Fed Deregulation Surge: Easing Capital Rules Heightens Financial Stability Risks

The regulatory landscape for large U.S. banks is undergoing major transformation. Federal Reserve Vice Chair for Supervision Michelle Bowman is centrally involved in initiatives to ease formerly stringent post-2008 capital rules and to substantially shrink the Fed’s capacity for bank oversight. These efforts carry potential implications for both the safety of the financial system and the predictability of regulation for banks.

Capital Requirement Rollbacks: In June 2025, the Fed proposed easing the enhanced supplementary leverage ratio (eSLR), reducing holding company requirements from approximately 5% to 3.5–4.5%, and lowering required capital for depository subsidiaries from around 6% to the same range. The intended outcome is to relieve regulatory burden, especially for banks involved in U.S. Treasury market intermediation.

Later, in November 2025, bank regulatory agencies issued a final rule modifying capital standards to reduce disincentives for lower-risk activities like holding Treasuries. Under this rule, the depository institution subsidiaries’ eSLR is capped at one percent, making the total requirement for these subsidiaries no more than four percent. The impact on bank holding companies is estimated to be a tier-1 capital reduction of under two percent in aggregate.

Reduced Oversight Capacity: Alongside capital relief, the Fed’s Supervision & Regulation division is set to undergo up to a 30% staff reduction under Bowman’s leadership. Critics—among them former officials and Democratic lawmakers—warn this could dilute oversight, delaying risk detection and undermining the Fed’s ability to enforce rules.

Strategic Implications: For banks, these shifts offer breathing room in capital planning, potential higher profits through lower capital charges, and more freedom to engage in low-risk activities. But the loosening of guardrails could raise systemic risk—especially in economic downturns or volatility in markets like Treasuries. Regulators might face legal or political backlash if bank failures increase. The Fed also risks its credibility and independence if perceived as yielding to political or industry pressures.

Open Questions: Several remain unclear. How will the new rules fare in a downturn when market discipline is tested? Will diluted staff and reduced oversight still suffice for stress testing, contagion prevention, and enforcement? What is the timeline and content of revisions to the Basel III Endgame rule, and how will this mesh with domestic regulatory priorities? And how will Congress respond to what some see as regulatory drift?