KBRA Financial Intelligence

Fed Closes in on New Rate Cuts and Bank Regulatory Reforms

Welcome to KFI’s monthly Viewpoint. In this edition, we highlight the following key topics:

• The Federal Reserve’s roadmap for the remainder of 2025 and its impact on the banking industry

• How the White House plans to reshape the central bank throughout 2026 and 2027

• Mergers and acquisitions (M&A) activity among U.S. lenders slowed to six announced deals in June, down from 12 in May

Fed Remains Focused on Cuts Despite Inflation Concerns

Despite Fed policymakers broadly raising their expectations for inflation over the past three months, the latest projection materials from June’s FOMC suggest that the median projected policy path among Reserve Bank presidents and Board governors remains 50 basis points (bps) of rate cuts by year-end 2025—unchanged from a previous estimate in March. Assuming easing will retain a pace of 25 bps per cut, the Fed will need to squeeze in two rate reductions in just four meetings throughout the remainder of the year to meet its forecast.

Amid fears that inflation is primed to reverse some of the progress made over the past year in bringing it closer to the Fed’s 2% target rate, the emergence of simultaneous concerns surrounding growth are likely prompting some FOMC participants to move forward with further easing anyway. More than six months have passed since the Fed’s last rate cut in December 2024, a much longer pause than was initially expected.

In January, CME’s FedWatch tool, which calculates rate cut probabilities as implied by 30-day fed funds futures prices, projected a nearly 80% probability that the Fed would have cut at least once in 2025 by the time July’s FOMC meeting—scheduled for July 29-30—wrapped up. Today, the odds are essentially flipped, with FedWatch projecting a 95% chance of zero cuts by the end of this month’s gathering of Fed officials. Though traders appear to be much more aggressive in pricing in a September cut at about a 70% probability, the path of monetary policy remains highly uncertain.

White House to Strengthen Influence on Monetary Policy

Whatever the projection materials or futures markets suggest about the Fed’s posture becomes less certain beyond the close of 2025, due to an imminent reshaping of its Board of Governors. The Board serves as the executive body of the central bank and, although it is composed of seven Governors, each are permanent voters in the 12-member rate-setting FOMC. All Governors, including the Federal Reserve Chair, are appointed to the Board by the U.S. president. Though current Fed Chair Jerome Powell was nominated by President Trump to serve as Chair in 2018, he has become a persistent critic of Powell, who will likely be replaced when his term expires in May 2026.

The president’s criticism of Powell, who he often refers to as “too late” and urges him to “resign,” originates from the president’s belief that the fed funds rate should be hundreds of bps below the current 4.5% upper limit. President Trump has recently opined that the Fed should cut rates by “ONE FULL POINT” (or 100 bps) and went even further in an open letter to Powell, claiming that the fed funds rate should be in line with Japan, Denmark, and Switzerland’s policy rates, each of which are below 2%. Not only will the president likely nominate a new Chair to replace Powell in less than a year, but he will also be able to nominate a new Governor to the Board in January 2026 when Fed Governor Adriana Kugler’s term expires. Assuming President Trump’s choice for Fed Governor is confirmed by the Senate, it is likely that Kugler’s successor could then be elevated to the role of Chair as early as mid-2026. While no choice has been made, it is likely the president will handpick a successor that shares his dovish bend toward monetary policy. KFI highlighted the significance of President Trump’s mandate over the future of the Fed in a recent webinar, which can be viewed in its entirety here.

The other Republicans currently serving on the Board, excluding Powell, have become increasingly vocal about their desire to cut rates sooner than later. Governor Christopher Waller struck a particularly dovish tone following the close of the June FOMC, noting openly that the Fed could cut rates as soon as their next gathering in July. Waller’s outlook suggests the Fed should “start the process of bringing rates down” and set the stage for the new Vice Chair for Supervision, Michelle Bowman, to make similar statements. Bowman, who was confirmed as one of the Fed’s two Vice Chairs by the Senate in June, noted that she may also “support lowering the policy rate as soon as our next meeting” if inflation remained contained.

Fed Leads Charge in Regulatory Revamp

In addition to a potential shift in the approach toward monetary policy on behalf of some Republicans on the Board of Governors, Fed rules governing U.S. bank regulation may be set to change as well. KFI has previously highlighted proposed adjustments to U.S. bank capital requirements, in accordance with the final stage of the Basel 3 Endgame. The regulation seeks to update global capital standards related to risk-weighted assets (RWA) among financial institutions, based on agreements within the Basel Committee on Banking Supervision, but efforts to implement Endgame have remained deadlocked for years, with no consensus reached on a final proposal. As Vice Chair for Supervision, Governor Bowman—replacing Governor Michael Barr, who resigned from the job last year—will step in as the Fed’s primary representative in negotiations between the central bank, FDIC, and OCC, who all must agree to the terms of potential adjustments to capital adequacy ratios. Though there have been scant details on when or if a new implementation proposal will be submitted by the Fed, Bowman has acknowledged the potential benefits of increases to capital requirements in the past, but has also cautioned that regulators should “carefully weigh the benefit of increased safety from higher capital levels with the direct costs to banks,” which might push certain financial activities outside the regulatory perimeter of the banking system.

