Regulators Are Cutting Capital Rules in Unison
When three regulators loosen capital rules in the same 36 hours, that's not independent judgment — it's a coordination failure dressed as consensus.
Three regulators loosened bank capital rules in the same 36-hour window. That’s not coincidence — it’s a signal.
Canada’s OSFI lowered capital requirements for the country’s largest banks for the first time in three years, explicitly naming defense spending, critical infrastructure, and AI as the targets for newly freed lending capacity. The Bank of England announced plans to dilute capital requirements on investment bank trading books and published parameters for private credit stress-testing. India’s SEBI took a different but related path: it reintroduced open-market share buybacks, giving listed companies a new avenue to return capital to shareholders — a loosening of restrictions on how companies can deploy retained earnings, even if it’s not a bank prudential rule in the same mold. Three jurisdictions, one window.
The conventional read is that each regulator is responding to local conditions: Canada wants to finance its NATO commitments without raising taxes, the UK is trying to stay competitive after losing euro-clearing flows post-Brexit, India wants to goose a stock market that has underperformed global peers. All true. All insufficient as explanation.
The deeper read is that the post-2008 Basel III tightening cycle has quietly ended, and every major regulator is now in a race to look business-friendly before their competitors do. The logic is the same logic that drives corporate tax cuts and special economic zones: if capital is mobile and talent is mobile, regulatory burden is just another cost of doing business in your jurisdiction. The regulator who loosens first captures the flows. The regulator who loosens last gets the blame when the next crisis hits.
Here’s what that gets wrong. Capital requirements don’t just constrain risk — they constrain the timing of risk expression. When you lower buffers during a benign credit cycle, you’re not removing risk. You’re compressing the spring. The Medallia situation, also in today’s news, is instructive: private credit lenders who fancied themselves coupon-clippers may find themselves having to run the company as equity owners. The FT’s framing is exactly right — private lenders had better be prepared to run companies. That’s what happens when the risk you papered over at origination shows up at maturity. The loosening of public bank capital rules doesn’t fix this dynamic; it widens the aperture for the same mistakes.
Canada’s stated rationale is the most honest and the most alarming. The OSFI isn’t pretending this is a neutral macro-prudential adjustment. The regulator said, out loud, “take risk.” The target is AI and defense infrastructure — long-duration, government-adjacent, politically salient lending categories. That’s not central banking. That’s industrial policy laundered through bank balance sheets. When the lending goes sour — and some of it will — the capital cushion that was supposed to absorb the loss will already have been spent.
The UK version is subtler but structurally identical. Diluting trading book capital requirements means investment banks can carry more market risk per dollar of equity. That’s fine if you believe current market volatility pricing is correct. It’s less fine if you think volatility is being systematically suppressed by the same policy environment that’s encouraging the loosening in the first place. You’re not measuring the ruler with the ruler, but you’re close.
None of this means a crisis is imminent. Basel III probably over-indexed on certain risk categories while under-indexing on others — the private credit explosion is partly a consequence of pushing risk out of regulated balance sheets. Adjustments were inevitable. But there’s a difference between a deliberate, evidence-based recalibration and three regulators doing it simultaneously in response to political pressure and competitive anxiety. One of those is prudential supervision. The other is a coordination failure dressed as consensus.
The stakes are straightforward: if this loosening cycle runs for three to five years without a credit event, the regulators get credited with unlocking growth. If a credit event arrives on schedule, the post-mortem will note that every major jurisdiction had just cut its buffers. History suggests the post-mortem gets written.
When regulators all say “take risk” at the same time, that’s the moment to remember what risk means.