US, Europe Bet on Banks to Fund Strategic Priorities
Deregulation is the economic backbone of NATO’s new strategic doctrine.
By: Antonia Colibasanu
Both Washington and Brussels are signaling a major break from the regulatory posture that has defined the trans-Atlantic financial architecture since the 2008 global financial crisis.
On June 25, the U.S. Federal Reserve proposed easing capital requirements for large U.S. banks – including a major cut to the Enhanced Supplementary Leverage Ratio – one of the most significant rollbacks of post-crisis safeguards in more than a decade.
At the same time, the European Commission and the Council of the European Union delayed and revised key elements of the Basel III framework, including a postponement of the Fundamental Review of the Trading Book and changes to liquidity and securitization rules.
The EU also made permanent the transitional ratio levels, which were set to increase on June 28, for certain short-term securities financing transactions.
In short, both the U.S. and the EU are aiming to boost lending and market liquidity.
These shifts, announced almost simultaneously with the NATO summit, suggest a coordinated trans-Atlantic move toward a more permissive financial environment.
Both sides are grappling with persistently slower growth, subdued private investment and lingering distortions stemming from the pandemic’s aftermath, including labor market dislocations, volatile inflation and fragile supply chains.
In this context, loosening post-2008 capital constraints is not just a strategic maneuver – it’s an economic necessity.
Unlocking Investment, Supporting NATO
The relaxed rules will enable banks to deploy more capital to priorities that governments alone cannot finance, such as defense production, industrial reshoring, the energy transition and digital infrastructure.
These areas are central to the West’s push for strategic autonomy and are potential engines for growth, jobs and innovation.
With limited fiscal space, especially in Europe, governments are increasingly leaning on banks to bridge the gap between monetary restraint and strategic investment.
In the near term, the deregulation is expected to modestly increase economic activity and liquidity, but it comes amid global headwinds, including intensifying trade disputes.
The Fed’s supplementary leverage ratio proposal aims to allow banks to hold more “safe” assets and facilitate U.S. Treasury securities trading.
More broadly, credit conditions could ease as banks allocate less capital to low-risk assets, freeing up lending capacity for consumers and businesses.
This added flexibility could provide a short-term growth boost at a time when global momentum seems to be stalling.
The timing of these moves – coinciding with the NATO summit in The Hague – is no accident.
NATO leaders at the summit endorsed a plan to raise defense spending to 5 percent of gross domestic product by 2035, and both the U.S. and the EU appear to be aligning their financial systems to support that scale of investment.
Looser capital rules enable banks to expand their balance sheets, finance national priorities and underwrite private-sector involvement in areas like defense, energy, critical infrastructure and supply chain resilience.
In this light, deregulation is the economic backbone of NATO’s evolving strategic doctrine.
In the United States, the push is also politically driven.
The Trump administration sees current rules as a drag on U.S. competitiveness and a burden on banks that could otherwise fuel growth.
The proposed changes could release more than $200 billion in capital, producing a “regulatory windfall” for large banks.
Critics, including some Fed governors, warn the move could increase systemic risk, especially in this volatile environment marked by trade disputes, falling foreign direct investment and rising government debt.
In the EU, regulators are moving more cautiously but with clear intent.
Concerned about competitiveness with the U.S. and Asia, and under pressure to fund the bloc’s defense, energy and digital priorities, Brussels is easing liquidity standards and delaying stricter trading book rules.
This gives banks more flexibility to support cross-border investments and state-led strategic projects.
The move also reflects Europe’s growing recognition that in an era of increased military and economic coercion, economic security and financial mobilization are as vital as military readiness.
The EU’s regulatory adjustments represent another step in its broader effort to reindustrialize and strengthen its defense capacity.
The EU’s determination to unlock funding for defense became clearer in March 2025, when finance ministers approved a plan allowing each country to spend an additional 1.5 percent of GDP annually on defense for four years without breaching EU deficit limits.
If fully used, the so-called escape clause could free up an additional 650 billion euros ($760 billion) in national defense spending, supplementing a new 150 billion-euro loan facility for joint arms procurement known as the Security Action for Europe.
More important, EU officials also updated sustainable finance guidelines to affirm that defense investments are “compatible with sustainability criteria,” challenging the perception that EU rules prohibit capital flows to the arms sector.
However, if trade tensions escalate, they could undermine the benefits of deregulation. Citing the toll of “the Trump administration’s trade war” on business confidence, the Organization for Economic Cooperation and Development already cut its global growth forecast for the year to 2.9 percent, down from 3.3 percent in 2024.
The U.S. continues to threaten new tariffs on several trade partners when its 90-day truce expires July 9.
If the U.S. and the EU fail to strike a new trade agreement and Washington carries out its threat, Brussels would likely retaliate, further straining already weak European growth and disrupting supply chains.
While looser capital rules could provide short-term stimulus and have already contributed to a weaker dollar and modest euro gains, renewed tariff battles could reverse those trends, reignite global risk aversion and rattle markets.
In the longer term, prolonged trade wars (or long-term negotiations on commercial policy) could condemn the global economy to a lower growth path regardless of financial deregulation.
Higher trade barriers would fragment international markets, reduce efficiency and force supply chains to adjust, potentially fueling inflation.
Even with looser rules, banks could retreat to safer assets or tighten lending if business conditions deteriorate.
Governments could then pile on debt to offset the trade-related economic damage, compounding the fiscal strain.
Factoring in Russia and China
U.S. tariff disputes with China and the EU reflect deeper geopolitical tensions.
Both the U.S. and its European allies see China’s growing influence and Russia’s territorial aggression as threats to the established international order, and the tariff battles are embedded in this broader context.
The U.S.-EU relationship has been a cornerstone of international stability, but the future durability and effectiveness of trans-Atlantic ties will largely depend on how well they can balance their economic, military and diplomatic concerns.
The NATO summit provides some hope but also raises new questions.
Russia’s invasion of Ukraine has already reshaped energy markets and prompted sweeping Western sanctions on the Russian financial and energy sectors.
Europe is racing to secure alternative energy sources, while Washington considers whether to apply more sanctions – contingent on Moscow’s stance toward Iran, its nuclear program and bilateral negotiations.
So far, the Kremlin has remained quiet, and no apparent progress was made in the Trump-Putin phone calls.
Meanwhile, China’s growing assertiveness in the South China Sea and its economic entanglements in Africa and Latin America further complicate the West’s strategic outlook.
U.S. and European economic dependencies on China add another layer of complexity.
Their handling of China’s global posture and Russia’s military ambitions will shape the future international order.
An effective response must account for the nuances of Russia and China’s strategic alignment, including their different perceptions of opportunities and vulnerabilities in the face of Western resistance.
Finally, the Middle East remains a critical area of competition for energy, defense and trade.
How Russia reacts to regional developments and engages with North Africa will directly affect its broader relationship with Europe and the United States.
Any escalation of conflicts in the region could catalyze a reordering of not only shipping routes but also economic alliances.
For now, the easing of capital rules by the U.S. and the EU is cause for cautious optimism.
Amid disagreements on trade and the Russia-Ukraine war, financial market regulation remains an area where Washington and Brussels can coordinate.
But if the U.S. imposes new tariffs on July 9, U.S.-EU relations will hit a new low, market confidence will be badly shaken and recent positive currency moves could reverse – blunting the impact of looser capital rules.
In the long run, Western financial reforms could unlock more lending and investment, but the global economy still faces a hard trade-off between short-term growth and long-term stability.
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