Will Lower Capital Requirements Send Banks Higher?

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Are US banks about to embark on a big lending and dividend spree? Some think so after regulators introduced new proposals to ease capital requirements. But whether this gives you hope for more risk-taking or fear of another financial crisis, we think reality is likely to prove rather underwhelming. These rules are a relatively minor factor among the reasons to be bullish on banks today.

The latest proposals originate from Basel III, a regulatory framework aimed at strengthening the global financial system’s guardrails following the 2007 – 2009 crisis. The regulatory regime raised capital requirements and mandated higher capital and liquidity buffers as well as “living wills” for the biggest banks—ostensibly to end the problem of “too big to fail.”

The Basel Committee approved the rules in 2010, but actual implementation rolled out from 2013 – 2019. In 2017 the Basel Committee published additional reforms, and these changes, known as Basel III Endgame or Basel IV, started taking effect in January 2023 (delayed by 12 months due to the pandemic). Regional bank failures that year spurred US regulators to push for aggressive implementation and tougher regulations, including higher capital requirements based on risk weights (assigned percentages to account for the risk of various types of assets) and a standardized approach (rather banks’ internal models) for estimating credit, operational and trading risks for large financial institutions. However, the effort languished amid bipartisan blowback, and after President Donald Trump won 2024’s election, many in the banking industry expected a climbdown. But uncertainty lingered, and banks didn’t wait for clarity but began pre-emptively building buffers, lest they have to race to do it by deleveraging later.

That clarity has arrived, and while the latest proposals are subject to a 90-day comment period and subject to change, we do see a few positives. Lowered capital requirements could free up around $200 billion in capital that can be deployed elsewhere—funding dividends or share buybacks or backing new lending.^[i] Banks’ capital calculations are now more risk sensitive, meaning risk weights move from a flat to a sliding scale based on borrower quality for most types of corporate and mortgage lending. Allocating less capital to buffer against potential losses may let some big banks grow their loan books, particularly on the commercial front—perhaps the government’s way to reverse the general move toward private credit. The updates also reduce banks’ compliance costs and bring US regulations in line with other jurisdictions (e.g., Europe and UK).

Some observers argued the latest proposals will lead to a surge in banking activity as the biggest financial institutions unleash this unlocked capital. That is possible but consider: The largest banks’ common equity Tier 1 capital (the highest-quality regulatory capital) is set to decrease by just 2.4% in aggregate—smaller relative to midsize banks’ 5.2% and small banks’ 7.8%.^[ii] Major bank executives also have tempered expectations. While some will consider using excess cash for deals and/or stock buybacks, they won’t necessarily spend willy nilly—Goldman Sachs’ CEO said “the bar is going to be very high” to move forward with an acquisition opportunity.^[iii]

Ultimately, banks may not deploy all that excess capital. Financial firms have been dealing with the Basel IV framework for nearly a decade and subject to Basel’s general capital requirements for even longer. Given all the regulatory changes—which can shift depending on the political party in power—it doesn’t seem wise for banks to immediately draw down capital buffers. What if the next White House pushes for stricter capital requirements? That long-term uncertainty likely discourages risk taking to an extent, so we don’t think investors should hold their breath waiting for a surge in banking activity.

Whatever the finalized rules may be, falling uncertainty is a positive and minor tailwind. However, regulatory clarity alone isn’t reason to be bullish about the Financials sector. Consider a fundamental driver: a positively sloped US yield curve. The yield curve signals credit markets’ health. Banks borrow at short rates and lend at long rates, with the spread a proxy for loan profitability: The wider the spread, the more incentive banks have to lend. While the yield curve isn’t perfect, it has a long history of being a useful forward-looking economic indicator.

A year ago, the spread between America’s 10-year yield and 3-month yield was negative (-0.04%).^[iv] Today, the spread is 0.69%.^[v] While that reflects some volatility in long rates since the war began, the spread was already steepening before the conflict—indicating US banks’ core business looks healthy and profitable right now, a compelling (and overlooked) reason to be bullish about the industry.

Exhibit 1: Treasury Yield Spread Points Positively

Source: St. Louis Federal Reserve, as of 3/23/2026. 10-year US Treasury Yield minus 3-month Treasury Yield, daily, 3/22/2023 – 3/22/2026.

We don’t dismiss the possibility banks, emboldened by the rule changes, eventually lend aggressively and cause the economy to overheat. However, that scenario wouldn’t break out overnight, and we have time to monitor how activity evolves from here. For now, the new regulations look like an underappreciated, albeit minor, tailwind.

H/T Fisher Investments Research Analyst Davis Zhao