Are Bank Regulations Being Weakened At The Worst Possible Moment?

Economic uncertainly would be made worse by a bank crisis

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Three new federal proposals would strip tens of billions from the capital buffers designed to protect ordinary Americans. The timing couldn’t be worse — and the promised benefit, a bank-led mortgage lending boom, is not coming. Together with three other witnesses, I will testify before the House Committee on Financial Services, Tuesday April 28 at 10am, about why this is a terrible time to weaken bank regulations.

Three Notices for Proposed Rulemaking

On March 19, federal bank regulators released what they described as a long-overdue modernization of America’s bank capital rules. The Federal Reserve, the OCC, and the FDIC jointly proposed three Notices of Proposed Rulemaking that would, in aggregate, reduce capital requirements at the nation’s largest banks by nearly five percent. When combined with recent changes to the enhanced supplementary leverage ratio and stress testing, the eight globally systemically important banks — our GSIBs — face a six percent reduction in tier 1 capital requirements. That translates to roughly $60 billion stripped from the buffers designed to absorb losses before taxpayers are called upon to help.

The proposals arrive at a moment of cascading economic stress. GDPNow forecasts just 1.2 percent annualized growth for the first quarter of 2026, a stunning collapse from the 3.1 percent projection made just two months earlier. Consumer sentiment has fallen to its lowest reading in 74 years. Credit card delinquencies have climbed to 7 percent. Mortgage delinquencies are rising. Americans are increasingly turning to buy-now-pay-later services to cover grocery bills. Against this backdrop, weakening the safeguards on the institutions that sit at the center of our economy is not modernization. It is a gamble.

The Promise That Won’t Be Kept

The primary justification offered for these proposals is that lower capital requirements will unlock a wave of bank mortgage lending. The argument has political resonance: homeownership remains aspirational for millions of Americans priced out of today’s market, and banks have indeed pulled back from mortgage origination over the past decade. The logic seems intuitive — free up capital, and banks will lend more.

The evidence says otherwise. Analysts, academics, and the industry’s own representatives have examined the proposals carefully and reached a consistent conclusion: a surge in bank mortgage origination is not coming. Bob Broeksmit, president and CEO of the Mortgage Bankers Association — an organization that broadly supported the rule changes — acknowledged to Politico that he did not expect “a sea change in who does mortgages.”

The reason is structural. Banks have spent more than fifteen years systematically dismantling their mortgage infrastructure. They closed servicing platforms, laid off loan officers, and allowed institutional knowledge to dissipate. Changing a capital ratio does not rebuild a technology platform, reconstitute a compliance team, or restore the expertise required to originate and service mortgages at scale. As one Mayer Brown partner who advises major banks observed, transforming a large bank’s operations into something resembling an independent mortgage lender would be “extraordinarily difficult” even with favorable capital rules.

What lower capital will do is create room for banks to expand their highest-return activities: proprietary trading, lending to private credit funds, and returning cash to shareholders through dividends and share buybacks. The pattern is well established. In the first quarter of 2026 alone — a period of active regulatory easing — America’s eight largest banks returned $46.17 billion to shareholders. That is more than half a billion dollars per day. The banks most aggressively buying back stock in 2006 and 2007 were the same institutions that required taxpayer rescue in 2008.

What a Real Crisis Would Reveal

To understand the risk embedded in these proposals, I ran a stress test calibrated to the conditions of the 2007–2009 global financial crisis and applied those assumptions to the post-proposal capital environment. The results are sobering.

Under GFC-analog stress, where CET1 erosion for trading-heavy institutions runs between 650 and 700 basis points and even commercial-oriented banks see 450 to 600 basis points of erosion, four to six of the top twenty U.S. banks would be pushed dangerously close to the 4.5 percent absolute minimum capital floor set by Basel III. Wells Fargo, already holding a relatively thin CET1 ratio of 10.6 percent, would be stressed to approximately 5.6 percent — just 1.1 percentage points above the regulatory floor. Ally Financial, at 9.7 percent today, would be stressed to an estimated 6.8 percent.

Critically, those 2007–2009 stress assumptions do not include the risks that define 2026: elevated geopolitical tensions, cybersecurity vulnerabilities, artificial intelligence exposures, historic levels of bank lending to private credit and other non-bank financial institutions, or the mounting financial effects of climate change. The next crisis will be shaped by these forces. Not one of them argues for loosening capital standards now.

When Banks Fail, Main Street Pays

The case for strong capital rules is ultimately not technical. It is human. During the 2007–2009 financial crisis, unemployment doubled — from 5 percent to more than 10 percent. Wealth losses fell with brutal inequality: Hispanic families lost nearly 50 percent of their net worth; African American families lost approximately 34 percent; white families lost more than 10 percent. Those figures represent destroyed lives, lost homes, and shattered retirements. The recovery took years. For many communities, it never fully arrived.

