US Banks Face Regulatory Risks Following Silicon Valley Bank Collapse: BofA Names 4 Changes That Could Be Ahead

Zinger Key Points
  • Bank of America anticipates more rigorous regulations on U.S. regional banks.
  • These new regulations could significantly weigh on profits and growth for regional bank stocks.

The U.S. banking sector has dealt with major liquidity issues in recent weeks, including the failures of SVB Financial Group SIVB, Signature Bank SBNY and Silvergate Capital Corp SI.

It's becoming increasingly likely U.S. regional banks will soon face a wave of new government regulations to prevent this type of instability from happening again in the future, Bank of America bank analyst Ebrahim Poonawala said Monday. 

Regulatory Options: U.S. banks classified as global systemically important banks (GSIBs) have much more rigorous regulatory oversight and liquidity requirements. U.S. megabanks JPMorgan Chase & Co JPM, Bank of America Corp BAC and Citigroup Inc C are just three examples of GSIBs.

Related Link: S&P 500 Volatility Continues As Investors Digest Latest Banking Sector Headlines

Poonawala says the recent liquidity crisis will likely force regulators to close the regulatory gap between regional banks and GSIBs. He said there are several changes regulators could make to crack down on smaller banks:

  • Implement a minimum Liquidity Coverage Ratio (LCR) requirement.
  • Implement a total loss-absorbing capacity (TLAC) requirement.
  • Require an annual Comprehensive Capital Analysis and Review (CCAR) stress test for banks with more than $10 billion in assets.
  • Include unrealized loss on available-for-sale securities in the regulatory capital calculation.

Related Link: 15 Years Later, How Much Did The 2008 Financial Crisis Bailouts Actually Cost American Taxpayers?

Regulatory Fallout: These new regulations could significantly weigh on profits and growth for regional banks and potentially put them at a disadvantage to larger competitors. Fortunately for investors, Poonawala said the regulatory crackdown will likely not be coming immediately.

"We expect banks to have a multi-year phase-in period to comply with any new changes," Poonawala said.

Benzinga's Take: If Poonawala is correct, it may be wise for investors to avoid regional bank stocks until the new regulatory environment becomes more clear. In addition, it could set up an interesting bank stock pair trade opportunity for investors to go long GSIBs and short their smaller regional counterparts.

Photo via Shutterstock.

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Posted In: Analyst ColorGovernmentPenny StocksRegulationsTop StoriesAnalyst RatingsTrading IdeasBank of Americabanksbig banksEbrahim Poonawala
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