What the New Capital Proposals Mean for Borrowers and Businesses
A well-regulated banking system and a thriving economy are not competing goals, they are essentially the same goal. That principle is at the heart of a significant regulatory proposal released this week, and it is worth understanding what it means for the people and businesses that banks serve every day.
Just this week the Federal Reserve, FDIC, and Office of the Comptroller of the Currency jointly proposed a modernization of bank capital requirements. The proposals, which are now open for a 90-day public comment period, would modestly reduce capital requirements for large banks by roughly 5% and for smaller community and regional banks by nearly 8%.
Calibration, Not Retreat
This proposal is not a dismantling of the post-financial crisis framework that has made the American banking system more resilient. Capital levels would remain substantially higher than they were before 2008. The regulators themselves have been explicit on this point.
What the proposals do seek to address is a problem that has quietly grown over the past decade. In some cases, capital requirements have been applied to traditional, lower-risk activities — like mortgage origination and small business lending — in ways that don’t accurately reflect the actual risk involved. The result has been a gradual migration of some of those activities out of regulated banks and into less-supervised corners of the financial system. That outcome serves no one well, including consumers who benefit from the protections that come with regulated lending.
As Federal Reserve Vice Chair for Supervision Michelle Bowman put it, the goal is to ensure requirements are “properly calibrated to risk” and not simply to reduce them across the board.
Smarter Examinations, Better Outcomes
Alongside the capital proposals, regulators have also moved to modernize the bank examination process. Effective January 1 of this year, the OCC eliminated rigid, one-size-fits-all examination requirements for community banks, shifting instead to a risk-based approach that focuses supervisory attention where it is most needed.
This is good policy. A regulatory system that focuses examiners on material financial risks rather than procedural box-checking is better for banks, better for regulators, and ultimately better for the customers who depend on both to function well. Strong oversight and efficient oversight are not mutually exclusive.
Who Benefits and Why It Matters
Banks are not the only stakeholders in this conversation. A financial system that includes well-capitalized banks, innovative fintech companies, credit unions, and other lenders creates more options, more competition, and better outcomes for consumers and businesses alike. The goal of smart regulation is to ensure that all of these players are operating on a level playing field with appropriate guardrails that protect the public without unnecessarily constraining the flow of credit.
When capital rules are accurately calibrated, banks can do more of what they do best: finance small businesses that create local jobs, extend mortgages to first-time homebuyers, support farmers through difficult seasons, and provide the credit lines that keep Main Street running. That is not an argument against regulation. It is an argument for getting regulation right.
