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TheStreet Open House

5 Reasons to Avoid Bank Stocks

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- As of this writing, threats that Greece will default on its debt have European markets in turmoil. Rumors of a bailout by France and Germany were denied by both governments.

European Bank Stocks Plummeting

As a result, European banks like Société Generale, Crédit Agricole and Deutsche Bank are watching their stock values plummet. Absent an eleventh-hour agreement from other nations in the eurozone to prop up Greece, however, many analysts are predicting another European recession that will echo in markets worldwide. European bank stocks can only suffer additional losses if that occurs.

U.K. Bank Reforms a 'Net Negative'

Meanwhile, U.K. banks were hit Monday with a bill for more than $11 billion each year to put into place sweeping new reforms proposed by the Independent Commission on Banking. The new rules would require banks to segregate their retail activities from their investment banking operations. The "ring-fenced" retail divisions would be required to operate independently and to conduct all transactions with their investment banking counterparts at arm's length. Additionally, the largest banks would be required to hold as much as 20% in equity and loss-absorbing debt against their assets. According to The Wall Street Journal, bank analysts at Citigroup (C) call the proposal a "net negative" for U.K. banks. Again, U.K. banks can expect their stock prices to fall if the proposal ultimately goes through.

Capital Requirements Put More Pressure on Banks

The U.K. is not alone in seeking to impose additional capital requirements on banks. The Basel Group of global bank regulators' capital rules are intended to shore up the financial system by making banks accrue risk-absorbent "core tier one" capital up to at least 7% of risk-weighted assets; the largest banks would be required to reach 9.5%. Reuters reports that Jamie Dimon, chief executive of JPMorgan Chase (JPM) (a bank that would be required to meet the 9.5% level) has called for the U.S. to consider pulling out of Basel, calling Basel's capital requirements "blatantly anti-American" and criticizing liquidity rules that discount government-backed, mortgage backed securities commonly held by U.S. banks. If Dimon's criticisms are well-founded, the additional capital requirements may put additional pressure on U.S. bank stock prices.

U.S. Banks' Declining Profits

It would be hard for the timing to be much worse. The London Telegraph reported this week that Citibank analysts are calling for U.S. bank profits to drop by an average of 45% in the third quarter. According to Citibank, Goldman Sachs (GS) will lose the most, though profits at JPMorgan Chase, Morgan Stanley. Lazard and Bank of America (BAC) were also predicted to fall.

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