Writer: Eric Bank
Editor: Lillian Guevara-Castro
Reviewer: Adam West
Key Takeaways
- Fed Vice Chair Michelle Bowman and Treasury Secretary Scott Bessent favor tailored capital requirements meant to alleviate distress on small banks.
- Subprime lenders could benefit from capital relief, collateral flexibility, and reduced compliance costs.
- Reforms can increase competitive pressures on banks and nonbank lenders, which can prompt strategy shifts.
Federal Reserve Vice Chair Michelle Bowman and Treasury Secretary Scott Bessent both addressed a July financials conference on how they intend to tackle capital standard reform — a process with the prospect of upending the regulatory deck for banks serving nontraditional borrower pools.
Bowman broke ranks with the existing model of regulation, arguing that the complexity of current capital standards makes them unworkable for smaller institutions. Bessent repeated the call for a simpler, common structure for capital to lighten the load on banks outside the megabank tier.
Either way, the two stances indicate the possibility of having some post-crisis requirements rolled back and a tilt toward more even-playing-field competition between banks and nonbanks.
The Basel Backdrop and Lending Constraints
This push comes at a moment when conventional frameworks like Basel III still tower over balance sheets. While such global guidelines did serve to increase resilience, they’ve simultaneously made it harder for smaller institutions — particularly subprime lenders — to extend credit.
Research suggests that each 1% increase in capital requirements can reduce loan volumes by as much as 8%.
Tailoring Capital Standards to Institutional Risk
Bowman’s call for “regulatory tailoring” meets the conflict head-on. Instead of considering the same measuring stick for all institutions, she argues, the regulator should tailor rules by actual size, exposure, and complexity.
Such an approach could exempt smaller banks and regional lenders from the highest capital buffers, restoring some lost lending potential — especially in regions poorly served by large institutions.
Nonbanks and subprime specialist lenders may see greater flexibility. With fewer compliance hurdles and reduced indirect pressure, they could operate more efficiently and serve borrowers without passing on higher costs.
As Bowman opined, “Capital regulation should be appropriately aligned with size, risk, and complexity, rather than one-size-fits-all.”
Bessent’s Push for Collateral Flexibility and Capital Mobility
Bessent goes a step further, proposing to scrap the dual capital regimes and revise leverage thresholds to increase capital mobility within the banking system.
He’s also supportive of broadened collateral eligibility — namely, by permitting loans, including riskier ones, to serve as funding tools. Alongside decreased liquidity mandates, such a plan could give subprime lenders more authority over how they manage portfolios.
Taken together, these propositions may free new liquidity channels and smooth the friction that normally slows subprime businesses. Less capital drag and better balance-sheet tools mean faster response, more competitive products, and broader reach.
But it predicts more turf wars as well, as incumbent banks — once constrained by regulation — reenter markets currently dominated by fintechs and subprime lenders.
Competitive Pressure and Strategic Repositioning
“We need capital rules that encourage lending without inviting systemic risk,” Bessent said. “The goal should be a framework that works for all banks, not just the biggest.“
That appeal may strike a chord in thinly margined boardrooms where credit risk is most acute. But regulatory relief through looser capital standards will likely trigger closer supervision in other areas of risk modeling, disclosure, and stress testing. Lenders banking on the gain will have to have their wits about them.
A Measured Rollout with Strategic Implications
Thankfully, the process will not occur overnight. Bowman and Bessent both stated that reforms would be implemented over a gradual timeline with opportunities for public feedback and calibration of policy.
That provides institutions with a window to reevaluate capital strategies, adjust liquidity reserves, and play out scenarios under new assumptions.
The backdrop is a shifting lending environment. Since 2016, the nonbanks and shadow banking entities have been steadily capturing market share, often at the expense of traditional players that adhere to stricter rules.
As policy winds shift, the balance of power can change. Banks may regain ground they once lost, while subprime players are forced to adapt or push harder.
For companies with limited funding and higher-risk exposure, reform may provide a breath of fresh air. Whether it becomes a tailwind or headwind will depend on their agility and ability to read the new landscape.
