Two hours before the final bell on the final day of trading, Citigroup (C -1.09%) is up 4.7% for the week on reassuring news from the Fed, and despite unsettling news from regulators.
New rules discussed, and old news revisited
On Wednesday the Federal Reserve released the minutes from its June Federal Open Market Committee meeting, when chairman Ben Bernanke laid out a plan for the tapering of quantitative easing. The minutes show that the central bank is not as eager to begin tapering as it first appeared, which has reassured nervous markets.
And on Tuesday the Fed, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation announced proposed new capital requirements and leverage ratios for the nation's banks.
Leverage ratios would increase to 5% for the country's eight biggest bank-holding companies; global regulators now ask for 3%. And all banks would be required to hold twice the amount of capital they now do, as a cushion against runs, soured assets, and all the other things that can go wrong for a bank in times of financial crisis.
Foolish bottom line
Whether you're invested in Citi or any other American bank, the proposed new rules should make you stop and think.
When banks have to hold more capital, they have less to lend out, and are therefore less likely to make money, all other things being equal. The same goes for leverage. Higher leverage allows banks to do more with the money they have. But high leverage and low capital cushions were some of the very things that caused the financial crisis. So what do you want: safe banks or profitable banks?
And if your answer is, profitable with the implicit guarantee that comes with all too-big-to-fail institutions, remember that shareholders can be virtually, if not entirely, crushed even if the federal government steps in to bail them out. Along with news that a Senate bill has been introduced to institute a version of the old Glass-Steagall Act, which separated investment banking from less-risky forms of banking from the 1930s to 1999, this may be the beginning of the return of boring banks.
And the wave Citi and the rest of the market is riding since Wednesday's release of June's FOMC meeting minutes? This isn't necessarily good news, though share prices are up almost all around. The markets will have to learn to live without QE sooner or later, and there was evidence in the last few weeks that equity markets had begun to adjust to the notion; they were actually responding positively to good economic news, like last Friday's encouraging jobs report -- the way the markets are supposed to react, but haven't been.
Now there may be another period of panic, when investors perceive that the Fed "is really serious" this time about tapering QE, before they once again adjust. In the meantime, Citi had a big week, and there's something to be said for that. Next up is second-quarter earnings, scheduled for release on Monday, July 15. Look for rising interest rates to put at least a small dent in revenue and profit, though that effect will probably be more pronounced in the third quarter.
