Banks get US$2.6 trillion from deregulation, Jefferies says

[NEW YORK] Looser regulation for US banks is expected to unlock some US$2.6 trillion in lending capacity for large financial institutions, according to Jefferies analysts, cementing the richer valuation of American lenders over rivals in Europe.

Deregulation can “drive a material uplift through 2026” in lending, mergers and acquisitions and technology investment and will buoy earnings and market share, according to a Friday (Nov 21) note from analysts including Aniket Shah and Daniel Fannon.

“The capital release is likely to reinforce the valuation premium of US banks over European peers and support higher equity prices,” they wrote, citing a discussion with Fernando de la Mora, co-head of financial services at Alvarez & Marsal.

Trump administration officials are planning to soften bank capital measures established in the wake of the 2008 financial crisis. The Federal Reserve has circulated plans to dramatically relax a Biden-era proposal to hike capital levels after banks complained it would curtail their business. European bankers and politicians are also saying the bloc’s banking regulations are too strict and giving an advantage to US lenders.

The impact of US policy is already apparent with an increase in risk-weighted assets at US lenders, the analysts said. They cited boosts in lending, M&A or profitability targets at banks including JPMorgan Chase, Goldman Sachs, Wells Fargo and Bank of America.

The UK also will benefit from looser regulations, though more slowly and not as much as US rivals, the Jefferies team wrote. Meanwhile, EU and Swiss lenders “face constrained profitability and limited upside due to higher capital requirements”.

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In its own report, Alvarez & Marsal said US banks should see earnings per share and return on equity increase by around 35 per cent and 6 per cent respectively, with UK banks also posting growth on both measures to a lesser extent. UBS Group AG, the Swiss rival to Wall Street banks, is “negatively affected by new regulation”, Alvarez & Marsal said. BLOOMBERG