Key Takeaways
- Bank stocks were among the market’s worst performers on Tuesday as a deluge of business updates stole the spotlight from the unveiling of a major concession by federal regulators.
- Shares of JPMorgan Chase, Goldman Sachs, and Ally Financial all tumbled after executives from each raised concerns about their respective bank’s income statement and balance sheet.
- The Federal Reserve on Tuesday outlined a watered-down version of the capital requirements rules that banks pushed back on when they were first proposed last year.
Bank stocks slumped on Tuesday as a torrent of unsettling business updates pouring out of an industry conference overshadowed a major regulatory win for the industry.
JPMorgan Chase (JPM), America’s largest bank, was the worst-performing stock in the Dow Jones Industrial Average after bank president Daniel Pinto, speaking at a Barclays financial services conference in New York, tempered expectations for the bank’s full-year net interest income (NII). The current forecast of $91.5 billion in 2024 was, he said, “not very reasonable” in light of the Fed’s impending interest rate cuts.
“I think that that number will be lower,” he said, adding that projections for next year’s NII also appeared optimistic. JPMorgan stock closed 5.2% lower Tuesday, after falling as much as 7.5% during the session.
Goldman Sachs (GS), another Dow component, fell 4.4% on Tuesday after CEO David Solomon, speaking at the same conference on Monday, said trading revenue would likely decline by 10% in the third quarter due to “a more challenging macro environment, particularly in the month of August.”
Shares of Ally Financial (ALLY), a smaller lender, tumbled 18% after its chief financial officer, Russell Hutchinson, outlined some worrying consumer credit trends at the Barclays conference. He said auto loan delinquencies rose 20 basis points more than the bank expected in July and August. Net charge-offs, referring to debts that the bank does not expect to collect, rose 10 basis points above expectations.
Together, the disclosures raised concerns that elevated interest rates are having a more negative impact on consumer finances, and thus banks’ balance sheets, than previously forecast.
The financials sector was one of the worst-performing corners of the market on Tuesday, tumbling 1%.
Lower Capital Requirements a Win for Banks
The warnings from bank executives drowned out good news for the industry on the regulatory front.
The Federal Reserve’s Vice Chair for Supervision, Michael Barr, said in a speech on Tuesday that a set of regulatory proposals called Basel III Endgame would increase capital requirements for America’s largest banks by about 9%, less than half the increase that was originally proposed.
The regulations, first outlined in July 2023, originally mandated a 19% increase in capital requirements for global systemically important banks—a category of financial institution that includes JPMorgan Chase, Goldman, Bank of America (BAC), and Citigroup (C). That proposal was met with substantial opposition from the financial industry, which argued the rules’ benefits would come at too high of a cost to banks.
Regulators were widely expected to water down the original rule, possibly curtailing the upside to Tuesday’s announcement. In early July, Fed Chair Jerome Powell told Congress that regulators had made “quite a bit of progress” on amending the proposal. He also indicated that the changes were substantial enough that regulators should issue an entirely new proposal.
Shares of Citigroup and Bank of America fell 2.7% and 0.4%, respectively on Tuesday.