Fed Capital Changes Put Small Business Lending Back in Play

The flow of credit to small businesses may loosen somewhat, but the direction of that capital will be determined by digital channels.

Regulatory proposals now under consideration by federal banking agencies are designed to recalibrate capital requirements in ways that, in theory, give banks more room to lend.

Capital Relief?

Proposed revisions to the revised Basel III capital framework that would adjust how small business loans are risk weighted. Under the standardized approach, risk weights for certain corporate exposures would decline modestly, while more significant reductions would apply to qualifying small business loans, particularly those meeting investment-grade criteria. The intent is to better align capital treatment with actual risk and free up lending capacity. PYMNTS noted late last week that Federal Reserve Vice Chair for Supervision Michelle Bowman has said that credit would be more accessible and affordable.

Comptroller of the Currency Jonathan Gould framed the proposed rulemaking in similar terms, saying the changes would “increase lending capacity and give banks more runway to support their communities and customers.”

The Office of the Comptroller of the Currency estimates that minimum binding capital requirements could decline by nearly 7% under the standardized approach, with smaller reductions for the largest institutions.

These adjustments come at a time when small businesses remain a central pillar of the U.S. economy. According to the Federal Reserve of St. Louis, nearly 35 million small businesses employ 59 million people, accounting for 46% of the workforce and roughly 44% of GDP.

Yet access to credit has not kept pace with demand. Between 2019 and 2023,by way of example, bank lending to small businesses declined by 18% in real terms, even as applications shifted toward larger institutions.

Regulatory relief may increase supply, but distribution remains uneven.

Strategy Will Determine Who Wins

If capital becomes more available, the next question is which institutions are positioned to deploy it effectively.

For smaller banks, the opportunity is contingent on execution. The proposed rules create conditions in which lenders that can move quickly and deliver a consistent experience are more likely to capture demand.

Credit unions face both challenge and opportunity. Historically anchored in relationship-based models, they now face pressure to match the digital expectations of business customers or risk attrition.

PYMNTS Intelligence data indicates that small businesses are increasingly willing to change providers when those expectations are not met. Roughly 38% of small and medium-sized businesses (SMBs) report that they are at least somewhat likely to switch financial institutions within the next year, while 70% express a preference for digital onboarding and account management.

Digital Expectations Are Rewriting Loyalty

As for the opportunity, PYMNTS data show that half of SMBs rely on day-to-day cash flow to survive, underscoring the need for timely access to credit and liquidity. When traditional financing is unavailable or too slow, businesses turn to alternatives, including personal credit cards, which 27% of financially strained firms report using.

The value proposition extends to speed, transparency and integration into daily operations. SMBs increasingly expect the same level of digital convenience they encounter in their personal financial lives, including real-time decisioning, seamless onboarding, and integrated cash management tools. In a separate report, PYMNTS Intelligence and Velera found that high-performing credit unions, with loyal customer bases, are innovation ready and offer digital services and products that, among other things, speed access to funds.

Banks will have more flexibility on paper. Whether that translates into expanded credit in practice will depend on their ability to originate, underwrite, and service loans in ways that align with how small businesses now operate.