Financial deregulation has re-emerged as a significant theme, creating new opportunities but reopening familiar vulnerabilities.
At Columbia Threadneedle Investments, cross-asset class collaboration is part of our ethos. Within our global team of fundamental research analysts, eight are dedicated to covering financial institutions across equities and fixed income. This financials team meets regularly to debate the big issues, and recent moves from bank regulators got us talking about the broader potential implications.
Following more than a decade of tighter capital requirements and heightened oversight in the wake of the global financial crisis (GFC), the pendulum is swinging back toward deregulation. This new environment – characterised by reduced burdens on banks, relaxed constraints on mergers and acquisitions (M&A), and increased flexibility in capital deployment – raises critical questions for investors. Will financial institutions exercise prudence in using their newfound flexibility, or will history repeat with a cycle of deregulation and excess? How will changes in bank behavior affect Treasury markets, private credit and alternative asset managers? And how does the regulatory environment in the US compare globally, given the more cautious approach adopted by the UK and Europe?
Where capital rules are loosening
The most substantial changes are occurring in a series of bank capital regulations introduced in the wake of the GFC. Adjustments to the Comprehensive Capital Analysis and Review (CCAR), the Global Systemically Important Banks (G-SIB) framework, and the Basel III ‘endgame’ (see Definitions box) will collectively ease banks’ capital requirements. This means large US institutions can now operate with capital ratios roughly 180 basis points lower than before.
From 2022-2025, the six largest US banks accumulated nearly $98 billion in capital.1 The new rules could release a number of similar magnitude. This will have significant practical implications: Lower return-on-equity and return-on-assets thresholds give banks more flexibility around shareholder payouts, deal-making and participation in government bond markets. With current muted loan demand amid geopolitical and tariff uncertainty, the most likely near-term outcome is shareholder distributions, in the form of buybacks and dividends. At the same time, supervisory restrictions on large bank M&A have been lifted, and compliance burdens are expected to be eased. These changes will reduce the cost of transactions and allow management teams to pursue strategic expansion more aggressively.
US markets are already signaling this shift. Merger talks among regional banks and speculation around potential combinations among large trust banks underscore the extent to which the environment has changed.2 The merger of Fifth Third Bancorp and Comerica, which will create the ninth largest US bank, follows a stream of smaller deals this year. Even mergers involving globally significant institutions, once considered implausible, are now back on the table.
For investors, these developments point to a system positioned for growth and re-rating in a more permissive regime.
Definitions
CCAR: A regulatory framework established by the US Federal Reserve to assess the capital adequacy and planning processes of large banks.
G-ISB: An international regulatory initiative designed to identify and manage risks posed by banks whose failure could disrupt the global financial system.
Basel III: An international regulatory accord of reforms designed to mitigate risk within the international banking sector by requiring banks to hold more capital.
New vulnerabilities in Treasury markets and credit intermediation
While deregulation creates immediate tailwinds, it also brings a new set of risks that warrant scrutiny.
Treasury market stability
By adjusting leverage rules, regulators have incentivised banks to increase their Treasury holdings. So as the US Treasury is issuing more debt to fund the fiscal deficit, authorities have made it easier for the domestic banks to soak up the increased supply. In normal conditions, this should be a good thing, supporting liquidity and demand. However, history shows that in crises banks typically retreat from the market to preserve their own balance sheets. The Treasury’s current preference for shorter-term issuance compounds this rollover risk.
Private credit’s shifting role
Since the GFC, sponsor-backed middle-market lending has migrated from banks to non-banks. Deregulation may encourage banks to re-enter the segment, compressing spreads and changing competitive dynamics. At the same time, a recent executive order has set the stage for 401(k) plans to include allocations to private markets. Adoption will likely be slow and contingent on further regulatory guidance, but the potential pool of assets runs into the trillions.
Systemic risk considerations
Reduced oversight increases the potential for credit to migrate to less transparent parts of the lending ecosystem. While private credit vehicles generally operate with lower leverage than banks and have more stable funding structures, opacity remains a valid concern. If lending standards loosen as capital flows in, risks could build gradually, echoing previous cycles. What is more, the private credit sector doesn’t exist in isolation – there is a feedback loop into the banking sector through bank lending to non-bank financials, an area which has been growing fast. Large banks are often tight-lipped when quizzed about the details of this type of lending.
