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. A joint statement released by the Consumer Bankers Association, Bank Policy Institute, American Bankers Association, Financial Services Forum and National Bankers Association said, “We welcome regulators’ efforts to enable banks of all sizes to make more loans to American businesses and households, fueling economic growth while maintaining resilience in the banking system.”

Essentially, the banking industry says that looser rules could enable them to lend more easily to households and small businesses, while offering more competitive rates on mortgages, small business loans and other types of credit lending. They also argue that keeping borrowers within the regulated banking system — as opposed to unregulated “shadow banks” — is a win for consumer safety.

Proponents also argue that greater access to credit would protect consumers, since they’d be less likely to seek loans from private credit companies (as opposed to federally insured institutions).

The Fed and banking trade groups suggest the financial system is much safer than before the 2008 crisis and that lowering capital buffers won’t compromise its stability.

Critics are concerned that the Basel III Endgame weakens reforms designed to make the financial system more resilient. They argue that while the new rules closing the accounting loophole that sank SVB, lowering banks’ cushions leaves the system more vulnerable to economic shocks.

Americans for Financial Reform, a nonprofit advocacy group, argues that the current capital buffers are what prevented the 2020 recession and the 2023 regional bank failures from spiraling. AFR senior policy analyst Oscar Valdés Viera said in a March 20 press release, “Weakening them now, amid geopolitical chaos, turbulence in private markets, a potential AI-related bubble inflating, and signs of a slowing economy, is like closing your umbrella in the middle of a downpour because you are not getting wet.”

The FDIC, the Federal Reserve Board and the OCC expect the proposals would cut capital requirements for banks of all sizes with the largest banks seeing modest reductions and community banks seeing moderate reductions. However, Better Markets, another nonprofit financial reform advocacy group, argues that the agencies may be understating the impact.

The reliability of data is also a point of contention. The analysis underpinning the proposals relies on incomplete, self-reported data from the largest banks — and it comes from 2023, meaning it doesn’t reflect current balance sheets.

Phillip Basil, director of economic growth and financial stability at Better Markets, calls this an “upside down” approach to policymaking: “Essentially, they’re avoiding paying the tab now to eventually have the tab paid by depositors and taxpayers in the economy in the future when there’s turmoil,” Basil says.

Better Markets asserts that the true capital reductions are likely much larger than presented and will grow over time. The group says that when combined with other regulatory rollbacks, the Basel III Endgame proposals would leave Wall Street’s safety buffers as thin as they were before the 2008 financial crisis.

“You can’t really undo decades of regulation without consequences,” Olen says. “These rules were layered on for a reason, and taking them away doesn’t just reset things to neutral — it shifts risk somewhere else.”

The banking industry is promising Americans more affordable loans in exchange for weaker capital rules. The pitch sounds good, but there are caveats to consider.

“What the new capital requirements are doing is lowering capital for mortgage loans that have high down payments,” Basil says. “What it’s gonna end up doing is it’s just going to benefit the wealthier clients… First-time home buyers won’t really benefit.”

Olen is skeptical that banks will rush back into the mortgage market, in part because there isn’t a large pool of untapped borrowers waiting for loans. Without strong demand, rule changes alone may not be enough to meaningfully increase lending. “Maybe some banks will marginally loan a little bit more money, but I have a really hard time believing that banks are just going to suddenly go, ‘I’ve got to get back into the mortgage business!’” Olen says. “If it’s not required, I question whether it will really happen.”

She adds a broader caution about systemic behavior: “The big banks could have the best of intentions — let’s assume they do — but inevitably somebody’s gonna go do some risky debt, they’re gonna make more money, and then somebody else is gonna go, ‘I should do that,’ and so on down the line, till the whole thing blows up,” Olen says.

Furthermore, there is a risk to the community banks that many borrowers and small businesses rely on. Basil argues that if these institutions operate with thinner cushions, they have less tolerance for error if an economic downturn hits. The borrowers most at risk are those who rely on them most — small business owners, first-time buyers and people in smaller cities and towns without the presence of big banks.

Beyond small banks and mortgages, the biggest capital reductions affect trading and derivatives — two activities that fueled the 2008 financial collapse. Better Markets says weakening those safeguards could leave taxpayers on the hook.

Each year, the Federal Reserve Board runs a hypothetical stress test for the largest banks in the U.S., like JP Morgan Chase, CitiGroup, Bank of America, Goldman Sachs and Morgan Stanley. The test began after the 2008 financial crisis to ensure the banks really were “too big to fail.”

In the 2025 stress test, all 22 banks showed they could remain above minimum capital requirements while absorbing over $550 billion in potential lending and real estate losses.

However, the test was less rigorous last year than in the prior one. The hypothetical stress scenario assumed less severe economic conditions than the Fed tested in 2024 and didn’t account for present day risks due to volatile markets or geopolitical shocks — such as the Iran war and subsequent energy price shocks.

Some analysts say that despite appearing well-capitalized under routine scenarios, that more volatile conditions affecting multiple sectors of the economy could strain the banks’ ability to absorb losses, maintain lending, and protect depositors in the event of a more severe downturn.

Olen says there is still so little clarity about what the Basel III Endgame rules will end up doing and it’s likely that not much will change in the short term. While the immediate impact on your monthly loan payment might be negligible,the long-term risk is shifting. Olen fears that over time deregulation will eat away at safety guards in the financial system and ultimately do damage to consumers.

“These rules were put in for a reason. They have protected us,” Olen says. “And I don’t want to know what will happen if they, you know, if they go away. I’m sure I’m about to find out.”