US banks are in for USD 2.6 tn capital boost from upcoming reforms as global rivals fear growing irrelevance

What will the impact of the upcoming loosening of regulations for US banks be for the rest of the world? That’s the topic making the rounds in the business press as banks across the EU and the UK begin to call on regulators to also loosen strict regulations and bring down high capital buffers for fear of losing more market share to US banks.

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What’s happening? Fed’s vice chair of supervision Michelle Bowman is leading reforms that will bring down leverage ratios to as low as 3.5% from 5% and implement a looser form of Basel III capital level requirements and ease annual stress tests. The reforms are expected to free up some USD 2.6 tn in lending capacity for US banks, according to a Jeffries note picked up by Bloomberg and the Financial Times, which wrote a big read on the subject.

The rolling back of crisis-era capital requirements is celebrated by some and fueling concerns for others, with critics fearing it could reduce banks’ resilience to systemic shocks, especially as it comes only two years after the collapse of several mid-sized US banks, including Silicon Valley Bank and Signature Bank.

Still, the move is expected to give Wall Street far more room to expand credit, trading, and balance-sheet activity, as well as bolster banks’ activity in the USD 29 tn US Treasury market. It would immediately liberate as much as USD 140 bn in capital for US banks, potentially boosting loan growth, buybacks, and dividends, Alvarez & Marsal said in a report picked up by the Financial Times.

The move is expected to “drive a material uplift through 2026” in bank activity — from lending to M&A and tech investment. But it’s bad news for global rivals, including European and UK banks, which already face stricter capital regimes and say the upcoming shift risks entrenching Wall Street dominance. One senior European bank executive told the salmon-colored paper the divergence is “really bad news” for competitiveness, as fears mount over the loss of more market share to US banks.

Concerns have even prompted Swiss bank UBS to mull moving its headquarters to the US as it awaits a decision from the government that could hike its capital requirements by USD 26 bn, a move aimed at toughening its stance on the lender after the Credit Suisse meltdown.

US banks last year occupied the top five spots for investment-banking revenue worldwide and accounted for seven of the top 10, according to Dealogic. The top 13 US banks are already estimated to have about USD 200 bn of excess capital above their regulatory minimums, setting them up for massive windfalls from the upcoming reforms.

So far, Europe seems unlikely to follow. Claudia Buch, the European Central Bank’s top supervisor, said she has no plans to cut capital requirements, arguing “better-capitalized banks are better able to lend, particularly in times of stress.”

As for the UK, the Bank of England is reviewing its leverage regime and may adopt partial relief. Alvarez & Marsal estimates that if the UK mirrors the US, British banks’ capital requirements could fall by around 8%. However, analysts expect the UK to deliver only “half” the relief seen in the US.

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