Capital Strength: The Long Game

Lower Capital Requirements Risk Eroding U.S. Banks' Competitive Advantage

The Systemic Risk Council (SRC), of which I am a member, recently filed a comment with the banking agencies regarding their proposed rule that would reduce capital levels for the Nation’s largest banks. While the SRC’s comment recognizes some improvements in the proposal, it makes clear that its net effect would not serve the long-run interests of either the banking industry or the broader economy.

The proposed rule is long and highly complex, making it difficult for most readers to assess its implications. The SRC’s comment letter, however, addresses the proposal’s most important issues clearly and concisely. Below is a synopsis of its comments concerning just two of those issues: (1) the proposal’s fallacious arguments regarding the banking industry’s financial performance and competitive standing and (2) the proposal’s probable effects on bank lending. You can read the SRC’s full comment here.

1. Capital strength has been a performance and competitive advantage for U.S. banks.

Capital is an owner-provided source of funds for banks. Like bank deposits, it is invested in securities, loans, or derivatives that bank management judges to be profitable. The idea that bank capital is a sterile reserve and drag on the banking industry’s performance is wrong.

The SRC’s comment letter points out that since the Global Financial Crisis (GFC), higher capital has been a competitive advantage for U.S. banks — not a burden, and that the banking agencies’ proposal offers no evidence to the contrary. The agencies incorrectly suggest that because U.S. bank capital levels exceed those of European and United Kingdom banks, U.S. banks are at a competitive disadvantage globally. The implication is that international alignment requires the United States to lower its capital standard to the European level.

As the SRC shows, this notion is contradicted by more than a decade of market evidence, during which U.S. banks experienced the most sustained competitive expansion in modern history.

As of year-end 2025, U.S. Global Systematically Important Banks (G-SIBs) held a weighted average Tier 1 leverage ratio of 6.81%, against 4.92% for European and Canadian G-SIBs.[1] Relative strength matters, and it is no coincidence that the better-capitalized U.S. firms commanded dramatically higher valuations, with JPMorgan Chase trading at 2.54 times book value and Morgan Stanley at 2.76 times, compared with 0.77 times for BNP Paribas and 0.82 times for Société Générale. Several European G-SIBs continue to trade below book value. As expected, a premium equity valuation lowers a firm’s cost of capital and provides acquisition currency and retained-earnings capacity.

The SRC also shows that the higher capitalization of U.S. banks brings value in wholesale markets. Clients and counterparties direct flow toward dealers with the balance sheet strength to make markets, extend committed financing, and honor obligations in periods of stress. The decade-long retrenchment of European banks from capital-intensive sales and trading businesses has channeled volume toward U.S. G-SIBs despite — or rather because — U.S. banks have operated under the higher capital levels. A dealer operating at a 6.8% leverage ratio is a more reliable counterparty than one operating at 4.9%. In stressed markets that difference determines which institutions can deploy their balance sheets when clients need them most and which institutions must retrench. Moreover, well-capitalized banks are best able to lend and support growth over the market cycle. Bank counterparties know the value of their banks having higher capital during financial stress.

Finally, U.S. banks’ relatively stronger capital base made them more competitive, enabling them to relentlessly gain market share. In addition to the performance metrics cited above, U.S. banks’ share of global investment banking fees rose from 46% in 2015 to 51% in 2025, reaching 54% in the first quarter of 2026. In contrast, European banks’ share fell from 29% to 21% over the same period — and to 20% in early 2026, the lowest share since records began in 2000. As a result, the five largest global investment banks by revenue are now American firms.

Thus, market evidence shows that the capital advantage of the U.S. banking system has been a strategic asset. Before finalizing a proposal that risks surrendering that advantage by encouraging lower capital among the Nation’s most systemically important banks, the agencies should better analyze the performance and competitive costs of doing so.

2. While the banks and agencies claim that easing capital levels would result in expanded lending, the industry’s actions suggest otherwise.

One of the principal justifications offered for the proposal is that reducing capital levels will expand lending. The SRC’s comment letter, however, points out that market evidence contradicts this claim. Recent actions of the banks offer evidence that banks will use the lowering of standards as an opportunity to return capital to shareholders through buybacks and dividends, which would not translate into increased lending to the real economy.

In response to lower capital standards implemented over the past year, for example, banks have returned unprecedented amounts of capital to shareholders. In the first quarter of 2026, U.S. banks executed a record $33 billion in share repurchases, with JPMorgan Chase, Goldman Sachs, and Citigroup each completing their largest quarterly buybacks. Repurchases exceeded analyst projections by 30% to 50%, and Goldman Sachs alone returned $6.38 billion to common shareholders during the quarter. No G-SIB used its first-quarter results to announce an expansion of lending to households or businesses.

There should be no objection to returning capital to shareholders as earnings allow. But concern should be raised when doing so weakens both the industry’s financial and competitive strength with little evidence that promised lending will follow. The agencies should be cautious before changing a model that has allowed the U.S. banking industry to outperform and outcompete its global rivals.

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[1] Bank Capital Analysis Semiannual Update, 4Q 2025 (Federal Reserve Bank of Kansas City, December 2025),

https://www.kansascityfed.org/documents/16411/Bank_Capital_Analysis_-_4Q_2025.pdf