Fed Eases Bank Capital Rules, Sparks Profit Outlook for Big Banks

The Federal Reserve plans to meet with chief financial officers of major U.S. banks next month to discuss its updated approach to implementing international capital standards, JPMorgan Chase's Vice Chairman Daniel Pinto said at a conference in Frankfurt. According to reports, the meeting comes after regulators reached a final agreement on a plan to ease capital requirements for the nation's largest banks, which has been submitted to the White House for review. The proposed changes, part of the Basel III framework, aim to reduce the burden on banks like JPMorgan, Bank of America, and Goldman Sachs by recalibrating the capital buffer rules.

Under the proposed reform, the enhanced supplementary leverage ratio (SLR)—a key component of Basel III that dictates capital reserves—would be adjusted to reduce the amount of capital large banks must hold relative to their assets. According to the revised plan, the revised plan would replace the previous fixed 2% buffer with a more flexible approach tied to each bank's systemic importance. The final proposal is expected to be adopted within weeks, subject to White House approval.

The plan has drawn mixed reactions from within the Fed itself. While Vice Chair for Supervision Michelle Bowman supports the changes as a step toward stabilizing Treasury markets, Fed Governor Michael Barr has raised concerns about the reduced capital buffers, arguing they could weaken the resilience of the U.S. banking system. Critics of the plan worry that easing capital requirements could expose the financial system to unnecessary risks during periods of market stress.

Why the Change Was Pushed

The revised capital framework has been a long-standing demand from the banking industry, which argues that the current rules—established after the 2008 financial crisis—impose unnecessary constraints on financial activities. Banks have long contended that the requirement to hold capital against all assets, including low-risk U.S. Treasuries, limits their ability to support key markets during volatile periods according to industry analysis. For example, the recent Trump-era tariffs and other economic shocks have highlighted the need for banks to maintain flexibility in their operations, particularly in Treasury trading and lending according to regulatory sources.

The banks also see the changes as an opportunity to boost profitability by freeing up capital for business expansion and investment. JPMorgan has suggested that the updated rules will help it and its peers maintain competitive advantages in global markets. Bank of America and Goldman Sachs are expected to benefit similarly, according to industry analysts.

Risks and Uncertainties

Despite the potential benefits, the proposal has not been without controversy. Some regulators and outside experts have raised concerns about the risks associated with reducing capital buffers, particularly during periods of financial stress. Fed Governor Michael Barr has been a vocal opponent, warning that the revised rules could make the banking system more vulnerable to shocks. Others argue that the Basel III framework was designed to ensure resilience, and easing it too quickly could undermine the stability achieved in the aftermath of the 2008 crisis.

The final approval of the plan depends on the White House's review, and while regulators are optimistic about a quick adoption, the process could face delays if concerns about financial stability persist. For now, the focus remains on how the new rules will be implemented and whether they will provide the intended flexibility without introducing new risks to the broader financial system according to financial analysts.

What This Means for Investors

The easing of capital requirements could have a direct impact on the financial performance of major U.S. banks. Institutions like JPMorgan Chase and Goldman Sachs are likely to see increased profitability from the additional flexibility in capital use according to market forecasts. Investors will be watching closely for signs of how banks will deploy the freed-up capital—whether through expanded lending, increased market participation, or shareholder returns.

Meanwhile, the broader market may see indirect benefits from the changes, particularly in Treasury markets, which rely heavily on large banks to function efficiently. Vice Chair Michelle Bowman has noted that if the reforms help stabilize these markets during times of volatility, it could reduce the need for the Fed to step in during stress events. However, if the changes lead to unintended consequences—such as reduced risk management capabilities—investors may see increased volatility in financial markets.

As the final approval process moves forward, the focus will be on how regulators and banks balance the need for flexibility with the imperative of maintaining financial stability. The outcome of this debate will shape not only the capital rules for major banks but also the broader landscape of U.S. financial policy for years to come.