Major Banks Set to Win Big Under New Federal Capital Rules, Trading Giants Favored

A new federal proposal would reduce capital requirements for major U.S. banks by 4.8%, freeing up billions for lending and buybacks. Trading-focused institutions like Goldman Sachs and Morgan Stanley appear positioned to benefit most from the regulatory changes.

Major financial institutions across the United States are celebrating a federal regulatory proposal that would significantly reduce the cash reserves they’re required to maintain, though some banks appear positioned to benefit more than others from the changes.

The new framework, unveiled Thursday, would decrease capital requirements at the nation’s largest banks by 4.8%. This reduction would unlock billions of dollars that institutions could use for customer loans, shareholder dividends, and stock repurchases – marking a substantial victory for the banking sector.

The industry had previously faced the prospect of much steeper capital increases under a 2023 proposal that would have required double-digit hikes in their reserve requirements. That earlier plan was ultimately scrapped.

Financial experts indicate that institutions heavily involved in trading activities, particularly Goldman Sachs and Morgan Stanley, may emerge as the primary beneficiaries of the revised regulations. This outcome is somewhat ironic, given that trading operations were initially the main focus of the “Basel III” rules that formed the foundation of Thursday’s regulatory overhaul.

Banking institutions will have a 90-day window to submit feedback on the comprehensive and technical proposal. Industry observers expect firms to advocate for additional reductions in capital requirements, which could translate to billions more in potential savings.

The current administration supports loosening capital restrictions, arguing such moves could stimulate lending activity and boost overall economic growth.

However, opponents argue these modifications will compromise financial system protections at a time when geopolitical tensions and private credit risks are escalating. Some major banks are already restricting lending while certain funds have limited customer withdrawals.

The proposed changes could create divisions within the banking industry, which had previously presented a united front against stricter regulations.

“Some will think they got worse treatment than others,” explained Ian Katz, managing director of Capital Alpha Partners. “They may feel like this other cohort or size of banks just got a better deal and have to stick up for themselves.”

Representatives from individual banks either declined to comment or were unavailable for immediate response. A Federal Reserve spokesperson, whose agency is spearheading the capital reform effort, also declined to provide comment.

The Federal Reserve’s latest draft represents a complete reversal from the 2023 proposal, which would have increased bank capital requirements by as much as 20%.

While the Basel regulations would raise large bank capital by 1.4%, this increase would be neutralized by modifications to the GSIB surcharge – an additional capital layer imposed on eight systemically important global U.S. banks.

One significant adjustment would lessen the impact of banks’ dependence on short-term wholesale funding when calculating the surcharge. Federal officials acknowledged this factor carried more weight in the 2023 calculations than originally planned.

This modification could particularly advantage Goldman Sachs and Morgan Stanley, as they rely much more heavily on short-term wholesale funding compared to their GSIB competitors, who maintain substantial deposit bases, according to analysts and banking industry sources.

“The purest winners are the trading-heavy institutions,” noted Michael Ashley Schulman, partner at Cerity Partners. “Cracks in the coalition may appear as the specific rule details get negotiated as different banks push hardest for most favorable treatment.”

Wall Street banking advocacy organizations, which have spearheaded opposition efforts, issued a measured response Thursday, describing the draft regulations as an “important step forward” while stating the industry “will carefully review the proposals and expect to provide feedback.”

Despite potential internal conflicts, analysts believe the overall changes will benefit the entire industry by freeing up funds for lending, particularly among large regional banks.

Capital requirements at major regional institutions such as PNC and Truist would decrease by 5.2%, while banks with assets below $100 billion would see their capital obligations drop by 7.8% under the proposed framework.

Morgan Stanley analysts noted earlier this month that large U.S. banks currently maintain approximately $175 billion in excess capital due to years of regulatory uncertainty. They could begin deploying these funds through increased lending, capital markets activities, and stock buybacks.

“I think that there’s been universal belief that this is a good thing for the industry,” said Christopher Marinac, director of research at Brean Capital.