Regulatory Relief for Banks

De-Regulation Momentum

We’ve previously highlighted the positive momentum in the banking sector, and we continue to believe that Financials remain underestimated. So far this year, investor attention has largely been dominated by headlines around tariffs, geopolitical tensions and Federal Reserve policy. However, beneath the surface a powerful trend is taking shape – one driven by de-regulation. This shift is already underway and showing signs of accelerating.

Recent bank stress test results revealed strong capital positions across the industry, reinforcing confidence in the sector’s resilience. At the same time, the government is moving away from stringent oversight toward a more supportive regulatory stance, creating meaningful upside potential for financial institutions.

Less Capital Requirements for Banks

The Supplementary Leverage Ratio (SLR) for banks was initially implemented as a post-Global Financial Crisis safeguard. The idea was simple. Limit the amount of leverage banks could take on by tying it to their capital base, regardless of the capital’s riskiness. This meant a U.S. Treasury bond and junk loan were treated equally for leverage purposes on a banks balance sheet. Unsurprisingly, this disincentivized banks from holding low-risk assets, like U.S. treasuries. This also restricted banks from growing their lending activity past a certain amount, capping their ability to expand.

Financial institutions posted strong results during the Federal Reserve’s most recent stress tests. Shortly after, the Federal Reserve proposed plans for one of the most dramatic rollbacks of bank capital rules since 2008. The proposal suggested an alteration of banks’ supplementary leverage ratios. The proposal would lower capital requirements for Global Systematically Important Banks (GSIB’s) such as JPMorgan (JPM), Bank of America (BAC), Goldman Sachs (GS) Morgan Stanley (MS) and Wells Fargo (WFC). More importantly, it would reduce capital requirements for depository institution subsidiaries of banks by 27%, or ~$213 billion.

Lower capital requirements allow banks to hold less of their own capital as protection to cover losses, which frees up more funds for lending. This grants them more flexibility to expand operations and increase profitability, through investing or business expansion.

In addition, the proposed plan can help banks support Treasury trading and improve overall liquidity. Banks will be able to participate more actively in the Treasury market, where they will be allowed to hold larger treasury positions. In turn, this facilitates more turnover and improves market liquidity by enabling them to buy at higher prices and sell at lower prices.

Following the stress tests and Fed proposal, we saw multiple large banks increase their dividends and buybacks. JPMorgan Chase raised its dividend by ten cents to $1.50 from $1.40. Separately, Bank of America raised its dividend by 8%, while Wells Fargo increased its dividend to 45 cents from 40 cents. JPMorgan also announced a new $50 billion share repurchase program, while Goldman Sachs announced a $20 billion buyback program.

These recent developments are a big win for the major banks, which have long been complaining that the rules regarding capital requirements were too restrictive. Under the new proposed regulation, banks can lend more freely, hold more U.S. treasury and boost earnings for shareholders.

Chart 1: Possibly $5.5 to $7.2 Trillion Bank Balance Sheet Capacity Unlocked^[1]

De-Regulation Initiatives in DC

The current administration has clearly stated their interest in reducing regulatory burdens on the financial sector, which will likely lead to more changes in banking regulations. Earlier this year, President Trump signed an executive order stating that whenever an executive department or agency publicly proposes a new regulation, it shall identify at least 10 existing regulations to be repealed. While this is not specific to banking, this is a clear indication that the administration is actively working to reduce regulation.

Treasury Secretary Scott Bessent also said that one goal for the current administration is to modernize “outdated” capital requirements and determine a regulatory framework that is in the interest of the U.S. Bessent also mentioned that reducing capital requirements is a top priority for federal banking agencies.

Furthermore, the SEC, Nasdaq and NYSE are discussing easing disclosure rules for publicly listed corporations. Public company numbers are down 36% since 2000, and regulators are seeking to encourage more richly valued startups to go public. The reforms under discussion are focused on reducing the number of disclosures and the costs of going public, which currently make it harder for companies to IPO, as well as for minority investors to participate. An expansion in IPO activity provides banks with strong opportunities to generate revenues through underwriting fees, commissions for selling IPO shares, and revenues relating to advisory and market research services.

Chart 2: Listed Domestic Companies, U.S.^[2]

Stephanie Link’s TV Schedule:

Sources

^[1] Source: Goldman Sachs, As of June 30, 2025.

^[2] Source: World Bank Group, as of 2024.

Disclosures

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