Donald Trump’s re-election has derailed the proposed stricter Basel III regulations for banks, threatening their implementation for both U.S. and European institutions. U.S. bank share prices have surged sharply, and asset managers are spotting renewed opportunities on both sides of the Atlantic.
In October, the financial sector was still underweighted among institutional investors, according to data from Morgan Stanley. The bank, which shifted to a tactical overweight in cyclical stocks over defensive ones for the fourth quarter, now considers the financial sector a “top pick.”
Marco Pirondini, chief investment officer of Amundi’s U.S. division, also describes financials as an attractive “pocket of value” for investors who see the upper end of the U.S. market as overpriced.
Basel III faces an uncertain future
In November, following Trump’s re-election, the Biden administration’s key banking regulators informed the House of Representatives that they do not intend to move forward with stricter capital, liquidity, or long-term debt requirements for banks.
These measures, initially proposed after the 2023 collapses of Silicon Valley Bank and First Republic Bank, would have required U.S. banks to hold more equity. The Federal Reserve estimated last year that this would increase capital requirements for the largest banks by an average of 16 to 19 percent.
Under pressure from lobbying groups, the requirement was softened to 9 percent, but even this level is now uncertain. Basel III could be “completely dead,” Gene Ludwig, a former U.S. banking regulator, told Reuters in November.
Banking sector euphoria
JPMorgan Chase CEO Jamie Dimon made no secret of the sector’s euphoria after the elections: “A lot of bankers are dancing in the streets,” he said at a Peru conference on 14 November.
This optimism is reflected in the share prices of both large and regional banks. The Nasdaq US Large Cap Banks Index and the KBW Regional Banking Index have each risen more than 38 percent since the start of the year. Shares of JPMorgan, Morgan Stanley, and Goldman Sachs are up 40 percent, 40 percent, and 50 percent, respectively.
U.S. bank stocks surge as Trump wins White House
Broader optimism for U.S. financials is illustrated by comparisons with technology stocks. Over a five-year period, the earnings per share (EPS) growth of financials is comparable to that of tech, but at significantly lower valuations. Data from Yardeni Research shows a price-to-earnings ratio of 17 for the financial sector compared to 29.1 for the tech sector.
U.S. financials still undervalued compared to S&P 500
Credit markets: banks regaining ground
A potential easing of Basel III rules could also lead to a shift in credit markets. Stricter capital requirements have forced banks in recent years to reduce their exposure to risky loans, such as leveraged lending, with private credit providers filling the gap.
Bank lending has declined from 40 percent of all corporate loans in 2006 to 36 percent in 2024, according to Federal Reserve data. Meanwhile, non-bank lending has grown significantly.
Looser regulations could enable banks to regain market share, said Leah Savageau, corporate credit analyst at AAM. “This should position banks more strongly to provide loans.”
Stricter than assumed
Contrary to popular belief, U.S. banks have been subject to stricter capital requirements than their European counterparts in recent years. While Basel III is a global agreement, its implementation in the U.S. has been more stringent than in Europe.
Sean Campbell, chief economist at the Financial Services Forum, highlights the uneven playing field: “International efforts to create a level playing field have perversely led to inequality. European banks face lighter requirements and can calculate their buffers differently, giving them more leeway.”
In practice, this means European banks need to hold less capital for comparable balance sheets. The ECB in December said it would not lower its capital requirements for European banks, citing the need for “strengthening resilience to geopolitical shocks.”
Risk of a ‘race to the bottom’
A move towards looser regulations could endanger the financial system, warns Michael Barr, Federal Reserve vice chair for supervision. Michael J. Hsu, acting U.S. comptroller of the currency, also cautioned earlier this autumn against a potential “race to the bottom” in bank regulation.
If U.S. banks are allowed to hold significantly less capital, pressure could mount on European regulators to follow suit, threatening the balance between stability and competitiveness. European regulators have been reluctant to ease capital buffers, partly due to the existing flexibility in internal risk models.
European banks posted solid share price gains in 2024. The Eurostoxx Banks Index is up 24 percent this year, compared to 16 percent for the MSCI Europe Financials Index. However, European bank shares have traded sideways since the U.S. elections, with investors increasingly eyeing opportunities in the U.S.