If the housing market does fall further, that almost certainly means more losses for banks. Many still have real estate assets and mortgage-related securities on their balance sheets, which helped to trigger the financial crisis. A drop in home prices will translate into their values declining further.
Of course, if the housing market does stabilize sooner than later, and banks manage to find a way to create renewed confidence in mortgage-backed securities, then the values of some of these assets could rise. At this point, it doesn't seem likely that much appreciation would occur, but as long as these securities maintain their current values, banks would likely feel relieved.
Over the next several years, banks will begin to comply with new global capital standards from the new Basel III Accords. Although the capital levels themselves shouldn't be too difficult for most big banks to achieve, getting the right mix of capital that the new rules require could be more difficult.
It depends how the details of the new capital requirements look. If banks mostly already satisfy them, then they have nothing to worry about. If the rules pose new challenges, however, then they could have an impact on the industry's growth.
Over the next year, Washington will devise a new framework for how the mortgage market will function. On one hand, this will likely help banks. It's rather plausible that the government will end up guaranteeing all mortgages originated in the U.S. This would take borrower default risk away from banks and give it to taxpayers.
On the other hand, it also looks like those guarantees will come at a cost to banks. They'll have to pay a sort of insurance premium. Although that cost may ultimately be passed on to the borrowers, it will still likely cut into bank profits. So the bigger the premium the government demands, the worse off banks' mortgage business will be.
Securities Industry Regulation
The giant Dodd-Frank financial regulation bill passed this summer has a slew of new rules that banks must follow when creating and trading securities. There are strict new regulations surrounding the derivatives market, for example. And there's some evidence that business from this segment is already traveling overseas. Participating in proprietary trading was also made more cumbersome for banks.
Yet, there were loopholes created for many of these regulations. So it's unclear if these new rules will have a drastic affect on bank profit or just slice off a tiny piece.
Another part of Dodd-Frank resulted in a massive systemic risk regulatory framework. The Federal Reserve will soon begin creating new rules for big banks. This might mean even higher capital requirements for big banks than Basel III demands. The Fed could also impose other requirements like new compensation rules that might harm bank competitiveness.