For years, the largest American banks have operated under a regulatory regime that made long-term capital planning close to guesswork. Each annual stress test could swing a bank’s required capital buffer by hundreds of basis points, forcing management to hoard excess cushions rather than deploy them. That era may be ending.
On September 30, the Federal Reserve finalized two rules that overhaul how it runs its annual stress exam. The rules are designed to bolster transparency and reduce volatility in year-to-year changes to capital requirements. The most consequential change: banks will now see their stress capital buffer set as an average of their last two annual results, making the requirement less volatile. The Fed said the changes are likely to reduce year-over-year volatility in capital requirements by about 50% without materially affecting aggregate bank capital levels.
That last phrase deserves emphasis. The reform is not a giveaway. It is a smoothing mechanism. JPMorgan, Goldman Sachs, Morgan Stanley, Bank of America, Citigroup, and Wells Fargo will not emerge holding less capital. They will emerge knowing, with far greater confidence, how much capital the rules require. That predictability is worth more than it sounds.
Overlay this against what is coming next. Vice Chair for Supervision Michelle Bowman has said she hopes to complete revisions to the Basel capital rules and changes to G-SIB surcharge requirements by the end of 2026. In March 2026, regulators issued a revised “Basel endgame” proposal, though its precise capital impact will ultimately depend on what the agencies finalize and how they calibrate the final package. Bowman has said the Basel III proposal is expected to result in a small increase in capital requirements for the largest banks, while the G-SIB surcharge proposal would produce a modest decrease, with the combined effect being a small net decrease.
Together, these reforms constitute something the sector has not seen since 2010: a complete, coherent capital framework. Stress buffers smoothed. Basel rules finalized. G-SIB surcharges recalibrated. Finalizing Basel III would reduce uncertainty and provide clarity for bank capital standards, enabling banks to make better business decisions. That clarity is exactly what separates a cyclical bank stock from a business capable of compounding returns over a decade.
The market is already responding to the direction of travel. The Financial Times reported that the largest U.S. banks spent a record $33 billion on stock buybacks in Q1 2026, helped by strong profits. After the June stress test, JPMorgan unveiled a new $50 billion share repurchase program and said it planned to raise its quarterly dividend 10% to $1.65 per share. Goldman Sachs lifted its quarterly dividend to $5 per share, while Morgan Stanley increased its payout by 15 cents to $1.15 per share.
The honest risk here is transparency cutting against itself. One concern is that the effort to increase transparency will undermine the effectiveness of the exams, since banks can orient their holdings ahead of exam windows to get the most favorable outcome possible. Governor Michael Barr dissented from the September final rule, warning the plan will “significantly weaken the stress test and consequently, bank resilience.” These are legitimate concerns, not rhetorical ones. A test that can be gamed is a test that provides false confidence.
Still, the investment case for the big banks has rarely rested on regulatory leniency. It rests on something older: the ability of a well-managed, well-capitalized business to compound earnings when it is not forced to hold speculative buffers against rules that might change next year. Goldman Sachs reported an annualized return on average common equity of 23.5% in Q2 2026. JPMorgan generated a 23% return on tangible common equity on $16.9 billion in net income excluding significant items. These are not distressed businesses waiting on a regulatory catalyst. They are high-return franchises that have been partially constrained by regulatory uncertainty for fifteen years.
Q3 earnings begin October 13. The numbers will matter. But the more significant shift is structural: for the first time in a long time, management teams at the largest banks can plan capital allocation across a multi-year horizon without a regulatory unknown lurking in the spring. That is the condition under which great businesses become compounders.
