May 29, 2013

Sallie Krawcheck: Beware of Bank Stocks

Large financial institutions remain bogged down in a lot of issues, which makes them risky, the veteran executive says

Former Bank of America wealth management chief Sallie Krawcheck. (Photo: AP) Former Bank of America wealth management chief Sallie Krawcheck. (Photo: AP)

Sallie Krawcheck says U.S. banks still have issues.

“Accidents can and do happen,” the former head of wealth management at Bank of America (BAC) said during an interview with Yahoo’s The Daily Ticker early Wednesday. “JPMorgan (JPM) was easily able to weather [the London Whale losses], but the next one may not be.”

For investors, this risk and related issues means that they should not put too big a chunk of their portfolio into individual bank stocks.

Krawcheck, who also was CFO at Citi Smith Barney (C), recently acquired 85 Broads, a global women's network, from its founder, the former Goldman Sachs executive Janet Hanson.

She acknowledges that banks are “certainly safer than they were” in 2008. “I think banks and money funds will do just fine in a bad market … “But I do worry about a very, very, very, very bad market.”

Her chief concern is that banks continue to be undercapitalized.

During the downturn, some major banks had leverage ratios equal to 2% of assets, so “you can take a loss of 2% and [then] you’re out of equity,” Krawcheck says.

While today, the industry average is 8%, there is a risk that this “really is 4% to 6%,” given the fact that banks can lose access to overnight funding if their capital reserves drop by 50%, the financial services veteran says.

Earlier this year, Krawcheck suggested that banks should change the way they pay their senior executives and stop paying them in stock.

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Read Sallie Krawcheck: Top 10 Reasons It's Bad to Pay Bankers in Stock on AdvisorOne.

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