Large Banks Score Major Regulatory Win That Could Free Up Tens of Billions in Capital. Should You Buy JPMorgan Chase Stock?

The entire banking sector looks poised to score a major victory after regulators issued a proposal that would lower bank regulatory capital requirements. As a result, major banks, such as JPMorgan Chase (NYSE: JPM), could see relief, potentially freeing up tens of billions of dollars to lend and increase share repurchases and dividends.

Should you buy JPMorgan stock?

Where bank regulations have succeeded and failed

Bank capital requirements have been a moving target since just after the Great Recession, when regulators implemented sweeping changes to make sure such a fiasco could never happen again.

The new regulatory regime has certainly succeeded in some regards. There has not been another credit event like the Great Recession. The banking system has been deleveraged and become much safer, and credit underwriting has also improved significantly.

Image source: JPMorgan Chase.

However, the regulations have also come up short in some regards. For instance, they failed to stop the 2023 Silicon Valley banking crisis, when banks got into trouble due to poor asset-liability management amid rapidly rising interest rates, leading to the failure of several large regional-sized banks. The regulations have also had unintended consequences, making lending more difficult for banks, which has led to the growth of the now $2 trillion private credit industry.

Regulations have also changed a good deal, making it difficult for banks to plan properly. For instance, following the Silicon Valley banking crisis, Michael Barr, the vice chair of supervision at the Federal Reserve under former President Joe Biden, proposed raising capital requirements by as much as 20% for the largest banks.

The proposal never came to fruition, but many banks were forced to plan for it. Under the current Vice Chair, Michelle Bowman, capital rules are poised to decline.

Effect of new rules

Banks must follow several liquidity and capital requirements. Some focus on total leverage, while others address a capital cushion to cover unexpected loan losses that may arise after an economic shock or extraordinary event. A key ratio is the common equity tier 1 (CET1) capital ratio, which is essentially a bank's core capital expressed as a percentage of risk-weighted assets, such as loans and bonds.

Each year, the Federal Reserve conducts stress testing to simulate what would happen to bank balance sheets following a significant economic shock. The results of this annual test, along with other factors such as a bank's size and complexity, determine the minimum CET1 ratio each bank must maintain to avoid regulatory restrictions.

The CET1 ratio is composed of a minimum base that banks of all sizes must maintain, and a stress capital buffer (SCB) requirement resulting from stress testing.

The largest money-center banks that are "too big to fail," of which there are eight in the U.S., also have an additional layer called the G-SIB (global systemically important bank) surcharge. For example, JPMorgan's required CET1 ratio right now is 11.5%, composed of a 4.5% base, a 2.5% SCB, and a 4.5% G-SIB charge.

Under the Fed's new proposal, the largest banks, which are the eight G-SIB banks and then banks with $700 billion or more in total assets, would see their cumulative CET1 requirements go down by about 4.8%. Meanwhile, banks with over $100 billion in assets are expected to see a 5.2% decline, while smaller banks could see a 7.8% decline.

These cumulative declines are a mix of increases and decreases in certain areas of the regulatory requirements. For instance, banks with over $100 billion in assets would see a significant increase in their capital requirements for unrealized losses. This specifically aims to address the situation that unfolded in 2023, when banks didn't have to include unrealized paper losses in their large bond portfolios in their capital calculations. This artificially inflated their ratios.

While these losses were only on paper, banks at the time were facing significant deposit outflows that could have forced them to sell the bonds at a loss, permanently destroying capital.

Should you buy the large banks?

As I mentioned, JPMorgan currently has a CET1 ratio requirement of 11.5%. But banks will always run with some buffer over the requirement. JPMorgan Chase ended 2025 with a CET1 ratio of 14.5%. That means it's currently operating with over $60 billion in excess capital -- a truly staggering amount, considering that that's bigger than most banks in the U.S.

Based on these numbers, a 4.8% decline would yield about $14 billion of excess capital. But I expect the actual number to eventually be much larger if this proposal is implemented. For one, JPMorgan has the highest G-SIB surcharge at 4.5%, and the new rules propose reducing this requirement by 3.8%.

Furthermore, I don't think JPMorgan will run 300 basis points above its CET1 requirement forever. I think management has done this because the capital rule proposals change so often. If the bank gains greater visibility into the final capital rules, it can likely operate with a lower buffer above the requirements.

If this proposal goes into effect, JPMorgan will likely have a lower CET1 requirement and be able to operate at a smaller buffer above it, freeing up potentially tens of billions in capital. Not only will this allow the bank to increase lending and capital distributions, but the lower capital a bank has to hold, the higher the returns on that capital it's likely to generate.

Trading at close to 270% of its tangible book value, or net worth, the stock is not cheap historically. But this capital relief would be a major win for the bank, which I still view as a good long-term buy-and-hold stock.

I also see good opportunities in the small- to mid-cap banking space, as these entities are expected to receive even more capital relief than large banks and could see more consolidation.

JPMorgan Chase is an advertising partner of Motley Fool Money. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.