By Niket Nishant and Chibuike Oguh
(Reuters) -Shares of U.S. banks dropped on Tuesday as the prospect of tighter regulations and a possible downgrade of several lenders by Fitch Ratings raised investor concerns over the health of the sector.
Federal Deposit Insurance Corporation Chairman Martin Gruenberg said in a speech on Monday that the agency planned to propose new rules to overhaul how large regional banks prepare "living wills" - detailed plans on how they would wind up their businesses should they fail.
The rules are part of sweeping changes U.S. regulators are aiming to introduce to tighten oversight of the banking system following the collapse of several lenders in March.
A Fitch Ratings analyst warned that the agency could downgrade several large U.S. banks, weeks after rival Moody's (NYSE:MCO) cut the ratings of 10 mid-sized lenders, citing funding risks and weaker profitability.
The S&P 500 banking index was down 2.5%, hitting its lowest in a month, with JPMorgan Chase (NYSE:JPM) falling nearly 4%. Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), Goldman Sachs Group (NYSE:GS), Citigroup (NYSE:C) and Morgan Stanley (NYSE:MS) declined between 1.7% and 2.1%.
"We kind of knew some of this was coming and the downgrades are reflective of stuff the market has already digested and taken into consideration," said Jack Janasiewicz, portfolio manager and lead strategist at Natixis Investment Managers.
"It's just a reflection of the general sentiment," Janasiewicz added.
Among the mid-sized banks, Western Alliance (NYSE:WAL) Bancorp and PacWest Bancorp were down more than 3%, respectively. Michael Burry's Scion Asset Management had disclosed on Monday that it had sold its stake in both banks. Comerica (NYSE:CMA) and KeyCorp (NYSE:KEY) were also among the losers, dropping more than 4% each.
Benchmark 10-year U.S. Treasury yields hit an almost 10-month high at 4.274% on Tuesday before quickly dipping, boosting expectations that the Federal Reserve could hold rates for longer.
Bank depositors will probably watch whether higher rates could put further pressure on small and regional banks, said Quincy Krosby, chief global strategist at LPL Financial (NASDAQ:LPLA).