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US banks are set for an unprecedented easing of capital rules, which new research suggests could unlock $2.6tn in lending capacity and increase pressure on regulators elsewhere to follow suit.
The upcoming dilution of US banking regulation, much of it already signalled by Washington, is likely to free up almost $140bn in capital for Wall Street lenders, according to research by consultancy Alvarez & Marsal.
Since Donald Trump returned to the White House, US authorities have embraced a much more bank-friendly approach, committing to loosen many of the rules that forced banks to increase their loss-absorbing capital buffers after the 2008 financial crisis.
The reduction of capital requirements is set to reinforce the dominant position of big Wall Street groups, boost their capacity to finance huge investments in AI and data centres and allow them to return more capital to shareholders.
“We think the Trump administration is kicking off a major wave of deregulation, unlocking a huge amount of capacity, which will give a massive economic boost and an earnings uplift,” said Fernando de la Mora, co-head of financial services at Alvarez & Marsal.
The New York-based consultancy predicted US banks would benefit from a 14 per cent reduction in their requirements for common equity tier one, a capital buffer that gives them capacity to absorb losses.
It forecast this would result in a 35 per cent boost to their earnings per share and a 6 per cent increase in their return on average tangible common equity — a benchmark used by investors.
The report, due to be published on Monday, provides detailed estimates of the impact of changes to banking regulation across the world. It forecast UK regulators would follow the lead of the US and reduce British banks’ capital requirements by about 8 per cent.
However, it expects EU bank capital requirements to keep rising, predicting a 1 per cent increase, while capital levels for Swiss banks are forecast to rise by up to 33 per cent. The Swiss government has proposed higher capital levels that could require UBS to raise up to $26bn, as authorities seek to strengthen financial stability following the bank’s rescue of crisis-hit rival Credit Suisse.
“This is going to drive a further market share gain by US banks and the UK will just about hold its market share, while the Swiss and the EU banks will lose more ground,” said de la Mora.
JPMorgan Chase, the largest US bank, is set to be one of the main beneficiaries. The easing of restrictions is forecast to release $39bn of its capital, lifting its earnings per share by 31 per cent and its return on equity by 7 per cent.
Michelle Bowman, a longtime critic of stricter bank capital rules, was appointed this year as vice-chair of supervision at the US Federal Reserve and has since committed to ease restrictions that she has blamed for pushing lending into private credit markets.
US regulators have already presented proposals to water down requirements for banks to maintain a preset amount of high-quality capital in proportion to their overall assets.
They have also announced plans to reform the extra capital buffers required of the biggest US banks and to rework the annual stress tests that impose more restrictions on them.
“There is a capital investment boom in the US to be financed — for AI, data centres, energy infrastructure and some reshoring,” said Huw van Steenis, vice-chair of consultancy Oliver Wyman. “This recalibration of regulation will help banks lean into this financing wave.”
However, European regulators worry about the risks of looser bank capital requirements. Christine Lagarde, the European Central Bank president, this month cautioned against “regulatory rollback”, while Bank of England governor Andrew Bailey warned about “the baby being thrown out with the bathwater” when reforming financial regulation.