American Banks Are Healthy Now But Capital Proposals Endanger Them

The Shift In The March 19, 2026 Proposals

The joint regulatory proposals introduce sweeping changes that the agencies say would streamline capital requirements for banks of all sizes. In the agencies’ own assessment, the overall amount of capital in the system would modestly decrease: requirements for large banks would fall modestly, and requirements for smaller banks moderately. What I have seen in the last three decades is that bank executives and their boards always take more risks when capital is lowered.

Key elements of the revised framework include:

• AOCI Inclusion for Regional Banks: Category III and IV institutions ($100 billion to $700 billion in total assets) would no longer be permitted to opt out of including most elements of Accumulated Other Comprehensive Income (AOCI) in their regulatory Common Equity Tier 1 (CET1) capital calculations, with a five-year phase-in. This is the main provision that tightens capital recognition, and by the agencies’ estimates it is more than offset by reductions elsewhere in the package.
• Expanded Risk-Based Approach (ERBA): The proposals would require the largest banks (Category I and II) to use a single set of risk-based capital ratios, with loan-to-value-based risk weights for most real estate exposures and new standardized charges for operational risk and derivative credit valuation adjustments (CVA). Other banks could opt in. The package would also lower risk weights on corporate exposures (from 100% to 95%) and on other assets (from 100% to 90%), and would end the deduction for mortgage servicing assets.

Earlier this year I testified before the House Financial Services Committee about my significant concerns with the joint proposals. The proposed deregulation arrives as geopolitical tensions destabilize global markets, as banks expand their lending to nonbank financial institutions such as private credit and private equity funds, as the risks of artificial intelligence and cybersecurity threats grow more acute, and as the intensifying effects of climate change create new categories of financial exposure. Cutting required capital in that environment, even modestly, leaves banks less room to absorb losses from any of these sources, and it does so before the losses arrive rather than after.

Critical Factors Beyond Current Accounting Metrics

Focusing exclusively on current bank quarterly balance sheet reports overlooks several critical regulatory changes that would redefine capital adequacy if the proposals are finalized:

• Better Measurement, Offset by Lower Requirements (AOCI): Under existing rules, Category III and IV banks may exclude unrealized paper losses on Available-for-Sale (AFS) securities from regulatory capital ratios. Under the proposed rule, most of these unrealized losses would directly reduce regulatory CET1 capital as a five-year phase-in proceeds. That is a sound reform, but it is paired with reductions elsewhere: the agencies estimate that aggregate CET1 requirements for Category III and IV holding companies would fall by about 5 percent even after counting AOCI recognition and changes to stress testing. Should interest rates remain elevated or shift higher, these banks would carry growing paper losses against a lower overall capital requirement.
• Risk-Weight Relief on Commercial and Real Estate Portfolios: Although expanding floating-rate loans lifts gross interest income, the proposals lower risk weights on corporate exposures and introduce loan-to-value (LTV) sensitive risk weights for mortgages that the agencies estimate would cut mortgage risk-weighted assets by roughly 30 percent. Lower risk weights let banks hold less capital against each dollar lent, which magnifies the damage if borrower finances or collateral values weaken.
• Little Added Capital for Non-Bank Financial Intermediation (Private Credit): Bank lending to private credit funds and non-bank financial institutions (NBFIs) has been a primary engine of recent loan growth. However, the Federal Reserve’s summary of the March 19 proposals identifies no new capital charge aimed at this exposure, and to the extent these facilities are treated as corporate exposures, lower corporate risk weights would let banks hold less capital against one of their fastest-growing and least transparent exposures.
• Operational Risk, Derivatives, and Offsetting Relief: Net interest margin (NIM) gains do not automatically translate into retained regulatory capital. The proposals add standardized operational risk and CVA requirements for the largest banks, but they scale operational risk to business volume with lower charges for certain fee-based activities, exempt client-facing derivatives from CVA, and are paired with changes to stress testing. The agencies still estimate a net decline in required capital for large banks.

Summary Impact Matrix

Concluding Thoughts

While current banking balance sheets reflect significant operational improvements since the 2022–2023 rate shocks, banks are healthy today under a capital framework that is soon to change. If the Federal Reserve, OCC, and FDIC finalize the March 19, 2026 capital proposals as presented, better recognition of unrealized losses would come alongside lower risk weights and lower overall requirements. Today’s strength should not be mistaken for tomorrow’s safety. Regulators, financial institutions, and investors should look beyond current reported cushions and ask whether the thinner buffers the proposals allow are adequate for the risks ahead.