Arguably the most important and effective of the financial reforms passed after the 2008 financial crisis were restrictions on bank borrowing called “capital requirements.” These were a key part of the Dodd-Frank Act, as well as the Basel III international standards that govern the global banking system. Capital requirement rules increased the amount of money from shareholders banks were required to use, through equity capital, to fund their lending activities instead of debt. The reason why is obvious: The more a company is indebted, the smaller a loss it takes to bankrupt it. For instance, Bear Stearns, the holding company whose failure helped kick off the financial crisis, had about $395 billion in assets backed by just $12 billion in equity.
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The problem for Wall Street is that decreased risk means decreased profits. So ever since those increased safeguards went up, banking interests—fresh off a $700 billion taxpayer bailout—have engaged in a relentless campaign to bring them back down again. The bankers, desperate to drive up profit and return more money to their shareholders, have fought back at every step of the way as regulators worked to implement international standards and U.S. law.
Now it appears that the banks are going to get what they have long wanted. Federal regulators in the Trump administration are preparing to finalize a set of rules proposed in March that will lower capital requirements even further than years of government capitulation had already given the banks. All amidst a wide-scale deregulatory agenda extending beyond capital requirements, introducing even more layers of risk—and at a time when general financial risk is increasing all over the place.
The war in Iran has increased energy costs and caused all manner of chaos in commodities markets, and it might escalate into a regional conflict that blocks the Bab-al-Mandeb strait out of the Red Sea, too. The strongest El Niño in history is likely building, adding extreme weather risk. The market for U.S. government bonds, hitherto considered the safest in the world, is markedly unstable, and Treasury Secretary Scott Bessent’s antics are only making things worse. Most unsettlingly, cracks are beginning to appear in the AI bubble that has whipped much of Wall Street into a frenzy of risky lending this summer. Whenever the rickety tower of debt propping up AI-related spending begins to topple, the security of the world’s largest banks—banks designated Global Systemically Important Banks (G-SIBs)—will be essential in limiting the spread of a deadly economic contagion.
The main argument for rolling back capital requirements heard from bankers and bank-friendly regulators fresh off a job working for banks, despite the systemic risks attached, is that it will lead to more lending in communities and propel economic growth. “It is simply requiring more capital on the sidelines,” Senate Banking Committee Chair Tim Scott (R-SC) said of heightened capital requirements in an oversight hearing of Wall Street firms, “which then means fewer dollars to lend to small businesses, first-time homebuyers, car loans. So the actual impact of a higher regulatory standard is fewer dollars to lend to Americans.” He paints a picture in which capital requirements mean more money pointlessly sitting in bank accounts that could be put to work creating jobs.
Now, it’s clear that the Trump administration doesn’t actually care about helping banks lend more to American communities—they’ve worked tirelessly to dismantle and defund the Community Development Financial Institutions Fund created for that very purpose—but the argument itself is rooted in a gross misrepresentation of how capital requirements really work, according to Stephen Cecchetti, the Rosen Family Chair in International Finance at the Brandeis International Business School.
“The bankers are smart and their lobbyists are very smart,” he told the Prospect. “So the first thing is they get you to use the term ‘hold capital,’ which you should not use.”
The language used by Sen. Scott and other policymakers and regulators who advocate for limited capital requirements makes it seem like bank capital is sitting idle on the sidelines, but that’s wrong. “Capital is a funding source, it’s not an asset,” Cecchetti said. Capital requirements are simply the amount of lending that banks are required to fund with equity capital—money from the bank’s shareholders—instead of debt. That money isn’t sitting idle, and in fact, it’s contributing to the bank’s lending. In other words, the requirements change who is funding loans and bearing risk, not the quantity of lending.
Other arguments as to why higher capital requirements stifle lending and economic growth—equity is more expensive than debt, for example, and the requirements do impose a ceiling on the amount of debt banks can take on to then lend out, determined by their access to capital—could possibly be true if the banks behave the way they claim to. But they don’t. In fact, when post-2008 regulations pushed capital requirements up, the banking sector’s share of lending increased right along with them.
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“There’s no evidence at all anywhere that I’ve ever seen that raising capital requirements does anything except making banks more resilient and makes banks more willing to lend to good borrowers,” Cecchetti says. Stronger banks can borrow money more cheaply, and make better decisions that ultimately lead to higher lending and more secure financial institutions.
But banks aren’t interested in becoming more resilient; they’re interested in making money for their shareholders. Lower capital requirements means banks can take more risk with less shareholder money on the line, which means more profit if things go well. And if they don’t, well, the government can just bail them out.
“They’re always gonna argue for lower capital requirements,” said Cecchetti. “And this is especially true of the biggest banks, because they know for sure that they aren’t gonna be allowed to fail. So they’re just trying to maximize the subsidy that they’re getting from the government, and from the public. They’re trying to put the risk onto us, not onto their equity holders.”
Even more important, with less capital backing up the bank’s lending, that money can go right back into the pockets of the shareholders, according to Cecchetti. “What happens when you reduce capital requirements is [banks] increase dividends and they increase stock buybacks.” That’s the opposite of more community lending.
“That’s the ballgame here,” said Oscar Valdés Viera, senior policy analyst for capital markets with Americans for Financial Reform. “This is all about freeing capital to be returned to their shareholders.”
BANKS AND THEIR SHAREHOLDERS, like all companies, prefer share buybacks because they increase the share price and the tax burdens on capital gains are lower than the income tax shareholders pay on dividends. (So, if the bank needs a taxpayer bailout after reducing capital levels, less of that taxpayer money will be from the bank owners profiting off the risk.)
The relationship between capital requirements and buybacks can be seen again and again throughout the banking lobby’s campaign to limit the impact of Basel III safeguards on their balance sheets.
