Morgan Stanley says regulatory reform in the U.S. banking sector could materially increase excess capital at large-cap banks, creating more flexibility for lending, capital markets activity, and shareholder returns. As of early 2026, the largest U.S. banks held about $175 billion above minimum regulatory requirements, and Morgan Stanley estimates that figure could rise to between $212 billion and $279 billion over the next several years. The expected increase is tied to proposed changes involving the Supplementary Leverage Ratio, the GSIB surcharge, and the Basel III endgame reproposal.
Morgan Stanley also argues that the market is underestimating how much of that capital banks may put to work. Its forecasts assume banks deploy 26% of current excess capital by 2027 and 35% by 2028, supporting earnings per share that come in 6% above consensus in 2027 and 8% above in 2028. Commercial lending, M&A bridge financing, and buybacks are among the areas expected to benefit, particularly as deal activity and IPO issuance recover. In the firm’s base-case scenario, that combination could support a median 25% gain in bank stocks as earnings expectations move higher.
