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I expect to see further weakening as well. A push to lower liquidity requirements appears likely. And I have spoken recently about my concerns with proposals that would degrade requirements that banks hold sufficient portfolios of high-quality liquid assets relative to their projected needs in stress. We know that liquidity is essential to reduce the risk and severity of bank runs, and I fear that such a reduction would make bank runs more likely or more severe, which could burden deposit insurance funds and potentially threaten financial stability.
Weaker capital rules, weaker liquidity requirements, and weaker supervision expose all of us to increased risks of bank stress, failures, or crises that can harm the economy.
Declines in Oversight of Consumer Protection Laws
On top of these reductions in capital rules, liquidity requirements, and supervisory practices, we also have seen declines in consumer protection. 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. It was exactly these conditions of lax consumer protections that were allowed to fester in the years before the Global Financial Crisis and then did devastating damage. We risk making that mistake again.
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. They tip the imperative balance that must be maintained between openness to innovation, on the one hand, and safety and soundness, on the other, in a way that will increase the risks of financial instability. I have voted against these changes, and I feel it is also my duty to continue to speak about them and explain that the costs they impose, in the form of risk, greatly outweigh the promised benefits of a lighter regulatory burden.
The Costs of Underinsurance in Banking Regulation: Key Findings from Research
In accounting for the macroeconomic costs and benefits of financial deregulation, there is a tradeoff between short- and long-term effects. In the near term, deregulation can deliver something akin to a sugar high, in the form of more lending or market activities and higher profits. But this comes at the expense of greater vulnerability and
risk for the financial system and the economy in the longer term. These risks have often led to devastating crises that have more than offset those benefits and severely harmed millions of households and businesses.
Regulation helps ensure strong bank balance sheets. With solid capital and stable funding sources, both individual banks and the banking system as a whole can absorb a wide range of shocks, such as unexpected losses, while still continuing to lend. If capital falls short, by contrast, and banks’ solvency is questioned, it becomes hard to lend, and bad economic conditions become worse, potentially leading to a crisis.
While there may be benefits of deregulation in the short term, the long-term costs of a possible crisis would be much larger, and financial regulation exists in recognition of this tradeoff. In deciding on the appropriate extent of regulation, it is helpful to see this tradeoff as similar to the decision we face in buying less insurance. Anyone who has ever driven a car or owned a home or a business is familiar with this tradeoff. Deciding whether to reduce the amount of insurance one is carrying should involve a clear-eyed balance of the marginal gains of this reduction versus the probability and consequences of an uninsured loss. As I have discussed in an earlier speech, the short-term benefits of deregulation and the passage of time combine to lead many people to underestimate the probabilities of a financial crisis and forget the consequences.10 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.11
Resolving these crises and restoring bank lending also imposed massive fiscal costs. 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 ultimate cost was much smaller, but that was only because of unprecedented and unpopular government intervention to support individual financial firms and the financial system as a whole.12 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. And the bank stresses of 2023 revealed once again the importance of sound risk management and appropriate levels of capital in the banking system.
Impaired Bank Balance Sheets Harm Growth
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.13 Many studies have found that financial crises are followed by large and highly persistent declines in GDP. 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.14 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.15 For the Global Financial Crisis, this would be between $2.9 and $8.7 trillion in pre-crisis dollars in terms of a hit to U.S. GDP. The lengthy periods when economic activity falls short of its potential occur because the balance sheets of banks, businesses, and households take a long time to repair. With impaired bank balance sheets, credit becomes harder to obtain for many creditworthy borrowers, leading to constrained investment and innovation.
How These Ill Effects Can Be Prevented
The research literature also shows how these bad effects can be prevented: bank capital and liquidity requirements reduce the probability and severity of financial crises. Economies with higher pre-crisis bank capital ratios recover more quickly following financial crises due to stronger recovery in credit growth.17 Increases in bank capital ratios reduce the likelihood of the worst GDP outcomes.18 There is also evidence that U.S. states that deregulated less in the 1980s experienced smaller credit booms during the expansion but smaller declines in activity and employment in the subsequent recession.19 In other words, the short-term “sugar high” of a credit boom from deregulation is outweighed by longer-term loss of output, employment, and income.
Estimates of Optimal Capital Levels
Recognizing that there are benefits that must be weighed against costs, some research estimates what level of regulation would be needed to avert a crisis. 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.20 Taking into account these benefits as well as the costs, there is a range of optimal capital requirements in the research literature, depending on the data period and whether researchers draw conclusions from examples of real-world experience or economic models.21 According to this research, current regulatory requirements for U.S. banks are toward the low end of the optimal range, and the proposals would lower them further. 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. 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.
Taking into account the lessons from history and research, it is clear that while deregulation may provide a short-run boost to growth, the benefit is outweighed by increased longer-term risks of devastating financial crises, lower growth, lost jobs and businesses, and disrupted lives. Unfortunately, bank regulators are moving in this direction. Given the tradeoffs involved, especially the large costs of crises, I view the cumulative relaxation of capital requirements, other regulations, and supervision as unwise. I am concerned that a relaxation of liquidity regulations is coming next. These changes will result in harm to the resilience of banks and the U.S. financial system.
The Need for a Strong Banking Sector Amid Growing Risks in the Nonbank Sector
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. Banks are the bedrock of our financial system because they play a crucial role in lending to the real economy. Nonbanks have always been an important source of credit, often driving technological innovation, as we have seen with the rise of fintech.
Through credit lines, as well as in other ways, banks are exposed to nonbanks. 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. Banks also have asset-holding commonalities with many nonbanks.
If nonbanks come under stress and must fire sale their assets, this could harm bank portfolios as well. Second-round effects from bank and nonbank interconnectedness may also play a role if fire sales cause institutions that are highly connected with banks to come under pressure.23
What all of this means is that we need strong banks at the core of the financial system to deal with shocks, including from nonbanks. Dealing with those shocks requires robust capital and liquidity, and loosening bank regulatory standards moves in the opposite direction. Bank deregulation can also lead to a race to the bottom. If the goal is greater overall safety, it is perverse to relax safeguards. Deregulating banks so that they can better compete with nonbanks may lead to even more risk-taking by nonbanks. The answer is thus not to regulate banks less, but to regulate unsafe practices at nonbanks more.
Conclusion
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 have seen again and again that capital is crucial to long-term financial stability and thus economic growth. 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.
