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The financial sector pared gains in afternoon trading on Thursday, as the Federal Reserve failed to send a clear signal of more quantitative easing and announced new capital rules for large and small banks.
Earlier this week, equities jumped across the board as Jon Hilsenrath from the WSJ wrote that the Fed may be closer to more stimulus than previously thought. He explained, “Fed policy makers could take a small precautionary measure, like extending for a short period its ‘Operation Twist’ program, in which the Fed is selling short-term securities and using the proceeds to buy long-term securities.” However, Fed Chairman Ben Bernanke poured cold water on more easing at the moment when he testified to the Joint Economic Committee in Washington on Thursday.
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Bernanke noted risks in Europe and said the central bank was ready to take action, but did not specifically make a commitment to more monetary easing. “The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely. As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate,” he explained.
In the final hour of trading, the banking sector fell lower as the Fed also unveiled a plan that places tougher capital rules on banks with at least $500 million in assets. The new rules require banks to maintain a level of common equity equal to 4.5 percent of their risk-weighted assets, plus another 2.5 percent for a capital conservation buffer. The total 7 percent common equity cushion is more than triple the current standard of about 2 percent. The plan will be phased in from 2013 through 2019.
The announcement of the capital rules, which essentially forces banks to set aside more money to cover unexpected losses, had an immediate effect on major banks. Morgan Stanley (NYSE:MS) and Bank of America Corp. (NYSE:BAC) fell 3.8 percent and 2.9 percent, respectively. In fact, Bank of America was the worst performer in the Dow Jones Industrial Average (NYSEARCA:DIA). Other banks such as Citigroup Inc. (NYSE:C), Goldman Sachs (NYSE:GS) and JPMorgan (NYSE:JPM) declined around 1 percent.
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