Banks are not ordinary companies. As the late Gerald Corrigan, former president of the Federal Reserve Bank of New York, wrote decades ago — and as events continue to confirm — banks are special. They are the connective tissue of the entire economy. When a large bank fails, or even threatens to fail, the harm radiates immediately and widely: credit contracts, businesses cannot make payroll, and workers lose jobs. The consumers most dependent on bank lending — small business owners, first-time homebuyers, lower-income households — are typically last to regain access when banks pull back.

Regulations based on Basel III and Dodd-Frank, implemented beginning in 2010, have demonstrated this dynamic conclusively. The critics’ argument — that capital rules kill lending — has not been borne out by the data. U.S. bank assets have grown 116 percent since 2010, from $11.7 trillion to $25.3 trillion. Net income has risen nearly 290 percent, from approximately $20 billion to nearly $78 billion. Dividend payouts have hit all-time records. Banks with higher capital levels have lower borrowing costs, higher credit ratings, and, crucially, they lend more — especially during economic stress, when undercapitalized competitors contract sharply.

Three Gaps Congress Must Close

Among the fifteen recommendations I have submitted to the House Committee on Financial Services, three are most urgent because they address the gaps most likely to produce bank failures and taxpayer costs if left unresolved.

First: Extend the Liquidity Coverage Ratio to all Category IV banks — those with $100 billion to $250 billion in assets. Silicon Valley Bank lost $42 billion in deposits in a single day in March 2023. It was not required to meet any enforceable liquidity standard. NPR 2 does nothing to close this gap for the 40 to 60 Category IV banks most likely to face the next wave of deposit runs. Congress should direct the agencies by statute to require a modified LCR — calibrated at 80 percent of the full standard — for all Category IV banks, phased in over three years.

Second: Retain a binding output floor of 72.5 percent on internal risk models. NPR 1 consolidates large bank capital calculation into a single internal model stack, eliminating the constraint that model outputs must produce capital no lower than a percentage of the standardized approach result. Without this floor, sophisticated modeling at the largest banks can systematically compress required capital over time — exactly the dynamic that amplified losses during the financial crisis. The international Basel III standard includes this floor. The U.S. proposal discards it.

Third: Restrict dividends and share buybacks for any bank whose CET1 ratio falls within 200 basis points of its post-NPR minimum, until those buffers are restored. The proposals collectively release an estimated $40 to $70 billion in capital. Without distribution constraints, history tells us exactly where that money goes: to shareholders. The Americans who depend on these banks — depositors, borrowers, small businesses, municipalities — do not benefit from that transaction. Taxpayers, however, remain on the hook when the buffers prove insufficient.

A Dissent Worth Heeding

The Federal Reserve approved the proposals by a vote of six to one. The dissenting vote was cast by Governor Michael Barr, the Fed’s own Vice Chair for Supervision. That dissent is not a technicality. It signals that a credible internal argument exists — at the highest levels of our central bank — that these changes go too far at a moment of profound economic uncertainty.

S&P Global warned that the proposals, if finalized, could lead to “less stringent regulation, greater risk in the banking system,” and declines in risk-adjusted capital calculations. Fitch Ratings noted that while it did not expect immediate sharp drops in bank capital, the gradual easing across stress tests, leverage rules, and risk-based standards “could lead to lower capital ratios over time,” making ratings more sensitive to downturns for less-capitalized banks.

Meanwhile, as these proposals advance, the Federal Reserve, the CFPB, the OCC, and the FDIC have all seen significant staff reductions and departures, further eroding the supervisory capacity that has historically stood between Wall Street’s risk appetite and Main Street’s financial security. Rules are only as strong as the institutions that enforce them.

The comment period closes on June 18, 2026. Congress should act before then: hold joint oversight hearings examining the systemic implications of the aggregate capital release; require the agencies to publish a single integrated quantitative analysis of all three proposals’ combined impact alongside the 2025 Stress Capital Buffer; and consider targeted legislation amending Section 165 of the Dodd-Frank Act to codify liquidity requirements for Category IV banks regardless of how the final rules emerge.

Banks today are earning record profits, paying record dividends, and holding assets that have more than doubled since the regulatory reforms following the last crisis. The framework that produced those results is not failing. Dismantling it — at a moment of elevated geopolitical risk, softening GDP growth, rising consumer delinquencies, and diminished supervisory capacity — is a choice. And it is a choice whose consequences, when they arrive, will be borne most heavily by the Americans who are already most vulnerable.

They cannot be here to argue otherwise. That is why they need you—bank regulators and legislators.

Mayra Rodríguez Valladares is Managing Principal of MRV Associates, Inc., a consulting and training firm specializing in financial risk and bank regulation. She has consulted and trained financial professionals in over thirty countries and previously held investment banking roles at BT.AlexBrown, JPMorgan, and the Federal Reserve Bank of New York. She holds an MBA from The Wharton School, an MA from the Lauder Institute of the University of Pennsylvania, and an AB from Harvard and Radcliffe Colleges. This article is adapted from her testimony before the House Committee on Financial Services on April 28, 2026. The views expressed are her own.