Wall Street banks are close to achieving a significant easing of regulatory restrictions imposed on capital, with support from Republican officials in the administration of US President Donald Trump, but they are seeking to ensure the continuity of these changes in the long term, which may require support from Democrats as well.
The Federal Reserve is working to finalize, by the end of the year, the largest review of bank capital rules since the global financial crisis between 2007 and 2009. Although Trump appointed four of the seven members of the Board of Governors, the banks hope that Michelle Bowman, the Board's Vice President for Banking Supervision, will be able to secure democratic support for the amendments, making it more difficult to undo them in the future, according to what six industry executives said.
These efforts come at a time when the process of preparing the rules, which took years and witnessed sharp disagreements, is approaching its end, while independent analysts expect that the Democrats will win one or both chambers of Congress next month.
Democratic lawmakers said they intend to scrutinize the work of Trump agencies and companies that have benefited from shifts in regulatory policies. Bank officials are currently considering ways to protect the gains they have made if Democrats consolidate their influence next year, or regain the White House in 2028.
“Bipartisan, consensus-based outcomes, for the most part, stand the test of time,” said Michael Bright, CEO of the Structured Finance Association. He added that market expectations indicate that the Federal Reserve is seeking to reach a broader consensus.
Democrats tend to support tougher rules to prevent costly bank bailouts burdened by taxpayers, while Republicans often argue that too much regulation could limit lending and economic growth.
Based on this argument, in March, Bowman proposed amendments that would reduce the capital requirements of major banks by about 4.8 percent, in a major shift from a plan proposed in 2023 led by her Democratic predecessor, Michael Barr, which would have led to an increase in those requirements by about 20 percent.
The banks opposed Barr's plan, and succeeded in pushing Republicans in Congress and dozens of Democrats to pressure the Federal Reserve to reconsider it. Which led to the rule-making process extending until the Trump administration.
Barr stepped down as Vice Chairman of the Council for Banking Supervision early last year, saying he wanted to avoid a legal battle with Trump, who was reportedly planning to strip him of the position. But he remains a member of the Board of Governors and has opposed Bowman's proposal, warning that it would increase risks to the financial system. Progressive Democrats and advocacy groups echoed that concern, while most other Democrats have not stated a clear position.
The other two council members appointed by Democratic presidents, Lisa Cook and Philip Jefferson, voted in favor of the proposals, but said they would evaluate the final rules according to their content, after reviewing observations related to their impact on the economy and financial stability. “It is essential that we strike the right balance,” Cook said.
Some major banks are pressing Bowman for additional relief, including amendments that would reduce additional fees for capital requirements imposed on global systemically important banks. Other banks are demanding a change in the way Basel international standards are applied to credit limits not used on credit cards. Most banks are also seeking technical adjustments to remove what they describe as overlap between different capital rules.
But further cuts in capital requirements for major banks could weaken Bowman's chances of winning Democratic support. While a limited number of executives have privately called on Fed officials to prioritize further easing, most would prefer to vote quickly on a bipartisan package, according to the officials, who spoke on condition of anonymity due to the sensitivity of regulatory issues.
Bowman acknowledged this equation during testimony before Congress in June, when lawmakers asked her why the Federal Reserve had not adopted the approach preferred by banks to recalibrate additional fees imposed on systemically important global banks in line with economic growth.
Bowman said that what happened “was a compromise,” adding that the approach preferred by the sector would have reduced the capital requirements of major banks to levels that “some were not comfortable with,” in a reference that executives understood as related to Cook and Jefferson.
Executives and academics believe that the two members' support for the final set of rules will make it less likely that Democrats will target it later.
Two or more dissenting votes “will delegitimize the final rule,” said Jeremy Kress, a law professor at the University of Michigan, who generally supports tougher rules.
Objections may also provide fodder for litigants seeking to prove flaw in the rulemaking process. Last month, the non-profit Better Markets organization in Washington filed a lawsuit against the central bank, accusing it of committing errors in the process of preparing capital rules. The Federal Reserve has not yet responded to the lawsuit.
Objections, when they highlight shortcomings in the rules, may be useful in subsequent lawsuits, said Dennis Kelleher, the organization's chief executive.
The US central bank has always preferred to formulate policies on the basis of consensus, but the conflict over the rules regulating the Wall Street sector has tested this approach in recent years, with increasing disagreements within the board.
Experts in financial regulation believe that Trump's attempts to tighten control over the central bank, which enjoys historical independence, may increase pressure on the culture of consensus within it. Trump tried to fire Cook and former Federal Reserve Chairman Jerome Powell, who is still a member of the board. As for the new head of the central bank, Kevin Warsh, he said that he does not mind the existence of internal disputes.
The recent votes reflect widening divisions. In March, the Board of Governors approved Morgan Stanley's request to restructure its European operations, despite the objection of Barr, Cook, and Jefferson, in a rare split that also constituted the first vote in opposition to Jefferson.
Last year, Cook opposed the final version of a leverage rule, despite voting in favor of introducing it first, saying it reduced capital too much.
Chris said Cook and Jefferson had great influence within the council, adding that the question was whether they would choose to use that influence.
The Bank of Canada is likely to raise its key interest rate by 25 basis points on Wednesday, in a pre-emptive move to prevent inflation caused by rising energy prices from spreading to the rest of the economy, according to forecasts from financial markets and economists.
