US regulators' proposed changes to capital rules are poised to reshape the nation's banking landscape, lowering capital requirements and potentially shifting lending activity.
The Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. unveiled proposals that would cut aggregate capital requirements when combined with other reforms. The cuts would amount to about 8% for banks with less than $100 billion in assets and roughly 5% for the largest and most complex institutions.
"At a top-level, regulators' goal with the proposals is to modernize banks' capital requirements by improving their risk sensitivity and reducing burden, while also keeping their robustness," Piper Sandler analyst R. Scott Siefers wrote in a research report.
The new proposals are expected to "help to reshape the industry landscape" by reducing capital requirements across various asset types, including mortgages and consumer loans, Morningstar DBRS said in a commentary. This should limit regulatory arbitrage that has contributed to the expansion of nonbank lenders in recent years, it added.
The package of proposals is "the most significant regulatory relief for the banking industry during President Trump's second term," Raymond James analyst Ed Mills said, noting that it also supports a boost in mortgage originations and servicing. The rules also make favorable adjustments to the operations risk calculation, aiding wealth management, trust activities and credit card operations within depositories, Mills said.
The global systemically important bank (G-SIB) surcharge proposal delivers the "larger benefit to the big banks," which have been calling for changes to the GSIB surcharge since about 2016, Capital Alpha Partners analyst Ian Katz said. The proposal, issued by the Fed, would update requirements to reflect growth in the economy and financial system and reduce requirements for the use of short-term wholesale funding.
The changes related to short-term wholesale funding will favor large investment banks and trust banks, but are modestly unfavorable for the largest money centers, J.P. Morgan analyst Vivek Juneja said.
"We estimate the switch to a dollar-based calculation is relatively modestly unfavorable for the largest money centers, while benefiting large investment banks and trust banks which have narrower business models with more market sensitive revenues especially at the investment banks," Juneja wrote.
Jefferies analyst Daniel Fannon identified Goldman Sachs Group Inc. and Morgan Stanley as relative winners, citing their larger market-driven businesses and estimated incremental $4 billion of excess capital at Goldman Sachs and $3 billion at Morgan Stanley.
Piper Sandler's Siefers said the proposals are more reasonable than the punitive proposals from 2023 and free up capital and flexibility for banks. Still, regulators' capital expectations are not the sole concern for large banks.
"Our sense is that ratings agencies have not yet moved as materially in easing their own expectations, and shareholders of course have their own ideas," the Piper Sandler analyst wrote. "Thus, we suspect our banks will, over time, maintain capital levels that they believe represent the best balance of regulatory, rating agency, and shareholder expectations."
