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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a former chair of the US Federal Deposit Insurance Corporation and author of the book ‘How Not to Lose a Million Dollars’
Financial regulators are known for their poor timing. They tend to ease regulations when economies are strong and asset prices are booming, while tightening rules when the economy struggles and credit is in short supply. It’s happening again today.
Under the current Trump administration, US regulators have systematically weakened reforms put in place after the 2008 financial crisis. In the name of expanding credit — surely the most dangerous words in finance — they have curtailed the powers of bank examiners and taken multiple steps to reduce the cushions of equity capital required of banks to absorb losses and keep them solvent and lending in a downturn.
While there have been some positive proposals in areas — for instance, increasing capital required against unused credit lines — they mostly reflect industry demands for deregulation. Regulators have already eased stress tests; reduced requirements for the amount of ”bail-in” debt that converts to equity in a crisis; raised caps on big bank leverage; and, most recently, proposed changes to risk-based capital requirements and the surcharges that apply to the globally systemically important banks, aka “G-SIBs”.
But the credit cycle is turning, asset valuations are elevated and rising inflation is putting pressure on both business and household borrowers, to say nothing of geopolitical uncertainty. This is precisely the wrong time to weaken the banking system’s resiliency.
The US economy is not credit-constrained. If anything, too much credit has been flowing to borrowers who cannot repay it. Big banks complain that capital rules limit their ability to lend to households and businesses. Yet, they paid out a record $140bn in dividends and buybacks in 2025, and another $33bn last quarter on buybacks.
Lower bank capital requirements will probably lead to more shareholder distributions and/or acquisitions, not new loans. In the unlikely event that banks do decide to increase lending, it will be potentially inflationary and destabilising as they seek out riskier borrowers to deploy about $2tn of expanded balance sheet capacity that regulators are giving them.
Regulators say they want to help banks compete with non-bank financial institutions, particularly private credit funds. Private credit has grown dramatically since 2008. This is not because capital rules put banks at a competitive disadvantage. Private credit funds have significantly higher levels of equity capital than do banks. They have grown partly because banks have lent hundreds of billions to them, providing more than half of their debt financing.
Given the current stress in private credit, regulators should be strengthening bank capital requirements against these exposures. Instead, the proposed rules reduce the capital needed for complex securitisation structures commonly used by banks to finance private credit. They would also lower the required capital when banks make their own risky corporate loans if they internally rate them to be investment grade.
Regulators say they are trying to simplify post-crisis rules, but they are placing more reliance on complex “risk-based measures”, which large banks can manipulate by changing their asset mix and internal models. At the same time, they have weakened simpler, more transparent leverage ratios, and propose to eliminate “output floors” that limit big banks’ use of models in setting capital. Similarly, they simply ignore the “Collins Amendment”, a Dodd-Frank Act prohibition on setting big bank capital requirements that are weaker than the much simpler standards applicable to smaller institutions.
While regulators claim their current proposals will only modestly reduce capital, they have not assessed the cumulative impact of all the changes. Consulting firm Alvarez & Marsal estimates a capital release for banks of 14 per cent. This, when a Kansas City Federal Reserve analysis shows the G-SIBs’ leverage ratio has already fallen to a 15-year low. It is now only 6.81 per cent, well below levels at regional and community banks.
Trump regulators are right that bank regulation has become too cumbersome, complex and process-laden. But thoughtful, fundamental reform is needed, not an industry checklist. Big banks complain that US capital rules are tougher than those in Europe. Yes, and those rules have helped US banks to grow market share, while commanding significantly higher valuations than their European competitors. They and their regulators should want to keep that advantage during the next inevitable downturn.
