Why Financial Sector, ETFs Growth Has Been Slowed | ETF Trends

Banks and financial sector exchange traded funds may have one hand tied behind their back as the Federal Reserve finalizes additional capital requirements on Wall Street.

The Fed has placed a higher capital requirement for the eight largest banks, including a 4.5% capital “surcharge” for J.P. Morgan Chase (NYSE: JPM); 3.5% for Citigroup (NYSE: C); 3% for Bank of America (NYSE: BAC), Goldman Sachs Group (NYSE: GS) and Morgan Stanley (NYSE: MS); 2% for Wells Fargo (NYSE: WFC); 1.5% for State Street (NYSE: STT); and 1% for Bank of New York Mellon Corp. (NYSE: BK), reports Victoria McGrane for the Wall Street Journal.

The new surcharge comes on top of a base 7% common-equity capital requirement.

A number of large-cap financial ETFs include heavy tilts toward these companies. For instance, the SPDR S&P Bank ETF (NYSEArca: KBE) includes JPM 1.6%, C 1.6%, BAC  1.6%, WFC 1.6% and BK 1.5%. The Financial Select Sector SPDR (NYSEArca: XLF) holds WFC 8.6%, JPM 8.2%, BAC 6.0%, C 5.7%, GS 2.7%, MS 2.0%, STT 1.0% and BK 1.5.%.

J.P. Morgan was about $21 billion short of its required target as of December. The other banks currently hold enough capital to meet the requirement.

The surcharge can grow or shrink based on a bank’s changes in size, complexity and entanglements with other large firms. The excess capital helps diminish a company’s risk profile and provide a capital buffer in case of another financial crisis.