The upside for the industry is that banks with less than $250 billion in assets won't be subject to the same standards. But for the large Wall Street institutions, a regulatory backdrop that already was challenging just got a little tougher.
"Large banks are going to be forced to take on more capital. This will lower returns on capital," said Dick Bove, vice president of equity research at Rafferty Capital Markets. "It will make the cost of funding more, not less, expensive. It will reduce the appeal for investors to put money at risk in the banking system."
For investors, the most immediate effects will be in lower dividend payouts and share buybacks, tools critical for banks to keep their share prices afloat amid the tightening regulatory collar. In the first half of the year alone, financial institutions repurchased $52.4 billion worth of shares, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. In the second quarter, financials accounted for more than 20 percent of the total buybacks from S&P 500 companies.
Beset by pressure from regulators, an unexpectedly prolonged period of Fed-induced low interest rates and damaging headlines at Wells Fargo and Deutsche Bank, bank shares have been getting hammered.
The KBW Nasdaq Bank Index is off 3.7 percent in 2016, and financials as a whole are the second-worst performer on the S&P 500. The group was largely higher in Tuesday trading, but most of the big gainers were mid-size institutions like Regions Financial, Comerica and Zions Bancorporation that won't be affected by the new capital rules.
"Removal from the subjective portion, coupled with an expectation of a reduction in capital requirements, is a significant positive for regional banks," Edward Mills, financial policy analyst at FBR Capital Markets, said in a note to clients. "This should allow banks to have more certainty surrounding the process, have reduced regulatory expenses, and return more capital to shareholders."
That likely won't be the case for the banks that fall under the global systemically important financial institution, or G-SIFI, classification.
"This continued increase in capital is counter to the prevailing view that many of the covered banks are overcapitalized against current requirements," Mills said. "However, the higher standards could alter existing capital management plans at the G-SIFI banks or delay the narrative that banks will ultimately be freed to return more capital."