Financial Reform Winners: Trust Banks - TheStreet



) -- About a week before the financial-reform bill was finalized by Congress,


predicted that trust and custody banks like

Bank of New York Mellon

(BK) - Get Report


State Street

(STT) - Get Report


Northern Trust

(NTRS) - Get Report

might be the least exposed to any regulatory crackdowns.

According to KBW analysts, that prediction appears to be right and those banks may actually see some unintended benefits from the bill.

"With a few exceptions, Financial Regulatory (FinReg) reform was not directly targeted at the trust and custody (T&C) businesses since they are not derivatives dealers, engage in no proprietary trading, and do very limited amounts of principal investing, mainly as seed capital in investment products, among other things," said the analysts, led by Robert Lee.

Lee went on to note that T&C banks will still be able to hedge against risk because of last-minute modifications to a proposal on derivatives. Another amendment affecting capital levels is a "non-event" for T&C firms.

Additionally, revisions to the Volcker rule -- which will limit banks' involvement in proprietary trading and investments -- may represent an opportunity for T&C banks. The revised rule will allow banks to have limited investments in hedge funds and private equity, and to provide seed capital for alternative-investment products.

Lee calls this "a positive for each of the T&C banks and particularly

Bank of New York Mellon" because they will be able to retain those assets and perhaps build upon them, up to a level of 3% of Tier 1 capital

The KBW folks do warn that there may be some unseen negative consequences, because of the sheer size and scope of the The Dodd-Frank Wall Street Reform andConsumer Protection Act, named after two key legislative architects from the House and Senate.

"Considering that the bill is roughly 2,000 pages in length, it's difficult to know how various changes could impact the T&C banks, either intentionally or not," said Lee.

In recent trading, Bank of New York Mellon was up 0.7% at $26.06, State Street was down 0.7% at $48.10 and Northern Trust was up just a penny at $17.06. They had all ticked up on Friday as part of a rally in the financial stocks after finreg negotiations closed.

-- Written by Lauren Tara LaCapra in New York