More conservative approaches in the UK and Europe
The UK is also moving toward deregulation, albeit at a slower pace than the US. Policymakers are reviewing capital buffers, reconsidering the ring-fencing of retail and wholesale activities, and easing mortgage lending rules. Smaller banks have benefited from higher thresholds for bail-in debt, which support profitability and competition. Together, these steps mark a shift in tone in the UK, though they fall short of US changes.
Continental Europe remains more conservative. Minimum capital ratios for European banks are around 200 basis points higher than in the US. Proposals to implement Basel IV rules by 2030 face increasing scrutiny, and competitive pressures may eventually lead to delays or rollbacks of this.
Investment implications across asset classes
- US bank equities stand to benefit most directly from the deregulatory momentum in the US. Lower capital intensity supports higher returns on equity, greater flexibility in capital deployment and stronger earnings potential. Valuations may expand as banks consistently trade above book value. M&A activity is also poised to accelerate. A new wave of consolidation could reshape the sector, creating value for equity investors. M&A boutiques and capital market participants also stand to benefit.
- US bank credit dynamics are evolving as large US banks transition from being highly capitalised and relatively risk-averse toward levels more consistent with regulatory and historical norms. Recent developments, such as Morgan Stanley’s successful request for reconsideration, which lowered its minimum requirements by an additional 80 basis points (approximately $4 billion), underscore this trend. While further reductions could affect perceptions of balance sheet strength, the impact on credit spreads will depend on how far capitalisation moves relative to current conservative target levels.
- Government bond investors should monitor how banks’ increased appetite for Treasuries affects yields. In normal conditions, balance sheet capacity should support liquidity, especially in the intermediate part of the curve. In stress scenarios, as previously discussed, increased linkages between banks and the sovereign can cause problems. Banks may retreat, leading to volatility and more drastic Fed interventions. A second consideration centres on loan growth. The big US banks have been growing loans at more than 5% annualised in recent quarters, with corporate loans growing even faster. This sort of loan growth can be inflationary. If large US banks chose to deploy their newfound excess capital into loans, this could lead to higher inflation and higher treasury yields.
- Private credit and alternatives face a new mix of opportunities and challenges. Competition from banks could pressure spreads, yet gradual access to retirement accounts could unlock trillions in new assets to manage over time. Limited transparency remains a long-term challenge.
- Global bank equities are likely to diverge. UK banks may see a modest uplift from deregulation, while European peers remain bound by higher buffers. Relative valuations could shift in favor of US and UK banks if Europe does not follow. However, we shouldn’t overlook that European banks have rebounded strongly and still offer selective investment opportunities, driven by improved fundamentals, rising returns (ROTE), and cost efficiencies. We will wait to see how this proceeds as deregulation is enacted elsewhere.
- Environmental, social and governance (ESG) dynamics are shifting. US banks have pulled back from climate coalitions, and consumer-protection agencies face reduced influence under the current administration. These changes may dampen ESG-driven flows into US financials and refocus attention on profitability and discipline.
- Policy risk is a significant, ongoing factor for investors to evaluate. Shifts in the political balance of power in Washington – through the 2026 mid-term elections and beyond – could reinstate regulatory headwinds.
The bottom line
The resurgence of financial deregulation is reshaping the competitive landscape for banks, investors and alternative lenders. The trajectory is currently favorable, particularly for US banks and related markets. Capital is being unlocked, M&A activity is accelerating, and new opportunities are opening in both public and private markets.
Yet, as history shows, deregulation often delivers near-term gains while sowing the seeds of future instability. Outcomes will depend on how prudently institutions deploy their flexibility, how supervisors respond to emerging risks, and how policymakers act in the next crisis. For investors, vigilance and adaptability remain essential.
Authors who contributed to the viewpoint:
- Ed Al-Hussainy, Portfolio Manager and Senior Interest Rate & Currency Analyst
- Dick Manuel, Senior Analyst, Equity Research
- Rahul Patel, Senior Analyst, Equity Research
- Anthony Pederson, Senior Credit Analyst, Investment Grade
- Paul Smillie, Senior Analyst, Banks, Fixed Income
- Peter Tiletnick, Senior Analyst, Equity Research
- Matthew Van de Schootbrugge, Equity Research Analyst, Financials