Contrary to a potential tightening of regulatory capital requirements tied to RWA, the Fed announced in June that it will soon consider plans to ease leverage requirements for the largest banks in the nation. The specific measure at issue is the enhanced supplementary leverage ratio (eSLR), which requires Global Systemically Important Banks (G-SIB) to set aside capital against assets regardless of their risk. The Fed Board of Governors voted 5-2 in favor of a proposal to reduce G-SIB commercial bank subsidiaries’ tier 1 capital requirements by 27%, which would result in “a $210 billion decline in bank capital,” according to Governor Barr. A smaller 1.4% reduction in holding company capital requirements would free up an additional $13 billion. Currently, G-SIBs must hold at least 5% capital at the parent company level, and 6% at the bank subsidiary level, well above the 3% supplementary leverage ratio that other large institutions—those above $250 billion in assets (or $10 billion in foreign exposures) but not considered G-SIBs—are subject to.

Vice Chair Bowman, who voted to advance the proposal, has repeatedly advocated for the reduction of the eSLR in her capacity as Governor, and then in her first speech as Vice Chair last month. She has cited concerns related to “constraints imposed by the eSLR,” which could make banks “less inclined to engage in low-risk activities like Treasury market intermediation.” As of 1Q 2025, the U.S.’s G-SIB banks—JP Morgan Chase, Citigroup, Bank of America, Goldman Sachs, Bank of New York Mellon, Morgan Stanley, State Street, and Wells Fargo—comprised more than 70% of all U.S. Treasury (UST) securities holdings among domestic banks, which suggests these institutions could increase demand for Treasurys if a reduction of the eSLR is enacted.

A significant injection of liquidity into the UST market on behalf of large banks has been cited by Treasury Secretary Scott Bessent as a key pillar of his goal to reduce long-term rates, noting earlier this year that the White House was “pushing to have this supplementary leverage ratio either reduced or removed, and it will allow banks to buy more Treasuries.” Broader demand for USTs among large buyers such as banks could help to bid up bond prices, thereby depressing yields. KFI has covered the impact of elevated yields on the U.S.’s widening deficits and how this has impacted the banking industry at length in previous Insights reports.

Proposed changes to the eSLR are likely meant to serve as a more moderate alternative to temporarily or permanently excluding USTs from the denominator of the leverage ratio altogether. But reducing the tier 1 capital requirements does not guarantee banks will deploy the resulting capital relief to acquire more UST securities or improve the resiliency of the Treasury market. Governors Barr and Kugler, in explaining their opposition to the eSLR proposal, each note that it is not the commercial bank subsidiaries that play the largest institutional role in Treasury market intermediation, but rather the broker-dealer subsidiaries who handle the core market-making tasks. Moreover, Barr notes that banks could instead use newfound headroom to “engage in the highest return activities available to them,” leaving no excess capital to shore up the Treasury market during times of financial stress.

As the OCC, FDIC, and Fed Board of Governors have initiated a 60-day public comment period in relation to proposed rulemaking to modify the eSLR, final votes on a finalized proposal by these agencies are unlikely to take place until September at the earliest. KFI will continue to follow developments related to regulatory reform in the banking space in our Insights research reports.

June 2025 M&A

Needham, Massachusetts-based NB Bancorp (NASDAQ: NBBK) announced in a June 5 press release that the $5.2 billion parent of Needham Bank (KFI Score: B) that it will acquire Provident Bancorp and its $1.6 billion commercial banking subsidiary, BankProv (NASDAQ: PVBC) (KFI Score: C-). The cash and stock transaction between the two Massachusetts banks, valued at $211.8 million, is expected to close in 4Q 2025.

Commerce Bancshares (NASDAQ: CBSH) (KFI Score: B+), the $32.2 billion parent company of Kansas City, Missouri-based Commerce Bank (KFI Score: B+), announced in a June 16 press release that it will acquire $4 billion Finemark Holdings, Inc. (OTC: FNBT) (KFI Score: B+) and its commercial bank subsidiary Finemark National Bank & Trust (KFI Score: B+), headquartered in Fort Myers, Florida. The all-stock deal, worth $585 million, is expected to close in January 2026.

First Financial Bancorp (NASDAQ: FFBC) (KFI Score: B), parent of Cincinnati, Ohio-based First Financial Bank (KFI Score: B) announced in a June 23 press release that it will acquire Westfield Bancorp and its $2.1 billion subsidiary Westfield Bank, FSB (KFI Score: B+) of Westfield Center, Ohio. The cash and stock transaction, valued at $325 million, is expected to close in 4Q 2025.

Kalispell, Montana-based Glacier Bancorp, Inc. (NYSE: GBCI) (KFI Score: B) announced in a June 24 press release that the $27.9 billion parent of Glacier Bank (KFI Score: B) will acquire Guaranty Bancshares, Inc. (NYSE: GNTY) (KFI Score: B+) of Mount Pleasant, Texas and its $3.2 billion commercial banking subsidiary, Guaranty Bank & Trust, N.A. (KFI Score: B+). The all-stock deal, worth $476.2 million, is expected to close in 4Q 2025.

Fort Davis, Texas-based Maverick Bancshares, the parent of $333.6 million Maverick Bank (KFI Score: B), announced in a June 25 press release that it will acquire Sandhills Bancshares, Inc. and its $223.8 million commercial banking subsidiary Tejas Bank (KFI Score: A-) of Monahans, Texas. The transaction value was not disclosed but is expected to close in 1Q 2026.

Community Bank, N.A. (KFI Score: B), the $16.5 billion commercial banking subsidiary of Community Financial System, Inc. (NYSE: CBU) (KFI Score B+), announced in a June 25 press release that it will acquire seven Santander Bank, N.A. (KFI Score: C+) branch locations in the Allentown, Pennsylvania area, in addition to certain branch related loans and deposits. The cash deal, worth $48 million, is expected to close in 4Q 2025.

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