Trump is loosening America’s grip on its banks
The United States appears close to finalizing a new set of prudential rules for its banks that could trigger a global reassessment of tough capital and adequacy rules imposed after the global banking system’s near-death experience during the global financial crisis.
The US may be at the epicenter of this crisis, as the meltdown in the US subprime mortgage market triggers a global wave of banking stress, but the Trump administration has committed to rolling back or at least easing some of the key regulations developed by the global standard-setter Basel Committee on Banking Supervision.
Late last week, the Federal Deposit Insurance Corporation and the Comptroller of the Currency submitted proposals for new rules on the “Standardized Approach to Regulatory Capital and Risk-Weighted Assets” to the U.S. Office of Management and Budget.
Although the agencies did not offer any details on their proposals, the Trump administration has made clear that it wants to lower capital and liquidity requirements and move away from the standard approach to risk-weighted bank assets that has increasingly been adopted in the United States since the crisis.
On Monday, Michelle Bowman, vice chair of the Federal Reserve Board of Governors and the Fed official who oversees banks and their regulations, announced a new approach, moving from a standardized approach to regulatory capital requirements for mortgage loans to one that takes into account the “risk sensitivity” of mortgage loans.
Late last year, U.S. regulators lowered leverage requirements for major U.S. banks, reducing the amount of capital those banks must hold by about $US213 billion ($301 billion).
The “additional leverage ratio” required the largest banks considered to be of global systemically important to hold capital equivalent to five percent of their total assets, regardless of the riskiness of those assets. The rate has been reduced to a range of 3.5 percent to 4.5 percent.
The new rules are designed to give banks more flexibility, lower funding costs, hold more U.S. Treasuries and lend more, as well as recommending that banks be allowed to reduce the amount of subordinated debt they need to cover losses in a crisis.
Thus, the impetus for its approach to the prudential framework for the US’s major banks is clear. They want to reduce the amount of capital they need to hold in order to support the bond market, which is occasionally creaking under the pressure of government debt created by the administration, and to lend more to stimulate the economy.
Following the 2023 regional banking crisis in which several small banks collapsed, the Biden administration wanted to toughen prudential requirements but did not act before Biden lost office. Now the Trump administration wants to loosen them.
The new regulatory environment is expected to free up trillions of dollars of major bank balance sheet capacity, whether for additional lending, capital markets activities, share buybacks and dividends.
With the interest rate cuts that Donald Trump wants from Kevin Warsh, his candidate for the next Fed chair, the massive tax cuts in the Big Beautiful Bill, the downturn in consumer finances and environmental protections, and continued budget deficits approaching $2 trillion a year, the administration hopes to accelerate U.S. growth. Reduced bank capital requirements will contribute to growth.
US Treasury Secretary Scott Bessent took another step forward in announcing the administration’s easing of the regulatory burden on banks.
Aside from his insistence that the Basel regime will shave tens of basis points off the $1 trillion annual cost of government debt by increasing banks’ treasury purchasing capacity, he believes the Basel regime prevents banks from competing with non-banks.
Before the 2008 crisis, most bank activities, whether supporting the Treasury bond market or making leveraged loans, are now undertaken by nonbanks that are less regulated or unregulated, commonly described as the “shadow banking” sector.
The US’s prudential framework is at the conservative end of the spectrum of global banking regulations, due to the severity of 2008 and having more systemically important banks globally. Its banks have more capital relative to their asset base than most of their international peers.
Therefore, there is an argument in favor of slightly reducing the requirements that restrict their ability to lend and compete.
But the other side of the argument is that any reduction in the levels of capital they hold, or in how the risks in their asset bases are calculated, increases the levels of risk in the US banking system.
The 2008 crisis is now a distant memory for politicians and bank regulators, and rules restricting banks’ ability to lend or support capital market activity have been significantly challenged.
Perhaps this is borderline, but more broadly the increasing (albeit peripheral) exposure to the boom in data centers and AI, the growing links between banks and the private credit sector (where problems continue to surface) and the impact of Trump’s tariffs on small businesses in the US mean that there are latent risks within the US system.
Given the hardship of low- and middle-income households in the United States, even changes to mortgage risk weightings can result in deterioration in credit quality.
There is also a demonstration provided by the collapse of Silicon Valley Bank in March 2023 that holding so-called risk-free US Treasury bonds is not actually risk-free.
This bank and others collapsed because, responding to a run, it was forced to sell government bonds rather than hold them to maturity. Significant losses crystallized in this process.
Any deregulation of financial systems creates a certain level of increased risk. The magnitude of this increase is often known only in hindsight.
U.S. changes to bank regulations are being watched closely by other banking regulators who worry their banks will lose competitiveness if the previous broad consensus on the prudential approach crumbles.
Last month, the European Commission began reviewing the competitiveness of its banks relative to international rivals; This could lead to some simplification of complex rules and perhaps some weakening of capital requirements if Europeans want their banks to remain competitive with their U.S. counterparts.
The 2008 crisis is now a distant memory for politicians and bank regulators, and rules restricting banks’ ability to lend or support capital market activity have been significantly challenged.
It’s probably not a bad thing that regulators in the US and elsewhere are making some concessions to ensure their big banks are crisis-proof.
However, the significant weakening and fragmentation of global prudential regulation of banks and the emergence of regulatory arbitrage and competition among local banking regulators would be an unwelcome and potentially risk-increasing development. Nobody wants another financial crisis.
The Business Briefing newsletter delivers big stories, exclusive news and expert insights. Sign up to receive it every weekday morning.
Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and deputy editor of the Business Spectator website and associate editor and senior columnist at The Australian.Connect via email.
