The United States is undertaking one of its most significant reversals of banking regulation in more than a decade, driven by Michelle Bowman, the Federal Reserve’s vice-chair of supervision and a long-time community banker from Kansas. Her push to loosen capital and supervisory rules marks a decisive shift away from the post-2008 philosophy that banks must hold substantially higher buffers to absorb potential losses. Researchers estimate the reforms could free up trillions of dollars in lending capacity, increasing profitability for US lenders and renewing their dominance in global markets, the Financial Times reported.
Bowman has argued that the financial landscape has changed dramatically since the crisis years and that many restrictions imposed after 2008 may now be stifling innovation. Her agenda includes easing leverage ratio requirements, revising stress tests and introducing a lighter approach to the final phase of the Basel III capital rules. While she avoids the term “deregulation”, preferring “modernisation”, the practical effect is clear: US banks will face less stringent constraints than they have for more than a decade.
Strong support from Wall Street
The response from major US banks has been enthusiastic. Many executives say the post-crisis tightening of rules pushed lending and trading activity into less regulated corners of finance, particularly private credit markets and hedge funds. Lower capital requirements, they argue, will allow banks to re-enter areas they ceded to non-bank competitors and boost returns to shareholders.
Some of the biggest beneficiaries are expected to be the largest Wall Street institutions. Many already have excess capital and now expect to redirect it into loan growth, share buybacks and acquisitions. The moves also align with broader White House objectives to encourage financial sector expansion and support economic growth.
Fears of higher risks and reduced resilience
Not everyone shares the optimism. Bowman’s predecessor, along with some regulators and credit analysts, has warned that loosening too many safeguards could reduce the banking sector’s resilience to future shocks. They note that it has been barely two years since a cluster of mid-sized US banks failed, raising questions about liquidity risk, uninsured deposits and supervisory shortfalls.
Several critics point to the long historical pattern in which regulatory tightening after crises is gradually eroded during calmer periods, often with damaging consequences. The concern is that lower capital, reduced stress-test pressure and fewer supervisory constraints may encourage greater risk-taking across the financial system.
A global ripple effect
The impact of US deregulation extends far beyond American borders. European and British banks are watching closely as the US moves first on leverage rules and prepares its approach to Basel III. In contrast, the UK and EU have delayed their own implementation while waiting to see how Washington proceeds. Many policymakers in Europe fear a widening divergence: if US
banks are allowed to operate with lighter capital requirements while European institutions remain bound by stricter standards, competitiveness gaps could widen further.
Some European lenders are already publicly questioning whether they can remain globally competitive under higher capital burdens. A few have even floated the possibility of relocating to the US, where regulation may become more favourable. British regulators appear more open to easing leverage ratios, while the European Central Bank has signalled that major cuts to capital requirements are unlikely.
The risk of a regulatory race
The growing divergence has led to concern that the global financial system could again enter a regulatory race to the bottom, with jurisdictions compelled to lower standards to retain business. This dynamic played a significant role in the decades leading up to the 2008 crisis and remains a sensitive issue among supervisors.
Still, others argue that not all easing is inherently risky and that certain post-crisis measures were overly conservative. The challenge now is striking the balance between competitiveness, innovation and stability.
A turning point for global banking
As the US dismantles parts of its post-crisis rulebook, financial regulators worldwide are reassessing their own frameworks. Whether they follow Washington’s lead or maintain stricter standards will determine the contours of global finance for years to come. What is clear is that the direction set in Washington is already reshaping the global debate — and the consequences will extend well beyond the US banking system.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
