The U.S. economy relies on a strong and stable banking system that extends credit to households and businesses. Today I want to share with you a few thoughts on the Federal Reserve's role in overseeing the banking system and supporting financial stability, and concerns that I have about how the Fed and other banking regulators are weakening regulation and supervision of banks. Deregulation can provide a short-term sugar high in the economy, but it can also lead to long-term costs for society.
Achieving appropriate bank regulation and supervision is a balancing act. Banks need room to grow so that their lending can support innovation and aspiration throughout the economy. At the same time, long experience has shown that without proper safeguards, banks striving to innovate in pursuit of higher profits may take excessive risks. When banks get in trouble, their downfall threatens businesses and households, putting the viability of communities, and sometimes even the entire economy, at risk. That is the legacy of the Great Depression, the savings and loan crisis of the 1980s, and the Global Financial Crisis that occurred nearly 20 years ago. I am concerned that we're losing that balance.
Over the past year and a half, the Federal Reserve, along with the other federal banking regulatory agencies, lowered capital requirements through a series of regulatory proposals, and I have dissented from each of the decisions that apply to large banks. This began with reducing the stressfulness of bank stress tests, and making them less likely to be able to keep up with new risks. These changes also included eroding the leverage ratio applied to large banks and thus weakening its ability to serve as an effective capital backstop. The current proposal for the U.S. implementation of the international Basel III agreement falls short of the agreement's capital standards in a number of ways. And the Board reduced the GSIB surcharge, an important capital add-on for the largest and most systemically important banks designed to offset the potential harm they could cause to the economy at large. So far, in aggregate these deregulatory proposals reduce the amount of capital required for the largest banks by 6 percent. This matters because these eight GSIB firms play a dominant role in the banking system, holding around 60 percent of banking sector assets. It translates to $60 billion less in capital to protect against bank failure and instability that could spread through the financial system. Our capital standards are already near the low end of the range of optimal levels estimated by academic research—that is, the levels that strike the best balance between growth and safeguards. It is also important to note that when we deviate from internationally agreed-upon accords, we set a bad example for other governments that I fear could lead to a "race to the bottom" for capital requirements across jurisdictions.
At the same time that capital requirements are being lowered, bank supervision is also becoming weaker. The Board weakened the rating system we use for the 36 largest financial institutions. The changes are essentially "grade inflation" that would allow poorly managed banks to be judged as well managed, potentially ignoring weaknesses in risk management that may go unacknowledged and unaddressed. Also, regulators are curtailing issuance of an important form of supervisory input, matters requiring attention, which means that banks' risks may go unaddressed in time to make a difference for bank safety. In fact, the latest report on Supervision and Regulation shows that the level of these matters at the end of 2025 had already fallen to roughly half of what it was in 2024 for the largest banks. The report also shows that the share of large banks considered well managed under the new, weaker rules doubled from the end of 2024 to the most recent observation. On top of that, sharply lower staffing levels at the Board and curtailing horizontal reviews may leave us unable to uncover key issues. A push to lower liquidity requirements appears likely. Financial consumer protection regulations and supervision have been scaled back by the Consumer Financial Protection Bureau. Weakening protections against fraud, excessive fees, predatory lending, and unfair or discriminatory financial practices risks conditions that are harmful to consumers and sometimes can even destabilize the economy. Taken together, the regulatory and supervisory changes recently enacted or proposed represent the most significant deregulation of the banking system since the Global Financial Crisis.
Reducing financial regulation is effectively reducing insurance against risk, and I fear that we are becoming underinsured. Again, this is akin to buying less insurance: yes, you are locking in a lower premium, but you are also increasing the risk of a really bad outcome, and maybe one that is hard to afford. The series of banking crises in the Great Depression, the Savings and Loan crisis, and the Global Financial Crisis were all preceded by either a failure to adapt regulations to a shifting financial landscape or an identifiable weakening of existing regulations. The economic costs of the resulting crises were substantial: by some counts, one-third of U.S. banks failed in the 1930s, but the costs were much higher, helping drive a devastating economic depression. Unemployment reached 10 percent in the Global Financial Crisis and 8 percent in the early 1990s recession, a period of persistent low growth and high inflation that was partly related to the consequences of the savings and loan crisis. It cost $160 billion, or 5 percent of one year's U.S. gross domestic product (GDP) at the time, to resolve the savings and loan crisis, the equivalent of $1.6 trillion in today's economy. The direct fiscal outlay of government interventions to stabilize the banking system during the Global Financial Crisis totaled 4.5 percent of yearly GDP, or approximately $650 billion dollars at the time. The most recent brush with a severe financial crisis came with the onset of the COVID-19 pandemic. It was avoided in part because of massive government intervention and in part because of the robust levels of capital and liquidity among banks due to post–Global Financial Crisis reforms, the regulatory standards that are unfortunately now being weakened.
The academic literature is clear on the large and persistent economic costs of financial crises and the role of resilient banks in lowering the risk and severity of those crises. A long line of research, based on seminal findings related to the Great Depression authored by Ben Bernanke, shows how disruptions in financial intermediation generate severe and prolonged economic harm by restricting many borrowers' access to credit. For example, Christina and David Romer sampled 24 advanced economies that experienced such crises and found that the GDP decline related to these events peaks at 6 percent after three and a half years, with larger declines following periods of extreme and persistently elevated financial distress. An official study supporting the design of Basel III found that persistent effects of a financial crisis resulted in cumulative output losses that were much higher, with estimates on the order of 20 to 60 percent of GDP. Economies with higher pre-crisis bank capital ratios recover more quickly following financial crises due to stronger recovery in credit growth. Research by economists at the International Monetary Fund estimated that bank capital ratios between 15 and 23 percent of risk-weighted assets would have been enough to absorb the bank losses seen in most historical banking crises in advanced economies and thus likely would have prevented these crises in the first place. Moreover, the costs of getting it "wrong" are asymmetric: in most studies, a capital requirement that is modestly "too high" has a small cost to growth, but a capital requirement that is even a little "too low" can result in sharply rising costs to financial stability, as the rate of bank failures or risk of a financial crisis shoots up quickly.
While some have argued that we should deregulate the banking sector so that it can compete more effectively with private credit and other nonbanks, I would argue the opposite: we should maintain and improve bank regulation because forces outside of the banking sector can, and eventually will, threaten bank balance sheets. Bank credit commitments to other financial entities are growing rapidly and reached over $2.6 trillion in the second half of 2025. Banks and nonbanks are now closely entwined and interdependent, with banks acting as liquidity providers to nonbanks, which in turn take on credit risk. If nonbanks come under stress and must fire sale their assets, this could harm bank portfolios as well. The answer is thus not to regulate banks less, but to regulate unsafe practices at nonbanks more.
So, to sum up, while I agree with the objective of ensuring the banking sector can support the economy, I don't agree with the remedy: reducing bank capital. We're now in a risk-on environment with a booming stock market, robust bank profits, and a deregulatory mindset. The bank deregulation undertaken so far, and the plans for more to come, is ultimately going to make our financial system less robust. And when the bill comes due, we will all pay the price.
Source: U.S. Federal Reserve (Fed), speech at American University (June 6, 2026, Washington, D.C.)
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