U.S. Treasury Secretary Advocates for Capital Requirement Reform

In 1982, the Savings and Loan Crisis erupted, leading to the failure of nearly a third of the country’s savings and loan associations. This widespread collapse was driven by poor regulation, risky lending, and fraud. The aftermath left taxpayers with a $124B bailout bill, which led to a massive overhaul in financial regulations and the establishment of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) in 1989. This new law dramatically reshaped how financial institutions were regulated, aiming to prevent such a systemic collapse in the future.Just as the Savings and Loan Crisis forced a rethinking of financial regulations, today’s banking sector may need to reassess the burdens placed on community banks. As US Treasury Secretary Scott Bessent recently pointed out, too much regulatory pressure on smaller institutions can hinder their ability to lend and serve local economies. The challenge now is to streamline regulations to ensure stability while fostering growth, particularly for those who drive economic activity on Main Street.The Call for ReformIn July, US Treasury Secretary Scott Bessent made waves at a Federal Reserve regulatory conference by advocating for a reevaluation of the current regulatory framework. Bessent called for broader reforms of an outdated and overburdened regulatory system, aimed mostly at smaller banks.Bessent urged regulators to consider giving community financial institutions (CFIs) more flexibility, specifically pointing to the dual capital requirement proposal from 2023, which would have forced banks to meet the higher of two capital calculations. This proposal, designed after the 2023 bank failures, drew widespread opposition due to its potential to stifle lending and slow economic growth.He suggested that banks not subject to modernized capital rules could opt into simplified regulatory regimes, which could help ease capital burdens and boost lending capacity without compromising stability. Bessent also emphasized he was not trying to weaken oversight, but to tailor it more effectively to real-world risks, especially those faced by smaller institutions.Regulatory Relief Through Tailored ReformsBoth the Federal Reserve and Bessent have voiced strong support for reducing unnecessary regulatory burdens on smaller institutions, especially CFIs. The Federal Reserve, in particular, proposed significant changes, such as relaxing leverage requirements, which could release over $200B in capital for liquidity support. This shift could unlock new lending opportunities for CFIs by freeing up capital and simplifying capital management.The Independent Community Bankers of America (ICBA) praised Bessent’s call for tailored regulations that take into account the unique risk profiles of CFIs. Community banks, critical to local economies, face a distinct set of challenges, including the rising costs of compliance. The ICBA supports reforms that allow CFIs to opt out of certain regulations, particularly those imposed by the Consumer Financial Protection Bureau (CFPB), and to rethink burdensome requirements like internal controls and third-party risk management.Overall, these reforms would cut compliance costs, allowing CFIs to focus more on their core mission of serving their communities. By streamlining regulations and freeing up resources, CFIs would be better positioned to extend credit, innovate, and support local economic growth.Risks and ChallengesWhile the prospect of regulatory relief for CFIs is certainly appealing, it’s important to recognize the potential risks of deregulation. Regulatory tailoring may lead to improved efficiency and competitiveness, yet excessive deregulation could expose institutions to unnecessary risks.The risks associated with loosening regulations include the possibility of relaxing credit standards and extending loans to riskier sectors, especially those with lower credit scores. If capital relief translates into relaxed credit requirements, the risk of defaults could increase.CFIs must tread carefully, ensuring that deregulation doesn’t compromise their ability to weather economic shocks or protect their customers from financial instability.Strategic Recommendations for CFIsWhile many CFIs already engage in capital planning and regulatory tracking, upcoming reforms could create meaningful new opportunities — and challenges. Institutions that treat these developments as a strategic inflection point, rather than routine regulatory shifts, will be best positioned to adapt quickly and gain a competitive edge. The following actions can help CFIs move from compliance maintenance to capital optimization:

From Obligation to OpportunityThe Treasury Department’s proposed reforms signal a significant shift in the regulatory landscape — one that presents CFIs with a unique opportunity to redefine their future.  As financial oversight is reimagined, CFIs can strategically position themselves to take full advantage of potential capital relief, enhanced lending capacity, and a more streamlined compliance framework. By actively engaging with regulators, advocating for sensible reforms, and preparing for changes, CFIs can not only navigate the evolving lending landscape but also continue to drive economic growth and stability on Main Street America.