Morgan Stanley sees writing on wall for Citi before major change

Banks have had a stellar first quarter. The major U.S. banks raked in nearly $50 billion in profits in the first three months of the year, The Guardian reported.

That was largely due to Wall Street bank traders, who profited from a volatile stock exchange, Reuters showed.

But even without the extra bump from stock trading, banks are doing well when it comes to interest, the same Reuters article found. And some banks could stand to benefit even more from this one potential rule change.

Morgan Stanley thinks it could have a major impact on Citi in particular.

Upcoming changes for banks

To understand why Morgan Stanley thinks things are going to change at Citi, you need to understand some recent bank rule changes.

Banks make money by lending out money, which usually comes from depositors. But people need access to their money and the right to withdraw whenever they want.

So, banks keep a percentage of all money deposited to make sure they can cover what the average person needs.

But what happens if there is a major demand for withdrawals, as we saw during the financial crisis of 2008?

That’s where capital requirements come in. After the financial crisis, major banks like Citi were required by law to hold a higher percentage of money in order to avoid major bank failures.

For years, banks had to put aside billions of dollars. Money that couldn’t be lent out or even returned to shareholders.

Now, that’s all about to change.

Capital change requirements for major banks

Banks that are considered globally systemically important banking organizations (G-SIBs) have a higher capital buffer than community banks as they usually engage in banking activity that is far more complicated than your average market loan.

The list depends on the size of the bank and its underlying activity, according to the Federal Reserve.

Current global systemically important banks

A proposal from U.S. federal banking regulators could drastically reduce the amount that these large banks have to hold in reserve.

Changes would result in the largest U.S. banks holding an average 4.8% less. While that might seem like a small percentage number, for banks of this size, it equates to billions of dollars, according to a Federal Reserve memo.

The proposed changes were a long time coming, Robert Sarama, a financial services leader at PwC, told TheStreet.

“It’s a bit of a recognition that perhaps the pendulum swung a little too far in the higher capital requirement following the financial crisis, making it harder for banks to participate in some markets,” he said.