US banks are in for a 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 in 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 lower leverage ratios to as low as 3.5%, from 5% earlier, 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 FT.

It will be good news for capital markets + investment activity: The move is expected to “drive a material uplift through 2026” in bank activity — from lending to M&A and tech investment.

But bad news for global rivals. European and UK banks already face stricter capital regimes and say the upcoming shift risks entrenching Wall Street dominance. One senior EU executive told FT 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 that aimed to toughen its stance on the lender after the Credit Suisse meltdown.

To put things in perspective: 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. And 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. The European Central Bank’s top supervisor, Claudia Buch, 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 estimate 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.

MARKETS THIS MORNING-

Asian markets are mostly in the red, with South Korea’s Kospi leading losses with a 1.1% decline. Japan’s Nikkei, meanwhile, is down a marginal 0.1%, and Hong Kong’s Hang Seng is down 0.5%. China’s CSI 300 is also down 0.2%.

THE OPENING BELL-

The S&P BSE Sensex opened in Green reaching 85,782 in early trading, up 0.1%. The index is up 9.3% YTD.

Over on the NIFTY 50, the index also opened in Green reaching 26,235 in the morning, up 0.7%. The index is up 10.5% YTD.