Why Bank Stocks Are Stuck In a 'Crushing Bear Market'
The reason why banks stopped lending primarily was to comply with regulatory requirements, which have provided an economic Catch-22 that also has fueled investor concern.
In response to the years of irresponsible lending that precipitated the financial crisis, regulators have demanded that banks only loan to high-quality customers. But it is those individuals and businesses with good cash positions and credit histories who don't want to borrow in a down economy. Conversely, those who want and need the loans can't get them.
As indicated in the most recent Federal Reserve Senior Loan Officers survey, banks have relaxed lending standards and indicated a desire to lend, but have found too few takers.
"The challenge there is the borrowers who are in very good condition are sitting on a boatload of cash. So they're not all that anxious to borrow and the weak borrowers are still constrained because of recent credit history," Cannon said. "The thing that would get lending going would be a revival in the animal spirits of those in strong financial shape."
The window for getting those spirits going, though, could be a short one.
"It is encouraging that in response to the increasingly uncertain economic outlook banks have continued to loosen their lending criteria," Paul Dales, senior US economist at Capital Economics in Toronto, said in a recent report. "But it is a bit disturbing that firms have become less eager to borrow. This could take some of the gloss off business investment, which has been a rare shining light in an otherwise gloomy economic recovery."
And then there's Europe. Should the central bank solution applied Wednesdayprove to be fleeting, the increased appetite for risky lending among banks could be brief.
"The real danger, however, is that the events in Europe trigger a sharp fall in the willingness of lenders to lend," Dales said. "Another credit crunch is a risk that will hang over the U.S. economy until the problems in Europe are resolved once and for all."
Finally, there's the Fed .
The U.S. central bank has set criteria for stress tests in 2012 that assume devastating conditions: A 52 percent drop in stocks, a 21 percent slump in already-depressed housing prices, and a stunning upturn in unemployment to 13 percent.
Overkill? Perhaps. But the standards reflect the Fed's desire to make sure banks can withstand a major global crisis.
"The decline in bank stock prices and the financial crisis unfolding in Europe has the Fed concerned over contagion and risk to the U.S. banking system. High levels of retained capital at U.S. banks are a defense against this concern," KBW's Cannon said in a research note.
"European stress tests have done little to stabilize the market for European bank stocks," he added. "We believe the Fed wants to ensure that the U.S. stress test is more credible than what is presented in Europe."
Bove is more pointed in his views on the stress test plan.
"If the banking system is required to develop plans to meet the most adverse of these scenarios," he wrote in a series of notes lambasting the Fed, "it will be unable to function to assist the economy and a recession could result."
Yet Bove has been a continuous advocate for banks, insisting, for instance, that S&P's only mistake in its Tuesday downgrade was not noting that bank performance is improving.
Investors, though, aren't having any of it.
Cannon says investors are wise to stay away from large institutions, while Pandtle, of Eagle Asset Management, said there is only selected value in the space.
"We think there is compelling value in a select group of bank stocks," Pandtle said. "But to make a macro call on the banks that you have to own these stocks now — it's too early to make that call until you have more visibility."