Fed Vice Chair Bowman: Capital Rules Will Support Small Business Credit

Proposed changes to federal banking regulators’ capital rules would encourage access to small business credit, Federal Reserve Vice Chair for Supervision Michelle Bowman said Tuesday (March 31).

In remarks delivered at a Consumer Bankers Association event in San Diego, Bowman highlighted these changes proposed by the Fed and the other federal banking regulators.

“Today, loans to small businesses are generally risk-weighted at 100 percent, meaning that small business loans have the same capital requirements as many higher-risk bank assets,” Bowman said. “Our Basel III and standardized approach capital proposals are designed to encourage banks of all sizes to support these lending relationships.”

The standardized approach proposal would reduce the risk weight for corporates from 100% to 95%, Bowman said.

The Basel III proposal would reduce the risk weight for small business loans exceeding $1 million, for small businesses considered by the lending bank to be investment grade, from 100% to 65%; reduce the risk weight for small business loans less than $1 million from 100% to 75%; and for small business credit cards, provide regulatory capital treatment that is more aligned with the actual risk than the current rules, Bowman said.

These proposals would free up capital that banks could use to extend additional credit to small businesses and make larger loans more accessible and affordable, Bowman said.

Bowman invited stakeholders to comment on these proposals during the public comment period.

“Supporting credit for small businesses is critical to our economy,” Bowman said. “As we evaluate the Basel proposals, we must ask whether these regulations support or restrict lending to the small businesses that drive U.S. growth and create jobs. Our regulatory framework must provide access to capital for these businesses to ensure our rules support the economy.”

The Fed, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) said March 19 that they are seeking comment on three proposals that would streamline capital requirements for banks of all sizes, better align regulatory capital with risk, and maintain the safety and soundness of the banking system.

The regulators said that these proposals would “modestly” reduce the capital requirements for both large banks and smaller banks but would keep the capital levels in the banking system “substantially higher” than they were before the global financial crisis.