Large-cap U.S. banks are likely to see an increase in excess capital following a wave of anticipated new regulatory proposals this Thursday, March 19th. The possibility of deploying those resources for capital market activity is set to boost banks’ earnings and share value above consensus.
As of early 2026, the largest U.S. banks held about $175 billion more than the minimum required by government regulators for safety. Morgan Stanley Research forecasts that easing restrictions could increase excess capital to between $212 billion and $279 billion in the next few years.
“At a time when capital markets and loan demand are improving, both banks and their customers are ready to take advantage of this opportunity for growth,” says Manan Gosalia, Head of U.S. Large and Midcap Banks Research at Morgan Stanley. “We expect investors will increasingly give more banks credit for excess capital levels.”
Impact on Earnings and Valuation
The possibility of using excess capital more actively is not fully reflected in consensus forecasts for bank earnings and valuations, according to Gosalia.
Morgan Stanley Research estimates banks will deploy 26% of today’s excess capital by 2027 and 35% by 2028, while the consensus in markets suggests capital levels are likely to remain relatively flat.
“We have an attractive industry view as the street may be missing banks' ability and willingness to deploy this excess capital,” Gosalia says. “Our new estimates are a median increase in earnings per share of 6% above consensus in 2027 and 8% above in 2028. This activity will reassure investor confidence in bank shares and set the stage for upward revisions.”
In Morgan Stanley’s base-case scenario, bank stocks could gain a median 25%, driven by expectations for 2027 EPS growth and higher revisions in consensus estimates.
How Excess Capital Could Be Used
Banks are likely to use some of their excess capital to mainly drive higher capital markets revenues, loan growth and buybacks as soon as the reforms take place.
“They should first use those additional resources to satisfy pent-up client demand—particularly in commercial loans—and through M&A bridge lending as deal activity accelerates,” Gosalia says.
Capital markets activity has started a resurgence, with a 40% surge in global M&A volume and a rebound in IPO activity last year.
“Bank management teams are also increasingly willing to return excess capital they cannot put to work,” Gosalia says.
Understanding Regulatory Changes
A central priority since President Trump’s inauguration has been regulatory reform. The White House has been eager to soften regulation, with a focus on strengthening the private sector aligning with global standards and increasing economic growth.
Three key regulatory reforms that could drive the expected growth in excess capital include:
- The recent change to the Supplementary Leverage Ratio (SLR)
- The Global Systemically Important Bank (GSIB) Surcharge
- The Basel 3 Endgame Reproposal
Proposals for a GSIB surcharge as well as a Basel Endgame proposal are expected to be released by the Federal Reserve this week.
“These changes will be a key catalyst for banks to optimize excess capital more quickly than expected by the consensus,” Gosalia says.
