How Tight Are the Fed's New Banking Thumbscrews?

The Fed just tightened regulations on America's largest banks. If you're "too big to fail," you'll have to live up to premium requirements. As Spider-Man's uncle said, "With great power comes great responsibility."

The good news is, the Big 8 banks are mostly doing all right. Tuesday's market reaction probably told you so already as the Dow Jones (DJINDICES: ^DJI  ) jumped as much as 0.5% in this morning's trading action.

Here's how the eight banks under the "too big to fail" rules fare against some of the new requirements:

Company Name

Market Cap (billions)

Total Risk-Based Capital Ratio

Tier 1 Risk-Based Capital Ratio

Total Common Equity to Total Assets

State Street

$30

19.2%

18%

5.6%

Goldman Sachs Group

$73

17.3%

14.5%

6.9%

Citigroup

$147

16.1%

13.1%

8.5%

Bank of America

$139

15.5%

12.2%

6.7%

Wells Fargo

$219

14.8%

11.8%

8%

The Bank of New York Mellon

$33

14.7%

13.6%

3.5%

Morgan Stanley

$48

14.5%

13.9%

6.4%

JPMorgan Chase

$199

14.1%

11.6%

6.2%

Fed Targets:

 

8%

6%

4.5%

Data collected from S&P Capital IQ on July 2, 2013.

State Street (NYSE: STT  ) and Goldman Sachs (NYSE: GS  ) do consistently well on these metrics, ranking first and second in two categories. In layman's terms, this means that these banks carry much lower investment risks than the Fed now requires, since their financial bets are backed by strong balance sheets.

Another positive takeaway from the Total and Tier 1 capital ratios is this: No megabank fails either one of these tests. In terms of the Tier 1 ratio, which measures risk against the bank's most reliable core assets, only one bank falls below double the adjusted target level. This is good news for the big banks, and also for the economy as a whole.

When it comes to common equity as a ratio of total assets, the news becomes a bit gloomier. The Bank of New York Mellon (NYSE: BK  ) falls below the 4.5% target level with a 3.5% performance, and the other banks also skim a bit closer to the ground. This is where you measure the risk of overstretching your balance sheet, as applied to the company's investors. Citigroup (NYSE: C  ) runs away with this trophy, and it should come as no surprise that Citi's shares jumped nearly 2% this morning. The bank aced a crucial exam here.

The new rules are actually tighter than the international Basel III agreement on several points, including the Tier 1 capital ratio. So the Fed pulled the banking thumbscrews significantly tighter, but isn't drawing blood at this point. The Dow just earned its 14% year-to-date gains with flying colors.

Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable standout. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2521435, ~/Articles/ArticleHandler.aspx, 10/25/2014 6:17:36 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement