The big four already dominate the US’s banking industry – they swallow 44% of the entire sector’s profits, have masses of capital to put toward technology and automation and have powerful connections among the country’s top policymakers to ensure legislation goes their way. Now, it seems they’ll soon have another string in their bow, and all at the expense of the US’s community banks.
What I’m talking about here are plans to roll back capital requirements for these industry heavyweights. Ever since Donald Trump headed back into the Oval Office, Wall Street has been expecting to feel the grip of financial regulation slacken – and those predictions are now coming to fruition.
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It’s coming at the hands of Jerome Powell, who is gearing up to slash the enhanced supplementary leverage ratio. It requires the biggest banks to reserve a specified amount of capital based on their total leverage exposure, regardless of the risk weights of their assets.
Fed plans will supercharge big banks lending capacity
It’s a shift that would free up a colossal $210bn in capital requirements, supercharging lending capacity and tech investment for the banks that already tower over their smaller competition.
Look, I can understand elements of the Fed’s argument. The key motivation here is to ignite the Treasury market, which, let’s face it, does need all the help it can get.
Under the status quo, banks are deterred from buying up treasuries. They’re hesitant to add low-risk assets to their total leverage exposure, given that it disproportionately drives their capital requirements up. On the surface, I understand why Powell wants to incentivise the titans of the sector to increase their positions in this market, but the impact on smaller banks is a catastrophic consequence that, for the moment, is flying dangerously under the radar.
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By GlobalDataBy effectively handing over $210bn to the strongest banks in the country, the Fed will massively expand their lending capacity and send ripple effects across the entire banking ecosystem.
The implications would be twofold. First, the big four would find themselves with masses of capital, sparking a race to the bottom on loan rates. They’ll look to outcompete each other, driving loan rates lower and lower to attract as many borrowers as possible.
Smaller banks have always offered impressively competitive fees and rates – it’s been one of their strongest competitive advantages. In 2024, larger credit card issuers were far more likely to charge annual fees and higher interest rates, regardless of an individual’s credit score, but as larger banks battle to outdo each other, they’ll undoubtedly take the shine off smaller institutions’ competitive offers.
Community banks simply won’t be able to compete on these new terms. They’ll be priced out, handing an even greater share of the market to the industry giants.
Big banks to extend tech lead over smaller rivals
Second, the big four will have more financial firepower to drive technological advancement. They’re already investing billions, with JP Morgan ploughing $18bn into tech to automate processes, personalise online banking experiences and shore up risk assessment in 2025.
There is already a monumental gap, a gaping crater, between the tech capabilities of bigger and smaller banks, but stripping billions off capital rules is sure to deepen the divide.
It has the potential to seriously undermine the community banks that contribute to the US’s rich and diverse banking ecosystem. These smaller institutions are pivotal to their communities, are close to their customers, and we must preserve what they offer: competitive banking products that genuinely support individuals across the US.
Fed plans risk re-run of past crisis
The consequences of the Fed’s plans will be grave for the US’s colourful banking sector, but the threats don’t stop there – they could also jeopardise its entire financial system. The 2008 financial crisis is an episode of history that the US, and the rest of the world for that matter, would rather not repeat – so why are central bankers doing away with vital protections that help the country avoid such an outcome?
Despite what the lobbyists may tell you, I’m not sure the biggest banks need this capital requirement cut at all – if anything, recent events have proved how effective the current rules are.
The biggest 22 banks have just passed the Fed’s stress tests with flying colours, demonstrating that they have sufficient capital in reserve to weather adverse economic storms. It’s proof that the current rules are working as they should, and begs the question: is it really sensible to change them?
For me, the answer is a resounding no.
Slashing capital requirements will only risk a financial crash, allowing the biggest banks to run rampant and stamp out the community banks so pivotal to a healthy banking system.
Community banks are already up against it, but I fear the Fed’s plans would be the final nail in the coffin.
Adam Turmakhan is the CEO and COO of TurmaFinTech, a Florida-based fintech startup that offers bespoke customer data platforms for community banks and credit unions across the US
