Bank Regulations Are Getting Tougher. Wall Street Isn’t Surprised.

A passerby in San Francisco stops to read a posted announcement from the FDIC about the seizure of First Republic Bank and its sale to JPMorgan Chase.

Justin Sullivan/Getty Images

While stiffer capital requirements are coming for a large group of banks as U.S. regulators look to maintain the safety of the financial system, bank investors are taking the news in stride even as they examine how the effects could play out.

The largest U.S. banks are expected to have to boost their capital levels by 20%, while smaller banks with assets of at least $100 billion—which had historically been largely immune from more stringent regulation—may also face stricter capital requirements, a person familiar with the expected new rules told Barron’s.

It is expected that the new requirements could be announced by U.S. regulators as early as this month. They would begin to be implemented in 2025.

Representatives from the Federal Reserve and the Federal Deposit Insurance Corp. declined to comment. News of the higher capital requirements were previously reported by The Wall Street Journal and Bloomberg.

The harsher capital requirements are part of a larger international banking framework called Basel III, which has been in the works for years in response to the global financial crisis of 2008-09. But rolling out the rules and extending them to smaller institutions has taken on greater urgency over the past three months following the failures of Silicon Valley Bank,

Signature Bank


First Republic Bank

Wall Street didn’t seem too perturbed by the news, although the changing requirements are likely to have significant effects. Bank executives from

JPMorgan Chase

(ticker: JPM) and


(C) told investors in recent weeks that they were bracing for the new standards to be released. And back in December 2021, Randal Quarles, the Federal Reserve’s vice chair for supervision at the time, spoke about the implementation of Basel III in the wake of the pandemic.

“The experience of the Covid event has made clear that capital requirements in the U.S. are ample—yet, other things being equal, implementing the remaining elements of Basel III could result in a material increase in capital levels, perhaps up to 20% for our largest holding companies,” Quarles said in his final speech in the role.

With much of the news largely telegraphed by banks and regulators, it isn’t surprising that bank stocks lagged behind the broader market only slightly on Monday. The

KBW Nasdaq Bank

Index (BKX) was off by 1.1% in Monday’s trading while the

SPDR S&P Regional Banking ETF

(KRE) slid 2.6%. The

S&P 500

was off by 0.2%.

But even with Monday’s muted response to reports of the new rules, it is expected that the new regulatory regime will have effects on the banking sector—both direct and indirect. Traditional lenders may be less eager to lend to households and businesses for fear of having to maintain higher capital levels. That would be a drag on bank profitability and could also have spillover effects. Businesses could either be shut out from getting loans or would have to turn to the so-called “shadow banking” sector for financing

“Banking is a tough business to be in because private equity is doing similar things with less constraints,” said Keith Noreika, a former acting comptroller of the currency. He now serves as executive vice president and chairman of the Banking Supervision & Regulation Group at Patomak Global Partners, a financial consultancy.

“Regulators have to think about what the purpose of a bank is. The risks are still out there in the system somewhere,” Noreika said, adding that he hopes regulators take a “holistic” approach to rule-making and think about how new regulations affect the broader financial system.

Bank watchers have also been on alert about how these new rules could affect less traditional financial institutions that derive meaningful parts of their business from fees versus lending.

“Basel’s framework for calculating operational risk charges would disproportionately, and inappropriately, increase capital requirements for firms focused on fee-generating activity—such [as] investment banking, fiduciary services, and credit card services,” Katie Collard, senior vice president and associate general counsel at the Bank Policy Institute, told Barron’s.

Write to Carleton English at