Deregulation in the US and UK could allow major banks to expand balance sheets by almost $2.9 trillion combined, giving Wall Street and British lenders a growing advantage over more tightly regulated European rivals.
Regulators in Washington and London have loosened capital rules for large banks, while several leading European lenders face stricter regulatory buffers that are expected to limit lending growth, trading activity and balance sheet flexibility.
Wall Street’s largest institutions, including JPMorgan Chase, Bank of America, Citigroup and Goldman Sachs, stand to benefit the most. Regulatory reforms could free enough capital capacity for those banks to expand their balance sheets by roughly $2.5 trillion, equivalent to adding another Citigroup-sized institution to the American banking system.
Global banking rules are increasingly diverging between the US, UK, EU and Switzerland. Regulators in the US and UK are moving toward lighter capital frameworks while authorities in Europe and Switzerland continue tightening safeguards introduced after the 2008 financial crisis.
US regulators have accelerated deregulation since Donald Trump became president last year, easing some of the rules introduced after the financial crisis that forced banks to maintain larger loss-absorbing buffers.
Research estimates the American reforms could release up to 14% of common equity tier one capital across major US lenders, opening roughly $2.6 trillion in additional balance sheet capacity for lending and capital markets activity.
In the UK, HSBC, Barclays and Standard Chartered are expected to benefit from lower regulatory burdens supporting hundreds of billions of dollars in additional asset growth. The three lenders have already expanded assets by roughly $200 billion during the past two quarters.
Lower capital constraints generally allow banks to commit more money to lending, trading, acquisitions and securities markets. Larger balance sheets can strengthen market share in investment banking and wholesale finance while increasing banks’ capacity to absorb government debt issuance.
Safeguards introduced after the 2008 crisis were designed to reduce systemic instability and limit the risk of taxpayer-funded rescues during future banking shocks. Banking executives and investors, however, have increasingly argued that some post-crisis restrictions reduced competitiveness and constrained lending growth.
European lenders are moving in the opposite direction. Banks including BNP Paribas, Deutsche Bank and ING face rising regulatory demands expected to reduce lending flexibility and slow future balance sheet expansion.
American banks have already continued gaining market share in wholesale banking activity, with US lenders increasing fixed income and equity trading revenues faster than many European rivals.
Goldman Sachs emerged as one of the biggest beneficiaries after cutting its core equity tier one capital ratio earlier this year while continuing to expand assets aggressively.
Swiss regulators are pursuing an even stricter approach. Proposed reforms affecting UBS could sharply increase the bank’s minimum capital requirements, intensifying tensions between Swiss authorities and the country’s largest lender.
Large American banks have also increased holdings of US Treasury securities sharply over the past year as deregulation expands balance sheet flexibility, strengthening banks’ ability to absorb rising government debt issuance.
Banks operating under lighter regulatory frameworks are gaining advantages in lending, trading and capital markets activity, increasing pressure on European policymakers to respond.
The widening regulatory gap is giving US and UK lenders more room to expand lending, trading and capital markets activity while European rivals remain under tighter constraints.