Bank of America: Financial Winner

NEW YORK ( TheStreet) -- Bank of America ( BAC), was the winner among major U.S. financial names on Tuesday, with shares rising 2% to close at $13.52.

The broad indexes all advanced, after Alcoa ( AA) late on Monday kicked off earnings season by reporting a smaller-than-expected second-quarter loss. Alcoa reported a net loss of 11 cents a share, but excluding restructuring costs, the aluminum producer earned 7 cents a share, beating by a penny the consensus estimate among analysts polled by Thomson Reuters.

More importantly, Alcoa reiterated its projections of a 7% increase in global aluminum demand during 2013. During the firm's conference call, CEO Klaus Kleinfeld said Alcoa's "projection of an 11% demand growth for aluminum in China is really confirmed."

Despite a proposal from federal regulators to double the minimum Basel III Tier 1 leverage capital requirement for the nation's largest banks, the KBW Bank Index ( I:BKX) rose 0.5% to close at 64.58, hitting its highest close since October 2008.

The regulators proposal came just one week after the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency issued their final rules for the implementation of Basel III capital standards.

Coverage of the Basel III implementation has focused on the Tier 1 common equity ratio, which is a risk-based capital ratio, meaning that a banks' assets are ranked to require additional capital to support risker loans and investments.

After numerous calls in Washington for simpler capital rules, the three regulators on Tuesday proposed that all U.S. banks with total assets of over $700 million maintain supplementary Tier 1 leverage ratios of at least 6%.

The Tier 1 leverage ratio is not risk-weighted. Under Basel III, banks are required to maintain 4% Tier 1 leverage ratios, but the largest banks also required to perform a separate supplementary leverage ratio calculation that factors-in off-balance-sheet items. The minimum supplementary Tier 1 leverage ratio for banks required to use this "advanced approach," is 3% under Basel III.

So one could argue that the new proposal is putting U.S. banks at a distinct disadvantage to foreign competitors.

Under the U.S. regulators' new proposal, the largest banks themselves will have to raise their core capital to 6% of average total assets, factoring in off-balance-sheet items, while their holding companies will have to maintain minimum supplementary Tier 1 leverage ratios of 5%.

Industry reaction to the new proposal was mixed. American Bankers Association CEO Frank Keating said in a statement that "just when there appears to be some agreement on international capital standards, U.S. regulators are proposing to undermine the whole exercise under a mistaken belief that doubling capital requirements will have no impact on credit availability or the ability to hedge risk."

Keating argued for regulators to stick with the risk-based approach of the Tier 1 common equity ratio. "Regulators should exclude, for example, safe assets banks hold for liquidity such as U.S. treasuries or reserves held at a central bank. Risk-based capital remains an important way to gauge and guard against the true risks associated with an institution, considerations that are lost by reliance upon a one-dimensional leverage ratio," he said.

The Independent Community Bankers of America expressed an opposing view in a statement: "This rule will target the risky financial instruments that the largest institutions keep off their balance sheets. This will offer a clean, common-sense way to help offset the true level of risk that these megabanks pose to themselves, to consumers, and to our financial system and economy as a whole. While not a panacea, this is a positive step that would go a long way towards helping to safeguard our economic system.

On the holding company level, Guggenheim analyst Marty Mosby estimates that Bank of America had a supplementary Basel III Tier 1 leverage ratio of 6.04%. The company's main bank subsidiary, Bank of America, NA, reported a solid Tier 1 leverage ratio of 8.81% as of March 31, although that was based on current rules and not on the regulators' proposal that would factor-in off-balance-sheet items.

Mosby rates Bank of America a "buy," with a price target of $15.50.

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-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.