Regulatory change is sparking fresh growth for financials and fintechs

This shift toward a more balanced and pro-growth regulatory environment is a potential game changer for banks – helping to unlock capital, boost activity, and enhance shareholder returns. The rules of the game are changing most quickly in the US where the appointment of Fed governor Michelle Bowman as Vice Chair for Supervision in June signals a more pragmatic, pro-business approach to banking oversight.

The US’s increasingly permissive stance on competition and scale is reflected in a pair of significant regulatory decisions: 1) the removal of the USD 1.95 trillion asset cap imposed on Wells Fargo and 2) the approval of the Capital One–Discover merger.

And we are still in the early innings, with many reforms yet to come. Those include the Enhanced Supplementary Leverage ratio (eSLR) revisions, improving stress test transparency, finalizing the Basel III Endgame standards as well as the recalibration of capital buffer surcharge for Global Systemically Importants Banks (GSIBs).

These changes are designed to standardize and harmonize risk measurement and capital reserve calculations across global banking. Reforms should not only provide long-term stability to the financial system, but also lower capital reserves and free up cash, with the greatest benefit accruing to large US banks.

Increased capital flexibility enables banks to pursue growth strategies, increase dividends and share buybacks, and improve profits. While the exact impact on profitability varies by institution, HOLT analysis suggests that a 1% improvement in Cash Flow Return on Equity (CFROE) – a proxy for economic performance – could translate into an 8% increase in warranted valuation for US banks.

European banks have historically lagged their US counterparts in profitability due to fragmented markets and heavy regulation (see Figure 1). However, external forces – from Trump pressures in the West to geopolitical vulnerabilities from Russia/Ukraine in the East – and internal pressure (the Draghi Report below) are pushing the EU to address its structurally weak and anti-competitive capital markets system.

According to the 2024 Draghi Report, the EU needs to invest EUR 750 billion to strengthen its competitiveness – the lion’s share coming from private, not public sources. Europe’s over-reliance on bank-based financing has limited capital availability, risk-sharing and financial sector innovation and growth.

In future, expanding the role of capital market mechanisms is necessary to channel assets into more productive investments and increase competitiveness. Therefore, the creation of one unified capital market is a clear political priority and legislation is already underway. Key initiatives under the new EU Savings and Investments Union (SIU) strategy include:

• Implementing the Listing Act to simplify companies’ access to public markets

• Reviewing the securitization framework

• Facilitating equity investment by institutional investors

• Channeling depositor savings into capital markets via pension schemes

Reforms are expected to boost growth and narrow the competitive gap between US and European banks. According to HOLT analysis, a 1% reduction in the discount rate applied to European banks – reflecting lower perceived risk – could lead to a 17% increase in warranted valuation.

Furthermore, reforms to Solvency II – the EU’s regulatory framework for insurers – will make it easier for insurance companies to provide long-term financing to the European economy. The European Commission is proposing changes that will ease capital requirements, improve solvency ratios and risk margins and enable insurers to more easily invest in the securitization market.

If enacted, insurers could make ‘long-term equity’ investments leading to lower capital charges (22% instead of 39%). Insurers could also access less liquid alternative equity investments if they qualify as long-term equity investments (held-to-maturity/long horizon and matching liabilities). More reforms, including cost-reducing, capital-enhancing and regulatory-efficient measures, are still to come from European lawmakers!

The sweeping policy agenda of the second Trump administration is set to benefit both traditional banking and next-generation finance. Under the executive order titled “Unleashing prosperity through deregulation,” for every new regulation proposed, agencies must repeal at least ten existing regulations. As a result, federal agencies such as the CFPB¹ and FDIC² are scaling back enforcement, especially in the fintech strongholds of Banking as a Service (BaaS), Buy Now Pay Later (BNPL), and digital wallets.

For example, the CFPB withdrew proposed regulations that capped credit card late-fees, which indirectly helps smaller fintechs and neobanks compete more effectively with deep-pocketed banks that issue cards. The CFPB also significantly reduced a civil penalty lodged against Wise, a fintech specializing in digital payment transfers, from over USD 2 million to just USD 45,000.

¹CFPB, the Consumer Financial Protection Bureau
²FDIC, the Federal Deposit Insurance Corporation