The big buzz around Wall Street this week is the so-called lifting of capital restraints to US securities firms, which could lead to as much as $4.4 billion in extra earnings this year, according to estimates. Read all about it here:
Wall Street Gets Lift From SEC That May Boost Profit
By Yalman Onaran, Bloomberg
Essentially, securities firms do not have to hold as much cash in reserves as they used to, allowing them to put more of that formerly reserved capital to work with higher yielding investments. This means earnings could surge by year end as more money seeks better returns—making big US Financials stocks once again quite attractive.
But before you plough all your dough back into Wall Street's big boys, let's get some perspective. The $4.4 billion bucks being bandied about is simply a hypothetical number—there's no telling how much capital companies will actually choose to employ. And let's not forget…investments involve risk! Just because they're free to earn more doesn't mean they will. It's very possible these incremental funds may actually lose money should poor choices be made.
Moreover, $4.4 billion just isn't that big a number. Spread across the industry, it probably won't amount to much for each individual company. They key word in the headline is "may." If extremes are taken and everybody receives a big windfall from their increased risk, it could be a significant boost to Financials earnings this year. But if the firms choose only to make slight adjustments, then this is probably a non-event. Our guess is it will likely fall somewhere in-between.
But while the jury may still be out on the new rule's potency to earnings, the adjustment does bring US Financials more in line with European competitors, who never had such restrictions in the first place. That makes the global Financial landscape more competitive—and we consider that a very good thing.