) -- 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

JPMorgan Chase

(JPM) - Get Report

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

Ocwen Financial

(OCN) - Get Report

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

(DFS) - Get Report


Signature Bank

(SBNY) - Get Report

to gain market share.

In the capital markets space, KBW expects alternative managers such as


(BX) - Get Report


Carlyle Group

(CG) - Get Report


Fortress Investment Group


and private equity firm


(KKR) - Get Report

, to benefit in the new regulatory landscape. Exchanges such as

Intercontinental Exchange

(ICE) - Get Report

and brokers

Evercore Partners

(EVR) - Get Report


Raymond James Financial

(RJF) - Get Report

are also likely to emerge as winners.

-- Written by Shanthi Bharatwaj New York.

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