Washington is ready to make life easier for the largest US banks.
This may sound very abstract if you don’t see it in mechanics. Regulators decide how much capital banks need to hold to absorb losses and how much liquidity they need in case they run out of funds.
More capital and more liquidity make banks more stable, although they also limit the amount of money banks can lend, trade or return to shareholders. Less of both gives banks more room to leave a thinner cushion when conditions change.
This exchange is now at the heart of US banking policy. On March 12, Federal Reserve Bank Vice Chairman for Supervision Michelle Bowman said regulators were preparing a softer rewrite of Basel III’s end-game rules, the capital package Wall Street has spent years weakening since 2008.
The new version could leave large banks’ capital requirements about the same or slightly lower than existing levels after related changes, and could free up more than $175 billion in additional capital across the industry. Surcharges for the world’s largest banks could also fall by around 10%.
It’s a sharp turn from where the debate was less than three years ago.
An earlier draft drawn up by Bowman’s predecessor, Michael Barr, would have increased capital requirements at the biggest banks by around 19% by 2023. Banks argued that the proposal would make lending more expensive, reduce market capacity and take activity out of the regulated system.
Their critics argued the opposite: years of easy money, asset concentration and repeated episodes of stress made thicker buffers necessary. The new project is much closer to the banks’ side of the debate.
Washington’s proposed banking policy aims to ease capital and liquidity rules, potentially unlocking $175 billion in additional bank capital.The contrast with Bitcoin is particularly interesting: while Washington is willing to give big banks more flexibility regarding capital and liquidity, the direct impact of crypto may still attract a tougher approach, suggesting that regulators remain more comfortable with traditional balance sheet risks than setting Bitcoin on bank books.
The actual circulation of politics is greater than that of capital
By itself, this would already be a major banking story. What gives it wider reach is the second part that runs alongside it: liquidity.
Earlier this month, Treasury officials said they were reconsidering liquidity rules and floated an idea that would give banks a regulatory credit for the collateral they’ve already posted during the Federal Reserve’s discount window.
In simple terms, regulators can begin to treat part of a bank’s ability to borrow emergency cash as usable liquidity. The Treasury described this borrowing capacity as “real and monetizable liquidity.”
This means that banks no longer need to carry as much dead weight if they can show that they have assets sitting at the Fed and can quickly turn them into cash. The system, in other words, is being redesigned around a more direct role to support the central bank.
Over the years, regulators have tried to create a framework that keeps banks on their toes in a panic. They should have enough liquid assets to survive a run and view the Fed’s discount window as an emergency tool of last resort.
But in practice, banks have long avoided the window because its use is considered a clear sign of distress. The Treasury is now openly saying that the label is a problem and the rules should better reflect the reality that there is a discount window to use.
It comes just three years after the regional bank failure of 2023.
Silicon Valley Bank, Signature Bank, and First Republic collapsed because confidence quickly eroded, depositors moved faster, and liquidity that seemed available in theory was much harder to mobilize in real time.
The Fed’s own review of SVB said the bank had serious weaknesses in managing liquidity risk and that supervisors failed to fully understand how exposed it was during the expansion. The official answer at the time was simple: banks needed better supervision, better preparation and stronger stability.
The 2026 filing says the system will also need lighter capital requirements, a less punitive approach to preparing for the discount window and fewer restrictions on the largest institutions.
More space for banks, less in the system
If the new framework is completed, big banks will have more opportunities to extend credit, increase business capacity, buy back shares and support trading activity.
Proponents say that’s exactly what it is. Bowman argued that excessive capital requirements have real economic costs and can hamper banks’ primary job of providing credit to the wider economy. Industry groups raised the same issue, saying the revised plan would make the requirements more in line with the actual risk.
The other side of this business is equally clear.
Capital rules are a shock absorber and liquidity rules are a form of brake. At the same time, it becomes easier and banks gain more freedom, while the system has less internal friction. It shifts the official balance sheet away from maximum safety and toward efficiency, credit creation, and easier access to Fed funding.
However, the Fed’s biggest challenge right now is timing.
Senator Elizabeth Warren has warned of weaker capital standards, while geopolitical and credit risks are already rising. While her protest is political, it still puts the contradiction at the heart of the debate.
After SVB, Washington said the stability of the bank should come first. Now, with fears of growth, market volatility and funding sensitivities, Washington is poised to give the biggest banks more breathing room.
The result is simple.
It is a decision about how much slack to maintain until the next stress event hits the financial system. The tighter framework forces banks to implement greater unemployment protection. A softer one accepts a little more volatility in exchange for more lending, more market activity and less drag on profitability.
Bitcoin’s criticism of the banking system has always been stronger when politicians have expanded the role of emergency support and presented the overall structure as stable and independent.
The discount window is not a side detail in this story, but part of the infrastructure that keeps trust from breaking down.
When the Treasury argues that the Fed’s advance collateral should be counted directly in the bank’s liquidity rules, it acknowledges that the system still depends on the central bank’s bailout architecture even during normal periods.
The crisis is not imminent, but Washington is determined to rewrite the post-SVB rules. This time, it wants to base it on a very pragmatic assumption, namely that when the next panic hits, the biggest banks should have more flexibility and the Fed’s support will be easier to use without hesitation.
This is certainly a relief for Wall Street.
For everyone, though, it’s a reminder that the banking system is still structured around the same old problem: private risk-taking works best when public liquidity is always close at hand.
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