Get ready: Bank deregulation now has Washington’s support

• In 2017, global regulators introduced the Basel III Endgame to tie up loose ends of the Basel III framework, which was initially implemented in response to the Global Financial Crisis. The Endgame initiative was strongly supported by European regulators, but its implementation was delayed by COVID-19.
• Following the banking crisis of March 2023, the United States took the Endgame to the next level by proposing rules that would increase capital requirements by ~20%. U.S. banks pushed back on the proposal, arguing it could constrain lending capacity while failing to address the liquidity mismanagement that contributed to recent bank failures. Despite the opposition, regulatory uncertainty prompted banks to proactively build capital.
• The tone around capital requirements shifted in September 2024, when former Federal Reserve Vice Chair for Supervision Michael Barr in a speech noted the potential for significantly scaling back the proposal—possibly by as much as half. Further signals from the Fed, the nominated Vice Chair for Supervision and the Trump administration have reinforced the expectation that the final rules will likely be capital neutral, with clarity expected in the first quarter of 2026.
• In addition to this Basel III Endgame clarity, U.S. big banks’ capital requirements will be lower next year, after the June 27, 2025, stress tests; and regulators are also considering changes to the GSIB surcharge (imposed on Global Systemically Important Banks to reduce systemic risk in the financial system), which would further bring down capital requirements. The takeaway: Banks may have even more capital than they need.

• While the near-term outlook for loan growth remains murky, we see catalysts that could drive an eventual pickup in loan growth, specifically, Treasury Secretary Scott Bessent’s push to re-privatize the economy and a normalization in Commercial & Industrial (C&I) lending. Bessent recently emphasized the administration’s commitment to “responsibly deregulating the financial sector to accelerate what I call the re-privatization of the economy.”
• This initiative is focused on reducing government spending and getting the budget deficit to 3% of GDP, while achieving 3% real growth. To reach this growth and make up for the lower fiscal spending, Bessent emphasizes shifting growth into the private sector, funded by banks. Whether or not this initiative will be successful, the first step of the plan is clear: Tight regulation should be eased. Specifically, reducing capital requirements could enhance the prospects for loan growth by allowing banks to hold less capital against specific loans. This could increase banks’ willingness to lend, as holding capital is a cost for banks. For example, cash stays on the balance sheet rather than earning a greater return on loans.
• Deregulation could thus decrease the cost of loans for borrowers, which could stimulate demand. In the JPMorganChase 2024 annual report, Jamie Dimon said, “Streamlining loan origination and servicing standards, reducing capital requirements and simplifying securitization rules would reduce the cost of mortgages without making them riskier. These simple reforms could lower the cost of mortgages by 70–80 basis points.”

Preferred issuance could be tempered by more lenient Supplementary Leverage Ratio (SLR) requirements, which could lower issuance needs and incentive calls. This could lead to a contraction or below-average net issuance within the preferred market.

• Preferred stock enables banks to satisfy a crucial regulatory measure—the SLR, which is essentially Tier 1 capital divided by assets.² Assets in the denominator are NOT adjusted for the risk. This means cash-like assets are fully counted in the SLR denominator, but have 0% weight in the Tier 1 ratio.³
• In June 2025, regulators proposed reducing SLR requirements from a flat 5% to a range of 3.4%–4.3%. Why? Because when assets in the denominator grow, even from lower risk assets such as cash, banks become constrained by the SLR and have limited capacity to facilitate Treasury trades, straining liquidity in the system. Regulators want SLR requirements to be a backstop, not a binding constraint.
• While banks already have large surpluses in Tier 1 relative to the requirements, banks have been quick to issue preferreds in times when SLRs are constrained, as in 2021 when banks’ cash at the Fed and Treasuries ballooned on the back of COVID-era facilities. As most banks have ample excess Tier 1 capital relative to SLR requirements, surpluses would likely grow further on reforms. Banks could call or issue fewer preferreds to reduce this surplus, which would not adversely affect other ratios, such as the CET1 ratio, which most banks are closer to breaching.

• Despite tepid banking M&A in recent years, we expect consolidation among the 4,500 U.S. banks, given the cost synergies, scale for compliance and technology, cyber demands and geographic diversification, among other potential benefits.
• Bank M&A has been tepid in recent years, given challenges related to regulations, elevated interest rates and unrealized losses on securities. Specifically, there were just 32 banking deals in 2024 with $16.2 billion in deal value. This compares to the 2000–2020 average run rate of 80 deals per year with an average $35 billion in deal value.⁴
• The Biden administration took steps to limit bank consolidation, issuing a 2021 executive order that encouraged regulators to scrutinize excessive concentration, and in September 2024, the FDIC, DOJ and OCC finalized more stringent rules on banking M&A. Trump-appointee Travis Hill quickly proposed rolling back these rules.
• Already this year we have seen examples of bank consolidation, with the approval of the $35 billion Capital One and Discover merger, and the proposed $8.6 billion Pinnacle Financial Partners and Synovus deal.

• Costly exercises, such as the bank stress tests and living wills, may also be simplified, and a less heavy-handed approach from key regulators may result in lower penalties and settlements. Further, steadily rising legal and compliance costs have fueled upward pressure on operating expenses for banks, which may reverse on deregulation. In fact, Bloomberg recently reported that paperwork hours for financial regulations increased by 51 million hours since 2008 to 425 million hours, and further noted that this equates to 26,500 full-time workers.

We can help you evaluate the risks

The financial sector is vulnerable to wide-ranging risks and vulnerabilities:

• Macroeconomic and geopolitical uncertainties, such as tariffs, immigration and conflicts, are increasing risks to the global economic outlook. Slower GDP growth could negatively impact financials, due to reduced loan growth. However, potential interest rate cuts by the Fed might lower deposit costs. Despite regulatory easing, bank M&A faces challenges, such as high valuations and unrealized losses on securities and loans, which may deter acquisitions.
• In the commercial real estate (CRE) sector, especially office CRE, risks persist. While currently manageable, any market shock could significantly impact book values. For now, banks have been decreasing exposure and increasing reserves. Adjusted CRE⁵ as a percentage of CET1 has decreased from 93% to 83% among the top 35 banks.
• Securities losses also erode the quality of bank capital. This could be exacerbated if rates increase.
• Preferreds’ technicals could be supported by deregulation; a lower capital buffer also has negative implications from a credit perspective, given a lower CET1 cushion below the preferreds. Nevertheless, this is starting from a very strong base, with historically high CET1 ratios and low loans to deposits.

Your J.P. Morgan team can help you evaluate the market and help guide your investment decisions.