Wells Fargo may soon become the largest bank

The Obama proposal to limit bank size and activities (The "Volker Rule") has already had a differential impact on the big banks. JP Morgan, which has sought to expand both its commercial banking and investment banking operations during the financial crisis by acquiring Washington Mutual and Bear Stearn, has been pummeled. Its stock price has dropped about 10% since the announcement on January 21. Similarly, Bank of America and Citigroup have been adversely affected. On the other hand, Wells Fargo appears to be least affected, as its acquisition of Wachovia was mostly an expansion of the commercial banking franchise.

Only two weeks ago, WFC had a much lower market cap than JPM, and was behind that of BAC. This week, WFC has over-taken BAC, and has come very close to JPM's market cap of $153 billions. The market reaction is quite understandable, if the rule is designed to separate the deposit-based business from the trading-based business that came to dominate the Wall Street. If this trend continues, Wells Fargo will soon become the largest bank in terms of market cap.

JPM has been viewed as the best capitalized large bank, also as a go-to bank for the government when it needs help in closing down a failing bank. As such, JPM has benefited tremendously through the crisis and has come out stronger.

Wells, on the other hand, has always had some problems with its capital position after the merger with Wachovia. In particular, its tangible common equity ratio is thought to be the lowest among the large banks. Even though it has a superior earning power, investors have not been willing to believe that it can earn its way back to the best capitalized bank.

Much of that is of course dependent on how well the economy recovers, in particular, how well the housing market recovers. Wells, because of its focus on community-based banking, may benefit disproportionately from the recovery, more so than trading-dependent operations. Perhaps for this reason, investors now are willing to give it more credit, in light of the new political climate and recent data that the economy is slowly but surely on its way to recovery.