Wall Street Pushes for Deregulation in Banking: Who Bears the Risk?

Prominent Wall Street financial institutions are collectively petitioning U.S. federal regulators to significantly loosen Basel III capital requirements. Groups such as the Bank Policy Institute, American Bankers Association, Financial Services Forum, U.S. Chamber of Commerce, and Consumer Bankers Association are specifically advocating for a revision of market risk rules. These demands risk weakening the buffers against potential financial shocks by reducing the capital banks are required to set aside against their risk-weighted assets.

Key industry demands include slashing operational risk capital by capping the Business Indicator coefficient at a flat 12% instead of the tiered 12/15/18% structure proposed by regulators. According to banks' own data, this change could strip $272 billion from operational risk-weighted assets, translating to approximately $27 billion less capital to absorb failures like cyber breaches, fraud, or rogue trading incidents. Furthermore, banks argue that the Fundamental Review of the Trading Book and the Federal Reserve’s Global Market Shock stress test double-count tail risks, resulting in capital requirements exceeding 'actual economic exposure.' Looser credit risk definitions, lower risk weights on mortgage servicing assets, and an implementation deadline no earlier than January 2028 are also among their significant requests.

Eight major U.S. banks have reportedly stated that the new Basel capital requirements could increase capital for their trading desks by 30% to 89%, potentially threatening liquidity in Treasury markets. This has led to additional calls for regulatory changes, such as the removal of a requirement to hold capital against unused credit card facilities and further adjustments to soften the effect of the surcharge applied to globally systemic banks (G-SIB surcharge). However, regulators had already released revised proposals in March 2026, aimed at lowering the overall capital burden on large banks by approximately 4.8% to 5%. Federal Reserve Governor Michael Barr has warned that deregulation might provide a short-term boost to lending and profits but could increase the financial system's vulnerability and crisis risk in the long run. Barr emphasized that these proposals would reduce aggregate capital requirements for the largest banks by 6%, or about $60 billion.

These developments could have significant implications for financial markets. Credit rating agencies like Moody's caution that lower capital requirements might incentivize banks to increase shareholder payouts, take on more risk, or operate with thinner capital cushions, rather than genuinely strengthening their balance sheets. If regulators concede to these demands, banks may reduce their market-making activities in Treasuries and other fixed-income products. This could lead to wider bid-ask spreads, less depth in order books, and increased volatility during stress periods. Past events, such as the 2008 global financial crisis, the 2020 Treasury market dysfunction, and the 2023 regional bank failures, have demonstrated that tail risks are routinely underestimated.

This lobbying effort is part of a broader trend towards easing banking regulations since the 2008 financial crisis. During the Trump administration, Treasury Secretary Scott Bessent spearheaded efforts to relax bank rules, framing deregulation as a cornerstone of economic strategy. Regulations like Basel III, implemented post-crisis, aimed to make banks safer and reduce the burden on taxpayers during crises. Since the Federal Deposit Insurance Corporation's (FDIC) Deposit Insurance Fund (DIF) is ultimately backstopped by Congressional appropriation (taxpayer money) in a systemic crisis, any relaxation of capital requirements could increase the likelihood of future bank failures being borne by the public.

Analysts and market participants anticipate that this deregulatory trend could free up billions of dollars in excess capital for banks, which could then be deployed into loan growth, share buybacks, and dividends. Some banks project that risk-weighted assets could decline by 6% to 8%, potentially boosting their Common Equity Tier 1 (CET1) ratios by 70 to 100 basis points. However, this situation re-emphasizes the delicate balance between the resilience of the financial system and the profitability of the banking sector. Regulators are expected to find a balance that protects the interests of depositors and taxpayers while also considering the competitiveness of banks.