S&P Really Hikes Bank Cost Targets on Dodd-Frank (BAC, C, GS, JPM, MS, PNC, USB, WFC)

If you think that the higher regulation of banks and financial institutions is immaterial, it is not.  Even if the banks need far more regulation than what they had been accustomed to, the projected cost figures are growing to a staggering level if Standard & Poor’s is anywhere close to its cost projections on the coming Dodd-Frank regulation.

S&P noted that even after two-years of having been signed, many of the rules and regulations are either not in place or they are not final.  The cost projection for the largest of the U.S. banks is being raised to $22 billion to $34 billion versus a prior projected range of $19.5 billion to $26 billion.

S&P put the large banks bearing the largest brunt of the expenses as follows: Bank of America Corporation (NYSE: BAC): Citigroup, Inc. (NYSE: C); Goldman Sachs Group Inc. (NYSE: GS); J.P. Morgan Chase & Co. (NYSE: JPM), Morgan Stanley (NYSE: MS); PNC Financial Services Group Inc. (NYSE: PNC); U.S. Bancorp (NYSE: USB); and Wells Fargo & Co. (NYSE: WFC).

The reason that S&P is changing its regulatory cost projection is that regulators will now interpret the Volcker Rule more strictly than what was previously expected. The good news is that the regulatory costs alone will not lower the banks’ credit ratings. The bad news is that what is left after the regulatory changes could change the assessment of the banking industry as a business and over the ability to take risks.  In isolated cases, S&P warned that could impact ratings.

As far as what the new range translates to, that is a drop in the pretax return on equity of 250 basis points to 375 basis points. That is substantial.

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JON C. OGG