Bank Stocks Face Pressure From Treasury Tough Talk

WASHINGTON (TheStreet) -- A statement from the U.S. Treasury Thursday is good for the banking system, but it could pressure financial stocks in the short to medium term.

In a statement released late Thursday, the Treasury said it supports requiring banks to hold bigger capital cushions to guard against a repeat of the crisis from which the financial sector is slowly emerging. If adopted, these measures would limit profitability for banks, while bringing stability to the sector.

The statement is impressive not just because it clearly supports tougher capital rules, but also because it sets a very fast timetable for reform, saying "a comprehensive agreement on new international capital and liquidity standards should be reached by Dec. 31, 2010 and should be implemented in national jurisdictions by Dec. 31, 2012."

In order to be meaningful, the adoption of the capital rules would require international cooperation. Regulators around the world typically follow the lead of the Basel Committee on Banking Supervision in Switzerland in deciding how much of a capital cushion to require banks to hold.

Adair Turner, the head of Britain's top regulatory body, has also come out strongly in support of higher capital requirements for banks. He, too, has set a timetable comparable to the one proposed by the Treasury.

If the rules are put in place, it would likely drive banks to sell more equity to bring themselves into compliance with the new rules. That would dilute shareholders at all large banks, though it would give a temporary revenue boost from underwriting fees for Goldman Sachs (GS Quote), Morgan Stanley (MS Quote),Citigroup (C Quote), Bank of America (BAC Quote) and others with large investment banking franchises.

Though the statement from the Treasury was released after the market closed on Thursday, it seemed to have no immediate effect on shares of large banks in the aftermarket. That could change as analysts react to the news. The banking sector has had a strong run since March, with the KBW Bank Index having more than doubled off its March lows.

The new rules are as good an excuse as any to take profits. Buying bonds of banks might be a good idea, as banks holding more capital is a good thing for bondholders.