It's a brave new world for megabanks like Bank of America (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 (NYSE:GS), JPMorgan Chase (NYSE:JPM), and Citigroup (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, 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."
This is one of the reasons that the market's smartest investors have begun to cast their eyes on smaller and more ably run banks like the one identified in our free report, "The Stock Warren Buffett Wishes He Could Buy." Besides being selected as one of the nation's best banks by Forbes magazine for multiple years running, it's been a huge win for shareholders, growing consistently over the last few years and paying a generous 3.6% dividend yield. To discover the name of this bank instantly, simply click here now.
Despite the impending regulatory regime, most bank stocks are headed higher today. Bank of America is up by 0.12% at the time of writing, and the broader BKW Bank Index (DJINDICES:^BKX) is surging by 0.84%.
John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America and Goldman Sachs. The Motley Fool owns shares of Bank of America, Citigroup, and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.