Bank Stocks Eye Worst Week Since May as Regulatory ‘Waves’ Loom

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(Bloomberg) — Bank stocks’ recovery from their swoon earlier this year took a step back this week, with one prominent analyst cautioning that US lenders face a series of regulatory headwinds over the next few months.

After rallying for the better part of a month since hitting their lowest level in more than two years, banking shares once again find themselves under pressure, with the Federal Reserve eyeing sharply higher capital requirements for the biggest lenders and results from next week’s annual Fed stress test due out Wednesday. 

The KBW Bank Index and KBW Regional Banking Index have each fallen more than 4% this week and are set for their worst weeks since early May, when JPMorgan Chase & Co. (NYSE:) agreed to acquire First Republic Bank (OTC:) following its failure.

“Bank stocks reflect the combination of a bank crisis discount post-SVB, recession discount, and regulatory discount given the 3 waves of regulation that should be hitting banks this summer or possibly into the fall,” Wells Fargo (NYSE:) analyst Mike Mayo wrote in a note to clients.

Mayo believes that the stress test is likely to be the smallest of three “regulatory waves” bank stocks will face this summer, adding that no banks will fail the test despite it being one of the toughest since they began. Instead, he says investors should turn their focus to the bigger impact that will come from new rules by the Basel Committee on Banking Supervision and additional Fed oversight in the wake of the Silicon Valley Bank’s collapse in March that sparked turmoil across the banking sector and roiled global markets.

Mayo’s warning follows Jerome Powell’s testimony, in which the Fed chair told members of the Senate Banking Committee that capital requirements for largest US banks could see an increase of about 20%. Earlier in the day, Federal Deposit Insurance Corp. Chairman Martin Gruenberg said banks with at least $100 billion in assets will face new rules to put aside more capital in the event of unexpected stress as part of the long-awaited Basel III reforms.

Read more: Powell Says Wall Street Faces Higher Capital Requirements (1)

“Since the stress-test scenario does not address SVB deposit issues or stagflation, regulators will likely require more capital, TLAC (total loss-absorbing capacity), liquidity, and oversight,” Mayo said.

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