[Digital Today reporter Jinju Hong] Major U.S. banks are calling for easing capital rules introduced after the 2008 global financial crisis. Banks argue the Basel rules now being pushed could reduce liquidity in the U.S. Treasury market and weaken the functioning of financial markets. Regulators are reviewing a system overhaul to find a balance between financial stability and market efficiency.

On June 18, crypto outlet Cryptopolitan reported that eight major U.S. banks said in a comment letter submitted to regulators that the new Basel capital rules could increase capital burdens in trading units by 30 percent to as much as 89 percent.

The biggest concern for banks is how risk weights are applied to the U.S. Treasury market. They worry the current proposal could increase the burden on financial institutions handling Treasury trading and weaken market liquidity. As Treasuries are a leading safe asset in global financial markets and used as collateral, a decline in trading function could raise borrowing costs and increase market volatility, they said. The industry cites turmoil in the Treasury market early in the COVID-19 pandemic in 2020 and the U.S. regional bank crisis in 2023. It said liquidity across the Treasury market was shaken sharply at the time as the intermediation function of banks acting as market makers weakened.

U.S. regulators also acknowledge in part the need for adjustments. Michelle Bowman (미셸 보먼), vice chair of the Federal Reserve, has reviewed revision options for the enhanced supplementary leverage ratio (SLR) and the Basel III endgame rules. Fed Chair Jerome Powell also said in public remarks last year that as banks came to hold large amounts of Treasuries and reserves, current leverage ratio rules were acting as a stronger constraint than expected.

Bowman said current standards were distorting capital allocation and that rules need to be adjusted so large banks can use capital more efficiently across the entire organisation, including affiliated broker-dealers. The Fed, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) began a joint comment-gathering process in March to modernise capital rules and are still receiving industry input.

But a recent letter submitted by Wall Street shows it is seeking a larger easing than what regulators are reviewing.

Markets are watching how much deregulation could expand banks' lending capacity. Morgan Stanley analysed that if all related rule changes are reflected, the U.S. banking sector could gain up to $1 trillion in additional capital capacity. The funds could be used for new loans to companies and households, but could also be used for share buybacks, higher dividends or funding for mergers and acquisitions (M&A).

The discussion is not only a U.S. issue. The European Commission and the Bank of England (BOE) delayed their Basel III implementation timelines in consideration of U.S. regulatory talks. The European Central Bank (ECB) is also reviewing simplifying the regulatory framework while maintaining capital levels.

Japan is also maintaining a cautious stance as it watches the final U.S. decision. Experts say if the capital burden on major U.S. banks is effectively reduced, other countries may consider similar regulatory adjustments to maintain the competitiveness of their financial institutions.

Analysts say the crypto market could also be affected by the discussion. If bank capital rules are eased, liquidity across financial markets could expand and risk-asset preference could improve.

Research by the Federal Reserve Bank of Chicago says accommodative monetary policy shocks tend to lead to increases in bitcoin prices and trading volumes. The Bank for International Settlements (BIS) also analysed in a study published last year that changes in global liquidity are a key variable for crypto returns and fund flows.

An indirect impact is also expected for the stablecoin market. Major stablecoin issuers such as Tether (USDT) and Circle (USDC) invest a significant portion of reserves in short-term U.S. Treasuries. If liquidity in the Treasury market improves, the stability of collateral asset management could also increase. The industry sees how far regulators accept Wall Street's demands as an important variable for financial markets overall.

If the final U.S. capital rule overhaul leads to large-scale easing, it could have wide-ranging effects on bank lending capacity, Treasury market liquidity and risk-asset investment sentiment. Market attention is focused on the results of the ongoing comment-gathering process and regulators' final decision.