The Fed just tightened regulations on America's largest banks. If you're "too big to fail," you'll have to live up to premium requirements. As Spider-Man's uncle said, "With great power comes great responsibility."
The good news is, the Big 8 banks are mostly doing all right. Tuesday's market reaction probably told you so already as the Dow Jones jumped as much as 0.5% in this morning's trading action.
Here's how the eight banks under the "too big to fail" rules fare against some of the new requirements:
Market Cap (billions)
Total Risk-Based Capital Ratio
Tier 1 Risk-Based Capital Ratio
Total Common Equity to Total Assets
Goldman Sachs Group
Bank of America
The Bank of New York Mellon
Data collected from S&P Capital IQ on July 2, 2013.
State Street and Goldman Sachs do consistently well on these metrics, ranking first and second in two categories. In layman's terms, this means that these banks carry much lower investment risks than the Fed now requires, since their financial bets are backed by strong balance sheets.
Another positive takeaway from the Total and Tier 1 capital ratios is this: No megabank fails either one of these tests. In terms of the Tier 1 ratio, which measures risk against the bank's most reliable core assets, only one bank falls below double the adjusted target level. This is good news for the big banks, and also for the economy as a whole.
When it comes to common equity as a ratio of total assets, the news becomes a bit gloomier. The Bank of New York Mellon falls below the 4.5% target level with a 3.5% performance, and the other banks also skim a bit closer to the ground. This is where you measure the risk of overstretching your balance sheet, as applied to the company's investors. Citigroup runs away with this trophy, and it should come as no surprise that Citi's shares jumped nearly 2% this morning. The bank aced a crucial exam here.
The new rules are actually tighter than the international Basel III agreement on several points, including the Tier 1 capital ratio. So the Fed pulled the banking thumbscrews significantly tighter, but isn't drawing blood at this point. The Dow just earned its 14% year-to-date gains with flying colors.
Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable standout. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.
The article How Tight Are the Fed's New Banking Thumbscrews? originally appeared on Fool.com.
Fool contributor Anders Bylund holds no position in any company mentioned. Check out Anders' bio and holdings or follow him on Twitter and Google+. The Motley Fool owns shares of JP Morgan Chase, Bank of America, Citigroup, and Wells Fargo. Motley Fool newsletter services have recommended buying shares of Bank of America, Goldman Sachs Group, and Wells Fargo. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.