US Banks: Could Regulation Roll Back Go Too Far?

Key Points

• Bank regulation moves in cycles, with the pendulum now swinging back toward deregulation under the Trump administration.
• Bank investors benefited greatly from strengthening regulations over the last 15 years. The greater concern would be a dismantling of the existing regulatory and legislative banking frameworks.
• Regulatory rollback is ultimately likely to be more modest and likely involve the cancelling of proposed rules. Basel III Endgame implementation is likely to be significantly modified or abandoned entirely, benefiting larger banks.
• One area to watch is possible revisions to regulations that currently require banks’ holdings of central bank reserves and treasuries to be backed by capital as part of complying with the Supplement Leverage Ratio (SLR). Easing of these rules has the potential to substantially reduce the larger US banks’ long-debt needs. If enacted, this event could potentially tighten credit spreads.
  
• The US Treasury is motivated to see a modification of the SLR to reduce long-term Treasury yields by encouraging banks to be larger buyers and holders of Treasuries.
• The growing bank vs. non-bank nexus creates additional systemic risk considerations as deregulation proceeds, and changes here should be monitored especially in the repo market.
• Bank M&A activity is likely to increase as regulatory barriers to consolidation are reduced, with transaction values having already risen in 2024.
• Despite deregulation, banks maintain strong capital positions with average TCE (tangible common equity) ratios of 7.15%, more than double the levels seen pre- GFC (global financial crisis).

The Regulatory Pendulum: Historical Context and Current Shift
Bank regulation moves in cycles. Following the GFC, where financial losses from the banking sector cost the global economy $2 trillion, the regulatory pendulum swung sharply toward stricter oversight. Politicians and bank regulators implemented comprehensive reforms that doubled the capital held by US banks. The Code of Federal Regulation (CFR) Title 12 on Banks and Banking expanded from approximately 5,000 pages in 2009 to almost 10,000 in 2010. Under the Biden Administration, this trend continued with proposed regulations totaling over 1,000 additional pages.

A notable result of heightened regulation has been the migration of risk outside the traditional banking system. Nonbank financial institutions' share of lending climbed to 8% of total bank loans in 2024 from low single digits in 2014, as banks became less willing to lend partly due to more stringent regulatory requirements.