Paving the Way for Balance Sheet Reduction, US Regulators Significantly Relax Bank Capital Requirements

On March 19, the three major regulatory agencies—the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC)—jointly proposed a new round of banking capital rule reforms aimed at easing capital constraints on the U.S. banking system. Specific measures include: first, fundamentally revising the controversial Basel III final rules to eliminate some double counting issues and improve the accuracy of risk weights; second, adjusting the G-SIB surcharge to link it with nominal GDP and reducing the buffer capital requirement (previously 50 basis points, now lowered to 10 basis points); third, relaxing the supplementary leverage ratio (SLR) constraints; and fourth, reforming the stress testing mechanism to increase transparency and reduce uncertainty in capital requirements.

This round of reforms, after incorporating Basel III final rules, stress testing reforms, and adjustments to the G-SIB surcharge, is expected to reduce the minimum Common Equity Tier 1 (CET1) capital requirements for large U.S. banks (assets over $700 billion) by approximately 4.8%. Medium-sized banks (assets between $100 billion and $700 billion) could see a reduction of 5.2%, and small banks (assets under $100 billion) could experience a decrease of up to 7.8%. When combined with previously implemented stress testing reforms and leverage ratio adjustments, the capital release for large banks could reach hundreds of billions of dollars.

From a policy perspective, this round of reforms will be the largest easing of capital rules since the 2008 financial crisis. In addition to direct modifications to capital rules, regulators are also shifting their policy focus toward liquidity requirements. Vice Chair for Supervision at the Federal Reserve, Michael Barr, and U.S. Treasury Secretary Janet Yellen have publicly advocated for adjusting key liquidity rules (such as LCR and ILST), proposing to include banks’ funding obtained through the Federal Reserve discount window and other channels into high-quality liquid assets (HQLA), thereby reducing banks’ over-reliance on traditional liquidity buffers.

Easing regulation and paving the way for balance sheet reduction

The immediate effect of this policy is to free up bank capital, promoting credit expansion. Wall Street banks will be able to release tens of billions of dollars to expand lending, increase stock buybacks, and boost shareholder dividends. In this process, traditional commercial banks and ultra-large regional banks will be the primary beneficiaries. The proposal significantly lowers risk weights for residential mortgages and corporate loans—for example, the risk-weighted assets (RWA) for residential mortgages at small and medium-sized banks are expected to decrease by about 30% to 31%. This structural tilt will markedly enhance the willingness and capacity of traditional lending institutions to expand their balance sheets.