The broad stock indices continued their upward climb with gains of less than 0.50%, while the KBW Bank Index (I:BKX) was up nearly 1% to close at 58.76, with all but five of the 24 index components ending the session with gains.
In a market strategy note to clients on Wednesday, BMO Capital Markets chief investment strategist Brian Belski wrote that "investors appear to be getting a bit more selective by focusing on areas with discernible fundamentals as the market continues to climb higher despite recent sluggish economic data." Belski added that "longer-term trends continue to favor valuation factors," which include price-to-earnings and price-to-book-value ratios.
The KBW Bank Index has returned 13% this year, compared to a return of 15% for the Dow Jones Industrial Average
In such a strong market environment, investors are warming up to stocks of the largest U.S. banks, which have been held back by general distrust of the industry in the wake of the credit crisis and the federal bailout. Investors may have also been shying away because of the uncertain political and regulatory environment. Nearly three years after the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed by President Obama, only about a third of the regulations based on the act have been put in place. Despite Dodd-Frank's requirement for banks to have stronger levels of capital in line with the Basel III agreement, some bank regulators have been arguing for even higher capital requirements. Politicians have chimed in as well, with Senators Sherrod Brown (D., Ohio) and David Vitter (R., La.) last month sponsoring the Terminating Bailouts for Taxpayer Fairness Act , which would require "megabanks" with total assets of over $500 billion to raise capital levels to at least 15% of total assets. Under the Brown-Vitter proposal, the United States would "walk away" from the Basel III agreement -- negotiated between the U.S. and 26 other countries, including all key European economies, Russia, China, Brazil, and India -- and do away with risk-based asset calculations for capital ratios. While most analysts see little chance of the U.S. Congress walking away from Basel III and such a huge part of Dodd-Frank, Brown-Vitter demonstrates how hard it is for the industry to move past the credit crisis. After all, politicians have nothing to lose while bashing the big banks, and while doing so, they get to be on television.
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