Lending Risk Is Growing Under the Radar

When Congress voted in 2018 to give regional banks a break from stiffer post-crisis capital rules, it created a two-tier banking system in the US. One aim of the Federal Reserve’s reforms launched this summer was to undo that and ensure that all banks with more than $100 billion in assets meet the same standards as the biggest lenders.

But the US will still have a two-tier regime if these proposals pass – which is no slam dunk given the heated opposition. This matters because the banks that will remain lightly regulated have become increasingly important lenders. Failures among those with less than $100 billion in assets should be less damaging — but they might not be.

There are 4,136 banks in the US at the last count by the Federal Deposit Insurance Corporation. Under the Fed’s proposals to adopt the so-called Basel III Endgame, only 14 more US lenders will become subject to the stiffest rules, bringing the total in the top tier to just 23. There are five members of the KBW Banks stock index that will still get a light touch, including Comerica Inc. and Zions Bancorp NA.

Those 14 larger regionals and credit-card companies have a total of about $4 trillion assets, using numbers for the end of 2022, equivalent to slightly more than two Wells Fargo & Cos., or almost 20% of total US domestic bank assets, according to Fed data. This would mean roughly two-thirds of all US banking assets will be governed by the stricter rules. All of this top tier will face steeper capital requirements than they do today – with the biggest increases hitting the biggest institutions, like JPMorgan Chase & Co and Goldman Sachs Group Inc.

But the remaining 4,000-plus banks won’t be affected and their role in the economy has grown, especially in real estate lending, since the 2008 financial crisis.

Small Banks Keep More Assets As Loans Than Large Banks