TD Securities strategists Gennadiy Goldberg, Molly Brooks, and Jan Nevruzi have analyzed the proposed Basel III endgame and related US bank capital changes, concluding that these regulatory adjustments should ultimately support wider US swap spreads, particularly at the long end of the curve [1]. The strategists highlight that deregulation is set to lower capital requirements for both Global Systemically Important Banks (GSIBs) and smaller banks, with capital needs expected to decrease by 7.8% for smaller banks and 4.8% for GSIBs [1]. This reduction is anticipated to boost balance sheet capacity and improve liquidity in the US Treasuries and repo markets, despite ongoing geopolitical volatility [1].
Recently, swap spreads have tightened due to geopolitical-driven volatility, specifically following the Iran war, which led investors to adjust rate cut expectations and caused Treasury yields to rise sharply amid deteriorating liquidity conditions [1]. TD Securities expects geopolitics to remain a key driver in the near term, but believes that renewed focus on deregulation will help push swap spreads wider, especially at the long end [1].
The strategists also anticipate that proposals to ease Liquidity Coverage Ratio (LCR) and Internal Liquidity Stress Test (ILST) rules in the coming months will further contribute to widening swap spreads [1]. While banks may allocate additional capital to higher-return businesses, TD Securities expects that some of this capital will flow into the Treasury and repo markets, enhancing overall market liquidity [1].
Overall, TD Securities projects that the regulatory relief from the Basel III proposals will increase banks' balance sheet capacity, creating a widening tailwind for swap spreads once markets refocus on these changes [1].
CONCLUSION
TD Securities expects that US Basel III deregulation will decrease capital requirements for banks, increase balance sheet capacity, and ultimately widen swap spreads, particularly at the long end. While near-term volatility remains driven by geopolitics, regulatory relief is projected to improve liquidity in Treasuries and repo markets. The market takeaway is cautiously positive, with medium impact anticipated as banks adjust to the new regulatory environment.