The Federal Reserve is proposing to lower the capital requirements of banks

A long-awaited proposal from the Federal Reserve released on Thursday would adjust cash requirements during the financial crisis, reducing banks’ cushions to adapt to changes in the economy while aiming to increase lending.

Under the proposal, big banks, such as JPMorgan Chase ( JPM ) and Bank of America ( BAC ), would see capital fall by 4.8%, while other big banks — those with assets between $100 billion and $700 billion — would see their capital requirements fall by 5.2%. Banks with less than $100 billion in assets will see a reduction of 7.8%.

After the proposals are implemented, US central banks will still hold more than $800 billion in reserves to protect against inflation, and liquidity levels will be double what they were before the financial crisis.

The Fed’s senior officer leading the panel, Fed Vice Chair of Supervision Michelle Bowman, said the proposal aims to better balance risk-based needs and that the reforms will continue to support the safety and soundness of the financial system.

“Rating is important, however, over-rating can harm banks’ competitiveness and ability to serve customers, reduce credit availability, and hinder economic growth,” said Bowman.

These changes are part of a comprehensive review of monetary requirements that the Fed has conducted over the past nine months. That review included examining the overlap between the regulatory framework known as Basel III and stress testing to help ensure that, taken together, capital requirements appropriately capture risk rather than being overly punitive.

It’s been nearly two decades since the 2008 financial crisis, and Fed Chairman Jerome Powell has acknowledged that some aspects of the post-crisis regulatory regime may warrant an overhaul.

“It is a healthy practice to re-evaluate regulations over time to ensure that they are still effectively and efficiently reducing the risks they were designed to address,” Powell said.

After the 2008 financial crisis, regulators implemented reforms that greatly increased bank liquidity. While those initial savings were necessary, Bowman noted that the stimulus requirements produced unintended consequences, including suppressing credit availability, pushing banking operations into the less regulated non-banking sector, while adding complexity and cost without significantly improving safety and soundness.

In the new regime, “banks will retain their ability to absorb losses while continuing to provide financial services to households and businesses across most economic conditions,” Bowman said.

The proposals also aim to bring traditional lending — such as mortgage origination, mortgage lending, and business lending — back into the regulated banking system. In recent years, those lending activities have moved out of the banking system.

But not everyone on the Fed’s board supports the proposals. Fed Governor Michael Barr said, “This significant reduction in capital requirements is unnecessary and unwise. Today’s proposals, if adopted, could harm the stability of banks and the US financial system.”

Barr said that, when combined with the impact of previously proposed changes in the Fed’s stress tests, the change in central banks is 6 percent, or $60 billion.

Basel III, which has gone through many iterations, sets international standards and minimum requirements for bank capital. It was adopted after the 2008 financial crisis to fill regulatory cracks and prevent another global financial crisis. It builds on the international standards of Basel II, introduced in 2004, and Basel I, introduced in 1988.

Jennifer Schonberger is a veteran financial reporter covering markets, economics and investing. At Yahoo Finance he covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and Washington’s financial policy mix. Follow him to X @Jenniferisms and continue Instagram.

Click here for the latest economic news and indicators to help inform your investment decisions

Read the latest financial and business news from Yahoo Finance