).

The article Headwinds Never Stop for the Too Big to Fail originally appeared on Fool.com.

Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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