Major Banks Rally as Fed Signals Softer Capital Rules
Reports suggest regulators are backing away from stringent 'Basel III endgame' proposals, easing investor concerns over profitability and lending capacity.
Shares of the largest U.S. banks surged in trading Tuesday following reports that the Federal Reserve is formalizing a plan to significantly scale back controversial capital requirements that have loomed over the sector for more than a year.
Major financial institutions saw broad gains on the news. JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), and Wells Fargo (NYSE: WFC) all climbed as investors priced in the prospect of a more lenient regulatory environment. The rally marks a potential turning point in a protracted battle between Wall Street and Washington over the so-called “Basel III endgame” rules.
The catalyst for the optimism was a Bloomberg report, later corroborated by other outlets, indicating that Fed officials are developing a revised proposal that would substantially reduce the capital hikes first proposed in July 2023. That initial plan, which suggested an aggregate capital increase of 16% for large banks and up to 19% for the biggest systemic institutions, was met with fierce resistance from the industry.
Bank executives have argued for months that the stringent requirements would make U.S. banks less competitive globally, restrain lending to the real economy, and ultimately harm consumers and businesses. JPMorgan CEO Jamie Dimon has been a particularly vocal critic, recently slamming the proposal's reliance on what he called “stupid calculations” and warning that his firm would be “compelled to act” and “fight back.”
Similarly, Bank of America CEO Brian Moynihan has quantified the trade-offs, stating that a 10% increase in capital requirements would translate into $160 billion in loans his bank could not extend to the market.
This unified and forceful pushback appears to have resonated with regulators. The Fed's stance has been softening for months, with officials signaling a willingness to revise the plan. In September, Fed Vice Chair for Supervision Michael Barr acknowledged the need for “broad and material revisions,” floating a new target that would roughly halve the initial capital increase to around 9%. The latest developments suggest the final figure could be even lower, with some analysts speculating about a nearly capital-neutral outcome.
According to reports from Reuters, the central bank has begun drafting a new risk-based capital rule that would be significantly less burdensome than the original proposal. This regulatory relief would free up billions of dollars on bank balance sheets, enhancing their flexibility to boost shareholder returns through dividends and share buybacks, as well as to increase lending activity.
While the financial industry is welcoming the shift, the new rules are not yet finalized. Fed Governor Michelle Bowman recently suggested that a formal re-proposal of the rules could be unveiled by early 2026. Investors and bank executives will be closely watching for the official draft to see the precise details and assess the ultimate impact on the industry’s profitability and the broader economy.