Federal Reserve stress tests of the nation's eight largest banks just became a bigger impediment to issuing dividends and buying back shares, but the first exam under the new rules won't hit until 2018.
In a Monday speech, Fed Governor Daniel Tarullo said that the eight U.S.-based banks important to the global financial system will face increased capital requirements under the new testing regime.
Those eight banks are Bank of America (BAC), Bank of New York Mellon (BK), Citigroup (C), Goldman Sachs Group (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), State Street (STT) and Wells Fargo (WFC) (IBD).
The biggest banks, with the highest capital requirements, will face the biggest impact from the change. Meanwhile, stress-testing and record-keeping will become somewhat less burdensome for banks with less than $250 billion in assets, Tarullo said.
The changes to the stress-testing regime are consistent "with the principle that financial regulation should be progressively more stringent for firms of greater importance, and thus potential risk, to the financial system," he said.
Shares of Goldman Sachs sank 2.2% on the stock market today, piercing its 50-day moving average after back-to-back days of negative regulatory news. On Friday, the Fed released a proposed rule that would require Goldman, Morgan Stanley and other banks that take physical possession of commodities in metals and energy markets to hold more capital.
Shares of JPMorgan fell 2.2%, closing pennies above their 50-day line after undercutting that support intraday. JPMorgan is still above a 65.08 buy point.
Citigroup lost 2.7% and Bank of America 2.8%, both closing below their 50-day.
Wells Fargo stock, which have been pummeled after disclosures it fraudulently opened millions of customer accounts, fell further on Monday, fell 1.9% to 44.88, its first close below 45 since February 2014.
Morgan Stanley fell 2.8% and State Street 1.8%, but both remain above their 50-day averages.
The Wells Fargo news increases the small but real political risk that Congress will seek to break up the big banks in 2017.
"Large banks will lose additional political capital in the wake of the Wells Fargo headlines and will find it tougher to find allies in Congress to defend the banks," wrote Keefe, Bruyette & Woods' Washington analyst Brian Gardner.
Another cloud for the banking sector comes from abroad, with Deutsche Bank (DB) shares sinking amid funding concerns as it girds for a legal battle with the U.S. Justice Department, which is seeking a $14 billion fine in connection with the German bank's financial-crisis-era mortgage bond sales.
U.S.-listed shares of Deutsche Bank were down 7.1% to 11.85, hitting a record-low 11.23 intraday following reports that it sought help from Berlin in its Justice Department fight. The bank denied the reports and said it doesn't plan to increase its capital.
IBD'S TAKE: Some bank stocks have traded more tightly as Wall Street speculates whether the Federal Reserve will decide to hike rates this year. See more details about which bank stocks might be in buy range.
Under a 2015 rule, the biggest banks already face a requirement that they hold bigger capital buffers against losses. Now the Fed will incorporate those capital surcharges when it determines whether banks, in high-stress economic and financial conditions, would have sufficient capital to pay dividends and buy back shares.
Some banks have worked to reduce their capital surcharge by decreasing deposits or derivatives holdings, and the stress-test change could lead to more of the same.
Tarullo also said that stress tests have previously only looked at a bank's health based on its direct exposures to recessionary conditions, but would in the future factor in indirect effects from financial markets. One such indirect effect would come from "the reduction in portfolio values for one bank by other banks selling certain types of assets in order to enhance their own solvency," Tarullo noted.
Tarullo said that the stress tests won't be updated until 2018, except to grant some relief to non-systemically important banks.
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