Regulators Prepare to Ease Post-Financial Crisis Banking Rules

Regulators are reportedly preparing to loosen banking restrictions imposed following the 2008 financial crisis.

As Politico reported Saturday (May 31), financial regulators are close to finishing a proposal that would scale back the rules on how much of a capital cushion big banks must maintain to handle losses and remain afloat during economic calamities.

The proposal is being developed by the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corp. (FDIC), and could be released in the months ahead, the report said, citing two sources familiar with the plan.

The report added that Treasury Secretary Scott Bessent, who is handling the administration’s financial regulatory agenda, said recently that reducing capital requirements is a “top priority” for federal banking agencies, with action on the issue expected “over the summer.”

“The 2024 election ushered in the largest turnover among federal financial regulators in the history of our country, and that’s starting to bear fruit,” said Ed Mills, a Washington policy analyst at Raymond James, who added that big banks were “back in the driver’s seat.”

As Politico noted, the efforts mark a major shift from last year, when regulators under President Joe Biden were advocating a plan that would require big banks to have even larger capital cushions, much to the industry’s dismay.

Meanwhile, PYMNTS wrote last week about the push within the banking community for greater regulation of nonbank financial institutions (NBFIs) such as hedge funds, private credit (PC) and private equity (PE) entities, and FinTechs.

The Federal Reserve Bank of New York said last month that banks and nonbanks can form relationships that include nonbanks “engaging in bank-type strategies,” as when “private credit firms lend to corporations, and money market fund deposits are available on demand (similar to uninsured deposits).”

“In high-interest-rate environments, if nonbanks find it unattractive to lend due to their high funding costs, banks can offer funds to nonbanks (by extending credit lines, for example) at a lower rate,” the bank wrote in a blog post.

“This transaction is profitable for both parties: nonbanks are able to lend to risky borrowers for a profit — and part of their income returns to banks in the form of interest payments.”

The Fed estimates that large banks’ total loan commitments to PE/PC funds are about $300 billion, or 14% of large banks’ total lending to NBFIs as of the end of 2023, up from less than $10 billion in 2013.