Bank investors bet on looser regulation under Trump. They are starting to see it

The Trump administration’s efforts to ease regulations on Wall Street’s biggest banks have taken a significant step forward with the Federal Reserve’s proposed changes to lower capital requirements for large U.S. banks. The proposed tweaks to the enhanced supplementary leverage ratio would allow banks like Goldman Sachs and Wells Fargo to lend more freely and increase their holdings of U.S. government bonds.

Under the new proposal, the enhanced supplementary leverage ratio would be applied on a bank-by-bank basis, depending on each firm’s mix of assets, rather than being set at a blanket level across all global systemically important banks. This move is seen as a proactive measure to address unintended consequences of bank regulation and build resilience in U.S. Treasury markets.

While the proposed changes are not expected to have a significant impact on financial institutions immediately, they signal a broader shift towards easing banking sector regulations under President Trump. Investors have responded positively, with bank stocks like Wells Fargo and Goldman Sachs experiencing a boost in the wake of the announcement.

The Fed’s Vice Chair for Supervision, Michelle Bowman, emphasized that the proposal is just the beginning of broader rollbacks on capital rules. Additional regulatory requirements under consideration include the surcharge imposed on global systemically important banks, which subjects them to more stringent capital requirements in times of financial crisis.

If implemented, the changes could allow banks to operate with smaller capital cushions, freeing up resources for activities such as boosting shareholder dividends or increasing lending. This could potentially drive up interest-based revenues and enable banks like Wells Fargo to expand their investment banking and wealth management divisions.

However, not everyone is in agreement with the proposed changes. Some, like Fed Governor Adrian Kugler, argue that reducing capital requirements for large banks could increase systemic risk without sufficient justification. Fed Governor Michael Barr also dissented, expressing concerns that the changes may not have the intended impact on Treasury market function.

The regulatory developments come amidst positive news for Goldman and Wells, with Goldman’s investment banking business seeing growth opportunities and Wells Fargo having its $1.95 trillion asset cap lifted by the Fed in June. Despite differing opinions on the potential impact of the proposed changes, the banking sector is poised for further evolution as regulatory reforms continue to unfold.