During the first Trump administration, Fed Chair Jerome Powell gifted banks with a major rollback of financial regulation that lowered their capital burden. In turn, banks gifted their shareholders with an explosion of stock buybacks. But as capital requirements tightened under Joe Biden’s choice to be the Fed’s vice chair for supervision, Michael Barr, in 2022 and 2023, buyback numbers contracted again.
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Then in 2024, major banks waged a successful campaign to pressure the Fed into rescinding that proposal and implementing new, looser rules. The campaign even extended to Sunday Night Football ads funded by the dark-money group Center Forward. Banks, which had already increased buybacks that summer after sailing through an annual stress test, a simulation that essentially runs a bank’s books through fake crisis scenarios to ensure enough capital would survive, breathed a sigh of relief and prepared to maintain higher buyback programs.
Once the new vice chair for supervision at the Fed, Michelle Bowman—elevated by Trump thanks to her escalating deregulatory rhetoric during the Biden years—began seriously hinting at again reducing capital levels last November, major banks responded by ramping up their buyback programs to line shareholder pockets.
One of those shareholders was Donald Trump, who spent the previous five months buying up millions of dollars of bank securities—a buying spree only revealed to the public months later in a late ethics filing—many of which belonged to some of the nation’s biggest banks, including JPMorgan Chase, Goldman Sachs, and Wells Fargo. While the filing only lists broad ranges, the total value of the transactions could be more than $20 million, according to Sludge. And, it appears, nearly all of the purchases were specifically the type of security that banks use to satisfy capital requirements, like preferred shares or similar instruments.
Another buying spree of bank securities reported in a later ethics filing happened in the months leading up to the actual release of the proposals in March, which includes a reduction in the surcharge placed on G-SIBs to limit the possibility of “too big to fail” banks failing. Bankers reacted to that release by, again, discussing plans to ramp up buyback programs.
Another target of the Fed’s regulatory changes under Bowman has been the aforementioned stress tests. While the banks made it through the stress test this year, it wouldn’t have mattered. The agency is implementing a new stress testing proposal, and the buffers that would typically be determined by the last test results have been left untouched.
Instead, the new proposal opens the models and crisis scenarios, which have historically been kept confidential to prevent gaming, to bank feedback before the test happens. “They’re essentially giving the banks the answers to tests,” said Viera. With the test answers in hand, the banks will be able to ace the test while obscuring the real risk on their books. “It’s just gonna end up in a place where banks are gonna free up a lot more capital.”
Higher stock buybacks also tend to lead to an increase in compensation and bonuses for top executives, separate from any direct stake in the bank’s equity.
THE WIDESPREAD REDUCTION IN CAPITAL—beyond what the bank lobby has already pulled off in the last decade—is only one part of a larger story. The second Trump administration continues to implement countless deregulatory proposals, all posing their own unique threat to the stability of the financial system. “You cannot examine these proposals on their own,” Viera told the Prospect. “Their effect is going to be larger than the sum of their individual parts.”
For example, one of the biggest concerns when banks use less capital to fund lending is that they start to make loans to riskier borrowers, because less of the bank’s own money is at stake, and more of the risk falls on their depositors and lenders instead. “Banks with lots of capital have an incentive to screen and monitor their borrowers more intensively,” explained Cecchetti.
Pair this with a new rule from the Office of the Comptroller of the Currency and FDIC preventing regulators from stepping in when banks do business with a client that could pose a “reputational risk” not based on traditional measures of risk to financial stability, and things start looking pretty shaky. Reputational risks have historically been considered as a stand-alone supervisory risk category that works to encourage banks to seek out and prevent potential threats that might not be apparent at first blush, or else face intervention from the OCC and FDIC.
With a reduced incentive to screen borrowers and regulatory agencies handcuffed by reputational risk rules, a myriad of potential dangers could be lurking in the shadows of bank balance sheets.
The reputation risk rulemakings came in response to Trump’s crusade against a that both MAGA and the crypto world have both been obsessing over for years called “debanking.” The two groups—which overlap quite a bit—often claim they have been shut out of the traditional banking world because of political persecution. In reality, virtually every time such people have actually been kept out of the banking system it is because the relevant individuals or companies are not following American laws and rules regarding fraud, money laundering, material support for terrorism, “know your customer,” and so on. Crypto itself also carries a risk of extreme market volatility that rightfully made some banks wary.
These same agencies are also gladly opening the doors to crypto risk with their implementation of legislation Congress passed last year to introduce lightly regulated stablecoin to the traditional financial system. The OCC last month began finalizing trust bank charters for stablecoin issuers beginning with Circle, a key player in the 2023 Silicon Valley Bank collapse. Trump’s own crypto firm, World Liberty Financial, just received its conditional charter from the agency. The charters grant crypto firms the rights to many of the same activities as traditional banks with only a sliver of the regulatory requirements and oversight.
Funnily enough, the stablecoin rulemaking came despite the protests of Wall Street, whose hold over the Trump administration is no match for the crypto lobby. But no matter who it’s for, or how it lines the president’s pockets, the one through line running throughout the last year and a half of federal financial regulation has been a rapid acceleration of the deregulatory trend already started during Trump’s first term under Powell.
“This administration is just a lot more radical, and staffed by more radical people than the first one,” Viera said. “Now [Powell’s] not good enough for Trump. Now he’s not radical enough for Trump.”
“The history of bank regulation in the United States is of progressive dilutions of core regulatory requirements over a number of years, leaving the banking system as a whole vulnerable to crisis,” warned former British central banker Paul Tucker in a 2018 letter to the Senate Banking Committee. With Trump 2.0’s radical regulators in the driver’s seat, the core regulatory requirements aren’t being diluted anymore so much as completely washed away.
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