US and UK Cut Bank Capital Rules While EU Tightens Regulations

Banking regulators on opposite sides of the Atlantic are moving in sharply different directions on capital rules, creating a growing divide in how much balance sheet capacity lenders can deploy.

American and British banks are set to gain substantial room for new lending and shareholder returns as regulators ease requirements, while their counterparts in the European Union and Switzerland confront tighter standards, according to analysis from Alvarez & Marsal.

The consultancy estimates that American lenders could unlock $2.5 trillion in additional asset capacity while boosting return on tangible common equity by 6% under the evolving regulatory framework.

That expansion would come from releasing 160 basis points of Common Equity Tier 1 capital alongside 113 basis points of leverage relief, the firm said in the May edition of its Bank Deregulation Primer.

What we are seeing now is U.S. banks using the deregulatory agenda to their competitive advantage. U.S. banks are already deploying substantial amounts of newly available capital into lending growth, acquisitions, shareholder distributions and technology investment.

Fernando de la Mora, co-head of the firm's EMEA Financial Services practice, said in an announcement Tuesday.

British banks stand to gain $400 billion in additional asset capacity if the Bank of England delivers an anticipated 75 basis points of CET1 relief.

The central bank is also weighing further reforms to leverage ratios and buffer requirements as part of its competitiveness agenda, according to the report.

Meanwhile, European Union banks will see capital requirements climb under Capital Requirements Regulation 3. The new framework is projected to increase their CET1 requirements by 109 basis points.

Switzerland is considering even more dramatic changes. Proposed reforms targeting the country's sole Global Systemically Important Bank could raise CET1 requirements by as much as 350 basis points.

The divergence between regulatory regimes is becoming increasingly visible in profitability, market share and valuations. U.S. banks are benefiting from lower capital requirements far more quickly than expected, while Europe remains focused on resilience.

de la Mora said.

The shift comes as American federal bank regulators advance proposals they say would streamline capital requirements across institutions of all sizes.

When the agencies announced the initiative in March and opened it for public comment, Comptroller of the Currency Jonathan V. Gould framed the changes as a way to expand lending.

This increases lending capacity and gives banks more runway to support their communities and customers.

Gould said in a statement at the time.