How we feel about banks being required to bolster rainy-day funds after SVB failure
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We’re more apt to view the latest rumblings about a possible boost to bank capital requirements through a buyer’s lens when it comes to our Club financials Morgan Stanley (MS) and Wells Fargo (WFC). The Wall Street Journal reported Monday that financial industry regulators could announce a proposal, as early as this month, seeking to increase the rainy-day funds of big banks. Ever since Silicon Valley Bank failed in March, followed closely by two others, it’s seemed likely that U.S. regulators would want banks to be better prepared to weather future crises. Morgan Stanley and Wells Fargo, while never a worry during the recent mini-banking crisis, have both seen their stocks decline in the wake of the SVB collapse and struggle to regain their footing. In our view, the substance of the Journal report was largely expected and bank stocks have already reflected the potential for increased regulatory scrutiny dating back to the first bank blowup. According to the Journal’s reporting, the changes could amount to as much as a 20% increase in overall capital requirements at large U.S. banks, which must maintain a certain buffer against their risk-weighted assets in order to protect the clients (and the business) in the event of losses. One popular metric used to measure this, which we highlight with every bank earnings report, is the Common Equity Tier 1 ratio, or CET1 for short. The Journal also indicates that regulators will look to take into account the bank’s business activities, in particular, fee-generating activities — impacting a name like Morgan Stanley which generates large fees from its wealth management business. Critics of the potential regulatory update don’t believe that a fee-based approach is the right move, arguing it would penalize banks for something that isn’t always an operational risk. As members know, we like fee-based revenues because they tend to be less volatile than non-fee-based sources, which are largely reliant on interest rates. Should Morgan Stanley really be penalized more than others just because it offers fee-based wealth management solutions, which through strong execution have grown? Details on the possible regulator proposal are limited at the moment. However, we’re inclined to consider a capital requirement change opportunistically, especially as it relates to Morgan Stanley. At a higher level, the WSJ news, along with certain agreements made to get the U.S. debt ceiling raised — such as the resumption of student loan repayments and work requirements around the Supplemental Nutrition Assistance Program (SNAP), also known as food stamps, supports the view that Federal Reserve should forgo another interest rate hike at its June meeting next week. According to the CME FedWatch tool as of Monday afternoon, the market is putting nearly 80% odds on such an outcome. A “hawkish pause” is what some are calling it — a scenario in which the Fed would refrain from its 11th straight rate hike in as many meetings to allow more economic data to roll in and to gauge the impact of the direct monetary tightening already done. But the other part of the “hawkish pause” would be for the Fed to reiterate that it remains data-dependent and that rate increases could resume if necessary. The market, at the moment, is viewing the possibility of a rate cut before the end of the year as less and less likely. (Jim Cramer’s Charitable Trust is long MS, WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Bing Guan | Bloomberg | Getty Images
We’re more apt to view the latest rumblings about a possible boost to bank capital requirements through a buyer’s lens when it comes to our Club financials Morgan Stanley (MS) and Wells Fargo (WFC).
