WASHINGTON (TNND) — Federal banking regulators are preparing to release new proposals limiting how much capital banks are required to hold to protect against losses.
Capital requirements force banks to hold reserves of cash and other assets that can be quickly moved as cushion against future losses. Banks have pushed to keep those requirements as small as possible to free up cash to lend and invest.
The Federal Reserve’s top banking regulator previewed the changes in a speech on Thursday in a push to encourage banks to increase lending and take back market share from private credit groups.
Fed Vice Chair of Supervision Michelle Bowman said the new rules would streamline capital calculation requirements and incentivize banks to be more active in mortgage lending, which has shifted heavily toward other financial institutions.
Regulators are planning to propose changes to a surcharge put on institutions that are deemed “global systemically important banks,” a designation that currently applies to 29 banks. Under the plan, those banks would see a small increase in capital requirements but pay less in surcharges that Bowman said were no longer aligned with underlying risk. Regional banks will see bigger decreases to their capital requirements. The changes would scale back elements of the Basel III endgame, a set of international capital rules developed after the 2008 financial crisis.
“Continuously increasing capital levels without a specific purpose imposes real economic cost,” Bowman said. “When capital requirements become excessive, they impair the banking system’s fundamental function of providing credit to the real economy. The price is paid in forgone economic growth, reduced job creation, and lower standards of living.”
The changes are meant to eliminate overlapping requirements, fill gaps in oversight and adjust calculations based on banks’ levels of risk, she said. The Fed, the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency will jointly release their proposals as soon as next week.
The framework regulators are now revisiting was built in the aftermath of the 2008 financial crisis.
“Capital requirements have grown into somewhat of a Frankenstein capital framework, where the level and complexity and the type of requirements that are imposed on banks to some degree just doesn’t reflect the true underlying risk as it was an initial major reaction to the 2008 financial crisis,” said Cliff Rossi, a professor of finance at the University of Maryland’s Robert H. Smith School of Business who also worked in high levels of risk management for several large banks.
“This is really about creating smarter capital rules than we’ve had in the past. They’re more refined. They’re taking more of a surgical approach to it,” he added.
Bowman’s predecessor, Michael Barr, proposed increasing capital requirements across the financial system following the collapse of Silicon Valley Bank in 2023, which sparked fears of broader contagion. His plan would have required the largest banks to hold an additional 2% in capital and forced regional banks to account for unrealized losses and gains in their calculations.
That effort ultimately stalled amid industry opposition and political pushback.
The new proposal marks a shift away from that tougher approach and aligns with the Trump administration’s effort to ease regulations on Wall Street. Regulators are also revising how banks are stress tested for emergencies and have rolled back additional rules for mid-sized institutions.
A street sign for Wall Street is seen outside of the New York Stock Exchange April 22, 2010 in New York. (Photo by Chris Hondros/Getty Images)
Concerns about the resiliency of the banking industry have ebbed since the run of bank failures in 2023 as regulators try to find balance between allowing banks to have enough capital to make loans, buy Treasurys and other activities to support the economy and maximize profits while keeping the financial system intact.
Critics argue the lighter requirements will increase the risk of bank failures that could require taxpayer bailouts and are a concession to industry lobbying.
“Three years ago, Wall Street launched an unprecedented lobbying attack to kill rules that would have prevented big banks from loading up on excessive debt to fund their risky trading operations and other activities,” Sen. Elizabeth Warren, D-Mass., said in a statement. “Trump’s bank regulators, once again, are handing the big banks exactly what they want — a weak rule that fails to address the severe flaws in the capital framework that were never fixed after the 2008 financial crisis, leaving our entire economy at risk.”
Banking groups have lobbied aggressively against Basel III and railed against proposals to increase the requirements on their cash reserves. A joint statement from the American Bankers Association, Bank Policy Institute and Financial Services Forum praised the changes Bowman outlined.
“We have consistently called for a capital framework that reflects the actual risks in the banking system, rather than over-calibrated requirements that impede economic growth and unnecessarily drive up costs,” they said. “The capital proposal outlined today suggests a welcome focus on risk-sensitivity and a comprehensive view, taking into account the cumulative effects of all capital requirements.”
The proposals will be subject to a 90-day public comment period before regulators finalize them later this year.
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