Bank deregulation set to unlock $2.6tn of Wall Street lending capacity

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U.S. banks are preparing for an unprecedented easing of capital rules, which new research suggests could unlock $2.6 trillion in lending capacity and increase pressure on regulators elsewhere to follow suit.

The upcoming easing of banking regulation in the United States, much of which Washington has already signaled, will likely free up nearly $140 billion in capital for Wall Street lenders, according to research by consulting firm Alvarez & Marsal.

Since Donald Trump returned to the White House, US authorities have adopted a more bank-friendly approach, committing to relax many rules that forced banks to increase capital buffers capable of absorbing losses after the 2008 financial crisis.

The reduction in capital requirements is set to strengthen the dominant position of major Wall Street groups, enhance their ability to finance huge investments in artificial intelligence and data centers and allow them to return more capital to shareholders.

“We believe the Trump administration is embarking on a major wave of deregulation, unlocking a tremendous amount of capacity, which will give a tremendous economic boost and increase profits,” said Fernando de la Mora, co-head of financial services at Alvarez & Marsal.

The New York-based consulting firm expected US banks to benefit from a 14 percent reduction in their requirements for Tier 1 common stock, which is a buffer capital that gives them the ability to absorb losses.

It expected this would result in a 35 percent increase in its earnings per share and a 6 percent increase in its revenue over the average tangible common stock — a benchmark used by investors.

The report, due to be published on Monday, provides detailed estimates of the impact of changes in banking regulation around the world. It expected that UK regulators would follow the example of the United States and reduce capital requirements for British banks by about 8 percent.

However, it expects EU banks’ capital requirements to continue to rise, anticipating a 1 per cent increase, while capital levels for Swiss banks are expected to rise by up to 33 per cent. The Swiss government has proposed higher capital levels that could require UBS to raise up to $26 billion, as authorities seek to boost financial stability in the wake of the bank’s rescue of crisis-hit rival Credit Suisse.

“This will increase the market share of US banks, the UK will retain almost all of the market share, while Swiss banks and EU banks will lose more ground,” de la Mora said.

JPMorgan Chase, the largest US bank, is expected to be one of the main beneficiaries. Easing restrictions is expected to free up $39 billion of capital, raising its earnings per share by 31 percent and its return on equity by 7 percent.

Michelle Bowman, a long-time critic of stricter bank capital rules, was appointed this year as deputy head of oversight at the US Federal Reserve, and has since committed to easing restrictions she blames for pushing lending into private credit markets.

US regulators have already put forward proposals to relax requirements for banks to hold a predetermined amount of high-quality capital in proportion to their total assets.

They also announced plans to overhaul additional capital buffers required of the largest US banks and to rework annual stress tests that impose more restrictions on them.

“There is a boom in capital investment in the U.S. that can be funded — for artificial intelligence, data centers, energy infrastructure and some rebuilding at home,” said Hugh van Steenes, vice president of consultancy Oliver Wyman. “This recalibration of regulation will help banks adapt to this wave of funding.”

However, European regulators are concerned about the risks of relaxing banks’ capital requirements. Christine Lagarde, president of the European Central Bank, warned this month of “regulatory rollback,” while Bank of England Governor Andrew Bailey warned against “throwing the baby out with the bathwater” when reforming financial regulation.