Banks have had a stellar first quarter. The major U.S. banks raked in nearly $50 billion in profits in the first three months of the year, The Guardian reported.

That was largely due to Wall Street bank traders, who profited from a volatile stock exchange, Reuters showed.

But even without the extra bump from stock trading, banks are doing well when it comes to interest, the same Reuters article found. And some banks could stand to benefit even more from this one potential rule change.

Morgan Stanley thinks it could have a major impact on Citi in particular.

Upcoming changes for banks

To understand why Morgan Stanley thinks things are going to change at Citi, you need to understand some recent bank rule changes.

Banks make money by lending out money, which usually comes from depositors. But people need access to their money and the right to withdraw whenever they want.

So, banks keep a percentage of all money deposited to make sure they can cover what the average person needs.

But what happens if there is a major demand for withdrawals, as we saw during the financial crisis of 2008?

That’s where capital requirements come in. After the financial crisis, major banks like Citi were required by law to hold a higher percentage of money in order to avoid major bank failures.

For years, banks had to put aside billions of dollars. Money that couldn’t be lent out or even returned to shareholders.

Now, that’s all about to change.

Capital change requirements for major banks

Banks that are considered globally systemically important banking organizations (G-SIBs) have a higher capital buffer than community banks as they usually engage in banking activity that is far more complicated than your average market loan.

The list depends on the size of the bank and its underlying activity, according to the Federal Reserve.

Current global systemically important banks

A proposal from U.S. federal banking regulators could drastically reduce the amount that these large banks have to hold in reserve.

Changes would result in the largest U.S. banks holding an average 4.8% less. While that might seem like a small percentage number, for banks of this size, it equates to billions of dollars, according to a Federal Reserve memo.

The proposed changes were a long time coming, Robert Sarama, a financial services leader at PwC, told TheStreet.

“It’s a bit of a recognition that perhaps the pendulum swung a little too far in the higher capital requirement following the financial crisis, making it harder for banks to participate in some markets,” he said.

Citi’s upcoming relief  

Citi is a G-SIB and as such, is subject to the capital requirement rules. And the fact that it could get 4.8% of its money back to spend elsewhere is why Morgan Stanley is so optimistic about the bank.

In a research note, Morgan Stanley analysts said they expect Citi’s annualized net income to be better than expected due to the upcoming capital relief.

While Citi stated its return on average tangible common equity (ROTCE), a type of financial measure, to be close to 13% by 2028, “the fact that Citi’s near-term and medium-term targets excluding capital relief were only marginally below our expectations including capital relief actually suggest upside to our numbers if Citi can deliver,” the note said.

More bank news

In fact, Citigroup’s own projections are likely conservative and it’s likely to show improvement each year, the analysts expanded.

“We have high conviction that the proposed capital rules will be finalized later this year and expect Citi can eventually revise the medium-term targets higher, suggesting further upside to consensus,” the Morgan Stanley analysts wrote.

Related: Citi just added an AI agent to your wealth management team

This story was originally published by TheStreet on May 11, 2026, where it first appeared in the Investing section. Add TheStreet as a Preferred Source by clicking here.

Story continues

Those who use the scheme, don’t have to pay for lender’s mortgage insurance (LMI), which essentially gets picked up by the backing of the Australian taxpayer.

But as the housing market cools, and prices in Melbourne and Sydney start to reverse, housing economists have warned buyers with a small deposit are a lot more vulnerable, and could quickly find themselves in negative equity.

Advertisement

New borrowers, including those who have used the 5 per cent deposit scheme, are falling behind on payments at a much higher rate this year. In the month of February, 0.78 per cent of new mortgage holders were 30 days in arrears, which is twice as high as the 0.39 per cent of borrowers who purchased their home earlier, according to data from the credit bureau Equifax, which was shared with Yahoo Finance.

“The scheme encourages risky borrowing and bidding. Borrowers are gambling with the taxpayers money,” former RBA economist Peter Tulip remarked online last week.

RELATED: Warning as Aussie couple face bankruptcy after using 5 per cent deposit scheme

But for a vast majority, like Natasha and Luke, they still have room to move. According to Loan Market broker Samuel Power, who helped the couple into their loan, their cautious borrowing approach is a common story.

“The only time we would look to move closer to that top-end borrowing limit is if it is the difference [for a client] between getting in or not, provided there is a strategy in place to be comfortable making repayments into the future,” he told Yahoo Finance.

Advertisement

“A key shift we are noticing is there is a shortage of stock in the price range typically favoured by first-home buyers and investors, which seems to be limiting both groups,” he added.

As Natasha works as an actor with unsteady income, the bank assessed the loan on the basis of Luke’s income, who works as an engineer for a Virgin Australia subsidiary.

“We’ve actually had three cash rate increases since we got our pre-approval, which is frustrating,” Natasha admitted.

“If the rate rises continue, then it’ll be consumption spending in our budget that gets cut.”

Two sides to first home buyer ‘band-aid’

Although she works in the entertainment industry, Natasha studied International Business and Economics at RMIT to get her degree.

She understands there is an inherent conflict at the heart of the policy that she believes made the difference to becoming a homeowner.

Advertisement

“It’s funny, I know economists have been sort of across the board very negative about the 5 per cent deposit scheme in terms of pushing prices up. Having studied economics, I understand that, but at the same time, I’ve benefited,” she said.

“So you know, sometimes a policy can work for you, even though you might think it’s not going to work long-term in the economy.

“So, yeah, it’s complicated … policy tends to be a band-aid, rather than something that’s actually structural change.”

Get the latest Yahoo Finance news – follow us on Facebook, LinkedIn and Instagram.

Advertisement