NEW YORK (
) -- The intense regulatory focus on "Too Big to Fail" banks should continue to create opportunities for smaller players and non-banks, according to KBW analysts.
"The implementation of the Volcker rule is likely to be tougher than was thought just a few months ago, the push to move derivatives to exchanges will accelerate, and the continued implementation of higher capital standards for large banks will move merchant banking activities to non-banks, in our view," the analysts said.
The argument to break up big banks has been gaining favor in Washington amid concerns of an ongoing perception in the market of an implied government guarantee for the nation's largest lenders. Trading losses at
amid regulatory and risk-management lapses have also raised concerns that some firms may be "too big to manage" and "too big to regulate."
That has stepped up regulatory pressure to toughen the Volcker rule, which is intended to limit risk by banning banks from proprietary trading and moving derivatives trading to exchanges. The Volcker Rule is meant to contain damage to the wider financial system from a trading firm's failure.
While the analysts do not believe there will be new legislation to break up the banks, they expect the largest banks, particularly those designated to be globally significant, to be in for a "long period of increased regulation, limited profitability and shrinkage."
Increased regulation has, however, created opportunities for smaller firms, the analysts note. The regulation and litigation surrounding mortgages, for instance, has allowed companies such as
to grow market share. Similarly, implementation of consumer banking laws in through the Dodd-Frank bank reform legislation has been cumbersome for the large banks, but has allowed lenders such as
Discover Financial Services
to gain market share.
In the capital markets space, KBW expects alternative managers such as
Fortress Investment Group
and private equity firm
, to benefit in the new regulatory landscape. Exchanges such as
Raymond James Financial
are also likely to emerge as winners.
-- Written by Shanthi Bharatwaj New York.
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