Article Content
MarketFlick Insights
At a glance
- •U.S. banks used public arguments to lobby for regulatory relief, masking a core conflict between capital buffers and shareholder returns.
- •Relaxed capital rules have coincided with a sharp rise in tradingrelated assets and credit provided to nondeposit financial intermediaries.
- •A growing share of bank financing flows to Private Credit funds and hedge funds, raising collateral and liquidity concerns.
- •Regulatory rollbacks and proposed reclassifications reduce capital costs and encourage higher leverage across the financial system.
- •The combination of weakened buffers and more aggressive risktaking increases the probability of systemic stress during market downturns.
Market Analysis
The biggest U.S. banks have spent the last years lobbying hard for lighter capital rules, and their public arguments have often been misleading. After the Federal Reserve proposed significantly tougher capital standards in 2023, major institutions warned loudly that higher buffers would choke off lending to businesses and consumers and thus slow growth. That message framed capital requirements as a straight choice between bank resilience and credit availability a claim that obscured the real trade-off: capital versus shareholder returns.
Banks have pushed for lower capital requirements largely so they can boost dividends and step up share buybacks. Those actions lift stock prices, reward management and feed record equity-linked bonuses. For regulators and politicians the messaging was often naïve at best. Michael Hsu, the former acting chairman of the OCC, noted between 2021 and 2025 that banks could repurpose capital for uses other than buybacks and payouts a statement that was technically true but politically undercut by banks behaviors.
Now, under an administration that has rolled back several post2020 regulatory initiatives, the consequences are becoming clearer. Excess capital accumulated during the prior tightening cycle is being deployed rapidly into share repurchases. A substantial portion of remaining capacity is not flowing back into traditional lending to households and businesses but into trading and financing activities that support market-facing desks. The largest U.S. banks reported about a 20% yearoveryear rise in assets tied to trading in the most recent quarter, and credit extended from trading books to hedge funds and other nondeposit intermediaries has surged in some cases rising by a quarter since early 2025.
The economics are straightforward: more lending to other financial intermediaries increases trading volumes and market volatility, which boosts profits in trading divisions and generates crosssell fee opportunities. But a material share of these counterparties are Private Credit funds that secure bank loans against portfolio assets whose valuation and liquidity can be unstable. That raises the prospect of fragile collateral and sudden repricing in stress scenarios.
Regulatory rollbacks have also eased several leverage constraints that previously limited how aggressively banks could underwrite risky transactions. Plans to reclassify loans to certain lenders so they are treated similarly to securitizations would further reduce capital costs for these exposures. Combined with looser capital floors, these shifts encourage higher leverage across the financial system exactly the pattern that can turn market dislocations into systemic crises.
Conclusion
Wall Street is already using relaxed capital rules to crank up leverage across markets. When banks shift scarce capital from supporting ordinary lending into buybacks, trading and financing of opaque private-credit structures, they increase upside in calm markets and magnify downside when sentiment turns. That combination weakened buffers plus more aggressive risktaking is a dangerous cocktail for financial stability and for the broader economy. Policymakers should be mindful that the choice is not simply between supporting lending and protecting bank profits: it is about ensuring the resilience of a system that the public ultimately underwrites.