By: Elliot Turner

As promised, I will follow up on my post from yesterday evening with some more on the regional banks. Before getting to the chart, I wanted to expand upon my statement that the Dodd financial overhaul provides an improved regulatory landscape for the regional banks. With the implicit guarantee against failure/losses in Too Big to Fail (TBTF) banks, government helps cheapen the cost of capital for these institutions. Bondholders know that they do not face the same risk of default with such an institution as they do with one that lacks that implicit guarantee. This leads to a misallocation of capital towards TBTF banks and away from others. With Dodd’s plan to grant breakup authority over Too Big to Fail institutions and the creation of a bailout tax, this should help level the playing field for the cost of capital between Too Big to Fail and run-of-the-mill institutions.

Adding fuel to this move is the fact that some of the larger institutions may seek to increase their depository bases in an attempt to improve their balance sheets and increase their capital base. Just days ago, the Wall Street Journal floated the idea that Barclays (BCS) would seek out a regional bank purchase in the U.S. to expand their presence in the U.S. and increase their deposit base. This is a very positive development for a sector still well off its pre-crisis levels.

Now let’s take a look at the chart. Below is a monthly chart of the RKH, one of several indices of regional banks. Take note how the index rallied back to the 38.2% retracement level off of the March 2009 lows and has since been digesting in that range for nearly half a year. This month, the index has finally broken out to the upside and now there is little resistance to the left for some time:

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