US and UK Lower Capital Requirements for Banks While EU Raises Them

Banks in the United States and the United Kingdom are gaining additional asset capacity due to bank deregulation, while those in the European Union and Switzerland face increasing capital requirements, according to Alvarez & Marsal.

For U.S. banks, deregulation could unlock $2.5 trillion in additional asset capacity and support a 6% uplift in return on tangible common equity (ROTCE), the company said in the May second edition of its Bank Deregulation Primer.

These changes could be enabled by deregulation releasing 160 basis points of Common Equity Tier 1 (CET1) capital together with 113 basis points of leverage relief, according to the report.

“What we are seeing now is U.S. banks using the deregulatory agenda to their competitive advantage,” Fernando de la Mora, co-head of Alvarez & Marsal’s EMEA Financial Services practice, said in a Tuesday (May 26) announcement of the report. “U.S. banks are already deploying substantial amounts of newly available capital into lending growth, acquisitions, shareholder distributions and technology investment.”

In the U.K., banks will gain $400 billion in additional asset capacity if regulators provide 75 basis points of CET1 relief, as they are expected to do. In addition, under the Bank of England’s competitiveness agenda, further reforms to leverage and buffers are being considered, according to the report.

In contrast, EU banks will see capital requirements increase under Capital Requirements Regulation 3 (CRR3). Their estimated CET1 requirements will rise by 109 basis points, the report said.

Switzerland is considering proposed reforms that would increase CET1 requirements for the country’s sole Global Systemically Important Bank (G-SIB) by as much as 350 basis points, per the report.

“The divergence between regulatory regimes is becoming increasingly visible in profitability, market share and valuations,” de la Mora said in the announcement of the report. “U.S. banks are benefiting from lower capital requirements far more quickly than expected, while Europe remains focused on resilience.”

When the U.S. federal bank regulators announced in March that they were seeking comment on three proposals that they said would streamline capital requirements for banks of all sizes, Comptroller of the Currency Jonathan V. Gould said in a statement: “This increases lending capacity and gives banks more runway to support their communities and customers.”