Introduction
For a decade after Dodd-Frank, US bank regulation moved one way: more capital, more stress testing, more merger scrutiny. Between late 2025 and late 2026 it reversed almost everywhere at once. The leverage ratio was recalibrated, the Basel III Endgame came back as a net capital reduction, stress tests were rebuilt to be less volatile, supervision narrowed to material financial risk, and merger review went from slow and unpredictable to the fastest in years.
The regulatory section explains each mechanism. This article reads them as one policy turn: what it does to bank capital, buybacks, M&A capacity and valuation, and where it could stall.
The 2025-2026 Policy Turn at a Glance
The shift is a sequence of rules and proposals from the Fed, the OCC and the FDIC, most under Michelle Bowman, Fed Vice Chair for Supervision since 2025. Several are in force; the two largest capital pieces are still proposals, with comments closed in June 2026.
| Change | Status | What it does |
|---|---|---|
| eSLR recalibration | Final (Nov 2025), effective April 2026 | Leverage becomes a backstop again |
| Basel III Endgame reproposal | Proposed March 2026 | Net CET1 relief for large banks |
| G-SIB surcharge recalibration | Proposed March 2026 | Lower surcharges over time |
| Stress test transparency and averaging | Final (Sept 2026), averaging from 2028 | Less volatile stress buffers |
| Community bank leverage ratio | Final (April 2026), 9% to 8% | More small banks qualify |
| LFI "well managed" test | Final (Nov 2025) | Fewer firms blocked from expansion |
| Merger policy rescissions | OCC and FDIC, May 2025 | Faster, more predictable approvals |
Together, the package lowers the capital banks must hold, steadies it from year to year and removes much of the friction around acquisitions: the three inputs behind capital return and bank M&A economics.
Capital Relief: Leverage, Basel and the G-SIB Surcharge
The eSLR Fix
The agencies' November 2025 final rule replaced the fixed 2% eSLR buffer for the eight US G-SIBs with a buffer equal to half of each firm's method 1 surcharge, and capped the buffer at the bank-subsidiary level at 1%. It took effect April 1, 2026.
- Enhanced Supplementary Leverage Ratio (eSLR)
The enhanced supplementary leverage ratio is the leverage requirement US global systemically important banks (G-SIBs) meet on top of the standard 3% supplementary leverage ratio. It measures tier 1 capital against total leverage exposure, including off-balance-sheet items, with no risk weighting, so when it binds it discourages low-risk assets such as Treasuries and repo.
A binding leverage ratio charges a Treasury position the same capital as a corporate loan, so the fix mainly helps Treasury market intermediation and other low-margin balance sheet businesses. It matters for G-SIB capital planning even though it releases little headline CET1.
The Reproposal Math: Higher Basel, Lower Total
The March 19, 2026 proposals rescinded the 2023 Basel III Endgame draft and replaced it with three linked rules: an expanded risk-based approach for Category I and II firms, a revised standardized approach for everyone else, and a recalibrated G-SIB surcharge. The netting is the part most people get wrong. On the agencies' estimates, the Basel overhaul on its own would raise CET1 requirements for the largest banks by about 1.4%, but combined with the surcharge and stress test changes it leaves them 4.8% lower than today. Category III and IV banks (roughly $100 billion to $700 billion in assets) would see a 5.2% reduction and smaller banks 7.8%.
- Expanded Risk-Based Approach (ERBA)
The expanded risk-based approach is the capital calculation proposed in March 2026 for the largest US banks (Category I and II) under the Basel III Endgame reproposal. It replaces internal credit risk models with standardized risk weights that are more granular than the existing standardized approach, so a bank's capital requirement depends less on its own models and more on rules set by regulators.
The G-SIB piece fixes a drift: the surcharge's method 2 coefficients were calibrated on 2012 data, so banks moved into higher bands simply because the economy grew. The proposal makes a one-time downward adjustment and indexes the coefficients to nominal GDP. The Basel III Endgame saga in the regulatory section covers the reproposal's mechanics in full.
