Potential Changes to US Bank Capital Rules
Reports indicate that US regulators are contemplating a reduction in bank capital requirements initially established to prevent another financial crisis like that of 2008. This comes as Donald Trump’s initiative to deregulate presents a significant opportunity for the most extensive rollback of post-crisis protections seen in over ten years.
The decision appears to be influenced by heavy lobbying from the banking sector, where large banks such as JPMorgan and Goldman Sachs have expressed concerns about how existing regulations, which govern the assets that banks must hold against their liabilities, hinder competition.
Regulators are anticipated to present proposals this summer targeting the supplemental leverage ratio, which mandates that large banks maintain high-quality capital for riskier assets, including loans and derivatives. An unnamed source shared this information with the Financial Times.
These rules were introduced following the 2008 financial calamity, aimed at preventing scenarios that could disrupt the banking system and lead to a global economic fallout. During that crisis, the government invested billions to rescue major banks that had taken excessive risks.
Amendments to these capital rules are widely expected, especially with Trump previously committing to a significant reduction in regulations throughout his presidency and plans to eliminate ten newly imposed regulations.
Despite some critics warning that the removal of such protections is ill-timed—especially amid rising market volatility and uncertain policy shifts—banks seem to have attained the attention of key policymakers. Lobbyists argue that the current rules impede their capacity to extend more loans, particularly for low-risk assets, such as those associated with US Treasury securities.
In London, there are growing concerns that the UK might lag behind and lose its competitive edge relative to US institutions as the latter ease restrictions. Prime Minister Rachel Reeves noted in November that the regulations instituted after the financial crisis “go too far,” urging financial observers to promote risk-taking and reconsider rules that might be stifling the growth of municipal businesses.
Some months after this statement, the Bank of England revealed it would further postpone the introduction of new UK capital rules (known as Basel 3.1) while assessing the ramifications of Trump’s potential return to power.
Additionally, regulators are reflecting on how long-standing mortgage regulations established since the financial crisis can be modified to encourage home ownership, aligning with pressures from the current labor government.
