Looser Banking Rules Could Mean Cheaper Loans For You. What Could Go Wrong?

There’s a constant tightrope act at the center of the financial system. When loans get cheaper and easier to access, the financial system is taking on more risk somewhere.

That tradeoff is at the center of three new rules proposed by financial regulators that would let banks hold less capital to cover potential losses. The proposal is more lenient than versions floated in 2023, which would have raised capital requirements. It reflects a broader swing toward a more relaxed, industry-friendly regulatory approach that accelerated under the Trump administration in 2025.

The banking industry says Americans would benefit from lower borrowing costs. Critics warn that the proposal is a recipe for trouble. The rules allow banks to pocket bigger profits, while leaving taxpayers and the broader financial system to absorb the blow when the economy turns.

“Most people don’t see the capital buffers,” says Helaine Olen, journalist and author of “Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.” “They only notice it when something goes wrong — and that’s too late.”

A bank’s capital serves as its cushion. It needs money on hand to cover losses and withstand other financial shocks, like a sudden flood of withdrawals or broader economic stress. If a bank loses money on loans or investments, its capital protects depositors and investors.

If a bank doesn’t have enough capital, it could fail during a downturn and the effects would ripple through the economy.

The crucial role of bank capital became painfully clear during the 2008 financial crisis. Prior to that time, banks were holding too little capital while taking on enormous risk — through subprime mortgage securities and exposure to credit default swaps — leaving them dangerously vulnerable when those positions ultimately collapsed. As losses piled up, banks turned to the government for bailouts.

While most banks were able to recover (thanks to the bailouts), it triggered a massive financial crisis thrusting millions of Americans into a period of economic hardship — known as the Great Recession — that endured for years. In response to the recession, federal regulators put into place stricter capital requirements in order to shore up banks’ finances and prevent another crisis.

“It wasn’t like somebody woke up one morning and said, ‘Gee, I think it would be a great idea if the banks held more money against risk — they did it because the banks needed it,” Olen says.

As post-crisis caution fades, regulatory rules in the financial system are loosening up. Over the past year, some bank regulations have already been relaxed, and the latest proposal — known as “the Basel III Endgame” — would allow banks to operate with thinner financial cushions.

The rules are complex, but to give an example, they would lower “common equity tier 1” capital requirements by 4.8% for the largest banks, 5.2% for mid-tier banks and 7.8% for smaller banks. Collectively, the rule changes would allow banks to free up almost $90 billion in capital.

Depending on who you ask, paring back capital requirements means either a remedy to an overcorrection or a disaster waiting to happen.

On March 19, the FDIC, the Federal Reserve Board and the Office of the Comptroller of the Currency presented the proposals to revise Basel III rules, launching a 90-day comment period before the rules are finalized. The agencies expect that while “the amount of overall capital in the banking system would modestly decrease as a result of these proposals, capital levels would still be substantially higher than they were before the financial crisis.”

Proponents say the new rules allow more targeted oversight. For example, the new rules aim to prevent another bank failure like those that hit Silicon Valley Bank and others in 2023. At the time, SVB had bonds that had, on paper, lost value. But federal rules didn’t require banks to include unrealized losses in capital calculations.

When news spread that SVB needed to raise funds to rebuild its financial cushion, panic hit and major customers rushed to withdraw their money all at once. SVB was forced to sell those bonds, which led to major losses and ultimately its collapse. The new rules force banks to include unrealized losses into their math, making it easier to detect true weakness before it becomes a crisis.

The banking industry quickly praised the new package of rules.

The banking industry, including the Consumer Bankers Association, Bank Policy Institute, American Bankers Association, Financial Services Forum, and National Bankers Association, supports regulators’ efforts to enable banks to lend more to American businesses and households. They believe that looser rules could lead to more competitive rates on mortgages, small business loans, and other types of credit lending, ultimately fueling economic growth while maintaining the banking system’s resilience.

However, critics are concerned that the Basel III Endgame weakens reforms designed to make the financial system more resilient. They argue that lowering banks’ cushions could leave the system more vulnerable to economic shocks. Advocacy groups like Americans for Financial Reform and Better Markets warn that reducing capital requirements could increase risks, especially for small banks and borrowers who rely on them.

There are also concerns about the impact on consumers, as the benefits of lower capital requirements may primarily benefit wealthier clients rather than average borrowers. Additionally, the potential reduction in safety buffers for trading and derivatives activities could pose risks similar to those that led to the 2008 financial crisis.

As the debate continues, the question remains whether the banking industry can handle another financial crisis with reduced capital requirements. The true test of these rules will be seen when the economy faces inevitable downturns in the future. Each year, the Federal Reserve Board conducts a stress test for the largest banks in the U.S., such as JP Morgan Chase, CitiGroup, Bank of America, Goldman Sachs, and Morgan Stanley. This test was initiated after the 2008 financial crisis to confirm that these banks were truly “too big to fail.”

In the 2025 stress test, all 22 banks demonstrated that they could maintain capital levels above the minimum requirements while absorbing potential losses of over $550 billion from lending and real estate. However, compared to the previous year, the test was less rigorous. The hypothetical scenario assumed less severe economic conditions and did not consider present-day risks from volatile markets or geopolitical events like the Iran war and subsequent energy price shocks.

Some analysts are concerned that while the banks may appear well-capitalized under normal circumstances, they could struggle to handle losses and maintain lending in the face of more severe economic downturns affecting multiple sectors. Olen, a financial expert, warns that deregulation may erode the safety measures in the financial system over time, potentially harming consumers.

Uncertainty surrounds the impact of the Basel III Endgame rules, with minimal short-term changes expected. However, the long-term risk landscape is shifting, raising concerns about the future stability of the financial system. Olen emphasizes the importance of these rules in safeguarding consumers and expresses apprehension about the consequences if they were to be dismantled. Following the recent guidelines, the text is being rewritten.