Raising interest rates would increase borrowing costs for consumers, and could increase pressure on an economy that is showing signs of weakness. But it will also reflect the extent to which policymakers are concerned about the transmission of rising energy costs to food and housing prices, according to economists, according to Reuters.
This will be the first interest rate hike since July 2023, and the first change in the interest rate adopted by the bank in a year.
Earlier this month, during International Monetary Fund meetings in Bangkok, Bank of Canada Governor Tiff Macklem signaled the bank's willingness to act if inflation remains high. The bank's surveys of businesses and consumers, released after his comments, showed growing concerns about inflation.
“The governor has repeatedly stressed that concerns about inflation increase as energy prices remain at high levels,” said Doug Porter, chief economist at BMO Financial Group. "I think the situation has probably exceeded the Bank of Canada's level of comfort."
Porter added that he does not support raising interest rates in light of weak economic conditions, but messages issued by the central bank indicate the possibility of taking this step.
However, a wide range of data released over the past few weeks has not shown that the rise in crude oil prices, which has pushed gasoline and diesel prices higher, has begun to reflect in food prices or the costs of other goods.
Annual inflation rose to 3.1 percent in September, driven almost entirely by higher energy prices, while core inflation indicators, which exclude volatile components, fell below 2 percent, the middle level of the bank's inflation target range of 1 to 3 percent.
Data related to the housing, manufacturing, and wholesale trade sectors indicate that economic growth in the third quarter will likely be much lower than its level in the second quarter. The United States also intends to impose higher customs duties starting in January on some Canadian products, such as cars, their spare parts, and steel.
The latest employment data for two consecutive months showed weakness in the labor market, erasing all job gains recorded since the beginning of the year.
Two-year Canadian government bond yields have risen more than 22 basis points since the central bank's last meeting in September.
“High oil prices will begin to put pressure on the prices of almost everything and in various sectors,” said Pedro Antunes, chief economist at Signal 49 Research, an independent economic research firm, adding that the bank seeks to prevent these effects from spreading to the rest of the economy.
“I think they want to adopt a firm tone and make sure that inflation expectations remain anchored,” Antunes added.
Financial markets are currently pricing in the possibility of a 25 basis point rate hike on Wednesday, which would raise the overnight interest rate to 2.50 percent.
Nineteen out of 34 economists polled by Reuters between October 21 and 23 expected the Bank of Canada to raise the overnight interest rate by a quarter of a percentage point on Wednesday to 2.50 percent. The majority of participants also expected at least one additional hike before March.
The Bank of Canada is scheduled to announce its monetary policy decision on Wednesday at 9:45 am EST (13:45 GMT). It will also issue its quarterly monetary policy report, amid expectations of a major review of inflation expectations for next year.
The US Federal Reserve is scheduled to announce its decision on monetary policy on Wednesday as well, amid widespread expectations to keep interest rates unchanged at their current levels.
The pound sterling fell against the euro, which in turn recorded an increase on Monday, after reaching its highest level in about 17 months on Friday. This decline comes in light of investors' reluctance to take large investment positions ahead of the British budget announcement on Wednesday, coinciding with a week full of central bank meetings.
The euro regained its gains against the Japanese yen, which is considered a safe haven, and also rose slightly against the dollar, after Moody's decided to keep France's credit rating unchanged, in a move that eased fears that the financial difficulties facing the country would lead to a broader repricing of euro zone assets, according to Reuters.
The British pound fell by 0.31 percent to 83.98 pence against the euro, after recording 83.63 pence on Friday, its highest level since the end of May 2025. It also fell by 0.15 percent to $1.3348.
On Wednesday, British Finance Minister John Healey is expected to announce a cautious first budget, making the stability of the bond market his top priority, rather than heading towards a significant increase in government spending, which is the approach that Andy Burnham indicated when he assumed the position of Prime Minister.
The pound sterling received support from declining concerns about the risk premium associated with British debt, which reduced investors' concerns about the possibility of Britain being subjected to market pressures similar to those witnessed in France.
Fabio Pasanin, a strategist at Morgan Stanley, said that prevailing expectations have shifted towards outcomes that would support the government bond market, in light of expectations of limited political measures, adherence to financial rules, and the restoration of a financial margin of about 15 billion pounds sterling, in addition to reducing long-term government bond issuances.
He added that improved expectations and increased optimism in the markets, in turn, raise the possibility of disappointment if the budget falls short of expectations.
In the bond market, the yield on 10-year British government bonds fell by 2.5 basis points to 5.34 percent. The yield reached 5.5267 percent on October 8, its highest level since July 2007.
Strategists pointed out that other factors also contributed to improving the prospects for the pound sterling, including the release of strong economic data that allowed the Bank of England to maintain a monetary tightening approach, and the widening of the yield spread on French bonds, which supported the pound against the euro. Indications of improved relations between the United Kingdom and the European Union also contributed to strengthening the British currency, as it may limit the risk premium associated with Britain’s exit from the European Union (Brexit), which continues to cast a shadow on the pound.
Investors will closely monitor central bank decisions in the coming days, in a week that witnesses meetings of the US Federal Reserve, the European Central Bank, the Bank of Japan, the Central Bank of New Zealand, and the Bank of Canada.
