It is reported that the Federal Reserve plans to "loosen" Wall Street, and Morgan Stanley: trading banks such as Goldman Sachs will benefit the most

According to recent reports, the Federal Reserve has presented a revised proposal for the final rules of the Basel III Accord to other U.S. regulatory agencies, which will significantly relax capital requirements for large Wall Street banks. It is reported that some officials estimate that the new proposal will reduce the overall increase in capital for most large banks to between 3% and 7%, a figure far lower than the 19% increase proposed in 2023 and also below the 9% increase suggested in last year's compromise version. Banks with larger trading business portfolios may see even smaller increases in capital or even declines.

The final rules of the Basel III Accord aim to clarify how much capital banks need to set aside to withstand economic downturns. Wall Street banks had previously strongly opposed the original proposal of the 2023 Basel III final rules, with critics arguing that significantly raising capital requirements would increase loan costs and weaken the position of U.S. banks relative to international competitors. However, supporters emphasize that this is crucial for financial stability.

It is reported that the Federal Reserve plans to announce the new proposal as early as the first quarter of 2026, led by Michelle Bowman, the Vice Chair for Supervision appointed by Trump earlier this year.

In response, Morgan Stanley stated in a recent research report that the timing for the announcement of the new Basel III final rules proposal may be close to the first quarter of 2026. This also means that the final rules for the supplementary leverage ratio (SLR) and new proposals for the global systemically important bank surcharge (GSIB surcharge) may be advanced simultaneously before the end of 2025.

If the Basel III final rules are re-proposed in the first quarter of 2026 with a 90-day public comment period (until the end of the second quarter of 2026), Morgan Stanley expects that the final rules could be issued in the fourth quarter of 2026. By then, banks will release updated capital requirements and buffer arrangements in 2027, paving the way for the complete optimization of capital allocation in their models by 2030.

Morgan Stanley pointed out that as of the second quarter of 2025, large banks collectively hold $157 billion in excess capital. Rough calculations show that even if capital requirements rise by 7%, large banks will still retain at least $146 billion in excess capital. With further adjustments to subsequent capital rules (such as GSIB surcharges, SLR, and stress test transparency), the capital adequacy of banks may continue to improve. Morgan Stanley added that for banks holding large trading portfolios, the reduction in capital requirements is most beneficial for Goldman Sachs (GS.US).

For institutional mortgage-backed securities investors, if the capital relief is lower than expected, it will pose a slight negative for bank demand, but it will be slightly positive for the Government National Mortgage Association (Ginnie Mae) and Fannie Mae However, more importantly, the clarity of regulatory rules and the certainty brought by their final implementation are crucial. Morgan Stanley stated that it is still necessary to wait for the detailed content of the new proposal.

Morgan Stanley mentioned that if the final rules of the Basel III Accord and other capital regulatory changes can be clearly implemented, it will be a positive signal that helps banks optimize excess capital allocation more quickly. If the reports are accurate, the proposed capital requirement increase of 3% to 7% is slightly higher than the bank's previous expectation of a "capital-neutral" plan, but the bank believes that specific details may still change during the rule-making and public comment period