Stress Tests: Less Volatile, More Transparent
For bank CFOs, the stress test changes may matter more than the capital cuts. The stress capital buffer is reset every year and has swung by more than a percentage point for some firms, so banks hold a management buffer on top: capital that never reaches buybacks or acquisitions.
The Fed's June 2026 stress test projected nearly $708 billion of losses for the 32 participating banks, yet their aggregate CET1 ratio fell only 1.6 percentage points, from 12.8% to a projected minimum of 11.2%. Because the Board had voted in February 2026 to hold existing buffers in place until 2027, banks announced dividends and buybacks immediately after the results.
On September 30, 2026 the Fed finalized two rules that change how future buffers are set:
- Annual public input on scenarios and material model changes, ending the "black box" complaint that drove industry litigation
- Two-year averaging of stress test results when setting the buffer, starting in 2028
- An estimated halving of year-over-year volatility in capital requirements, with no material change in aggregate capital
Supervision and Merger Review: The Approval Clock
Ratings, Reputational Risk and the SVB Review
The quieter half of the turn is supervisory. The Fed's November 2025 revision of its large financial institution rating framework now treats a firm with no more than one deficient-1 component rating as well managed, where a single deficient rating used to disqualify it. Because that label gates expansionary activity, including acquisitions, the change reopened the M&A path for firms stuck below the line. The Board also ended the use of reputational risk in supervision.
In September 2026 Bowman presented an independent review of SVB's failure finding that supervisors knew, or should have known, about SVB's vulnerabilities by March 2022 and that the 2018 tailoring rules did not cause the delays. That contested framing recasts 2023 as a supervisory failure rather than a case for tougher rules.
Merger Review: From 369 Days to 126
Merger policy moved first. In May 2025 the OCC restored expedited review and streamlined applications and rescinded its 2024 merger policy statement; the FDIC rescinded its own 2024 statement the same month and reinstated the earlier version. The results show in the timetable. On Brean Capital data reported by American Banker, bank deals of $500 million or more took an average of 369 days from announcement to close in 2024, 211 in 2025 and 126 in 2026 through late May. Fifth Third closed Comerica in under four months.
A shorter signing-to-closing gap means less interest rate risk on unlocked marks, less time for deposits and bankers to walk and less exchange ratio drift. The regional bank consolidation wave and the bank merger approval process both look different when that window shrinks from a year to four months.
What the Turn Means for Deals and Valuation
The most visible effect is capital return. Allianz Research estimates the six largest US banks returned more than $110 billion through buybacks in 2025 and about $32 billion in the first quarter of 2026 alone, letting their CET1 ratios fall roughly 100 basis points year on year as they positioned for lower requirements. This is excess capital deployment running ahead of the final rules.
For M&A, two effects stack: lower requirements leave more capital after deal marks, and faster approvals cut execution risk. That combination is why acquirers have been willing to sign larger deals, led in 2026 by Santander's roughly $12.3 billion agreement to buy Webster Financial, a bank with more than $80 billion of assets.
The justified P/BV framework develops that link, and it explains why deregulation shows up in P/TBV and not only in capital ratios.
Where the Turn Could Still Stall
The relief is real but not locked in, and three risks could still shrink it:
- Unfinished rules. The Basel reproposal and the G-SIB surcharge recalibration still need final rules, and Governor Michael Barr dissented, counting 20 material downward deviations from the Basel standard. The Basel III Endgame debate showed how one administration's rule can be reversed by the next; that regulatory whiplash risk now runs the other way.
- Credit losses. Lower capital is only relief if losses stay low, and bank lending to private credit funds and other nonbanks is one of the exposures supervisors are watching most closely.
- Rates. The AOCI phase-in means a sharp rise in long yields could undo part of the relief for Category III and IV banks.
The finalization calendar sets the next agenda: final Basel and surcharge rules, 2027 stress buffers under the new transparency rules, and averaging from 2028. The working assumption for FIG bankers is a lower and steadier capital requirement that supports buybacks, larger regional deals and higher multiples, with the caveat that the most consequential rules are not yet final. The 2026 regional bank M&A primer shows how those assumptions feed into deal pricing and earnback.
