A photo of Farmers & Drovers Bank takes pride of place on a bookshelf next to Michelle Bowman’s desk at the Federal Reserve Bank — a prominent reminder of her family’s ties to one of Kansas’ oldest lenders.
Bowman’s great-grandfather was the first president of the foundation, which was founded 143 years ago and is still family-controlled. Before joining the Fed, she was the bank’s vice president herself for seven years.
This family background made her a natural choice for Donald Trump, who appointed her as vice chair of the Federal Reserve’s oversight body in June, and also made her a likely candidate to succeed Jerome Powell. It also helps explain the enthusiasm with which it has pursued one of the largest rollbacks of financial regulation in the United States in decades.
The move, accompanied by a 30% cut in the Fed’s supervisory staff, follows the Trump administration’s agenda of shrinking the state and loosening rules.
Researchers estimate that the Bowman-led reform could free up nearly $2.6 trillion in credit capacity and increase the profitability of U.S. banks by lowering capital requirements.
Wall Street and Trump supporters praise Mickey, as she is known, for removing what they see as overly restrictive lending restrictions that have stifled financial innovation and limited economic growth since the 2008 crisis. They say the strict rules have pushed large portions of lending and trading into private credit markets and less supervised hedge funds.
“The eyes of the world are on the United States,” says Tim Adams, president of the Institute of International Finance. “After 15 years of adding capital and liquidity, it’s time to rethink.”
Foreign rivals to major Wall Street banks fear that easing US rules will give the country’s lenders a powerful advantage, allowing them to expand their already dominant position in many parts of international capital markets.
Bowman’s critics warn that relaxing the rules just over two years after the collapse of mid-sized banks will encourage excessive risk-taking, increase client losses, and could pave the way for a new financial crisis. Some predict a “race to the bottom,” as bankers around the world pressure their regulators to ease restrictions.
Robert Mazzoli, of Fitch Ratings, says the move toward more flexible regulation “is likely to reduce the banking sector’s resilience to systemic market shocks.”
Michael Barr, the Fed’s deputy chairman for supervision before Bowman, said in a speech this month that “periods of relative financial calm” have repeatedly led to efforts to weaken regulation and oversight, which often end badly, as happened in the 2008 crisis.
Bowman’s initial reforms aimed to free up the lending capacity of U.S. banks by loosening many of the restrictions that determine how much capital they need to allocate to these loans and other assets.
One of the key lessons from the 2008 crisis was that heavily indebted banks did not have enough capital to absorb large losses, leaving regulators with an unpleasant choice between allowing banks to fail or bailing them out to protect depositors.
In the following years, creditors were forced to increase their capital levels significantly. The amount of Tier 1 capital – the main indicator of bank capital – has doubled at major US banks since 2011, to more than $1.1 trillion, according to JPMorgan Chase.
The Fed has already approved some planned reforms, such as easing the so-called enhanced supplemental leverage ratio, which sets the amount of non-risk-adjusted capital the largest US banks need in proportion to their total assets.
The plan will reduce the rate from at least 5% to between 3.5% and 4.25%. Officials estimate this would free up $13 billion in capital at the holding company level for the eight largest U.S. lenders, and $210 billion at deposit-taking subsidiaries.
This would remove a barrier preventing banks from being more active in the US Treasury market, Bowman said. Officials also point out that this only brings US rules in line with international standards, removing additional protections – so-called “gold plating” – that Washington had previously adopted.
Barr, who remains a member of the Federal Reserve, voted against it, saying the move increases the risk of a major bank failing.
The central bank also revealed plans to overhaul the annual stress test, which assesses the sector’s resilience, following an unprecedented court challenge last year that argued the tests were illegal because they lacked transparency.
The Fed estimates that the change will lower capital requirements for the largest institutions by just 0.25 percentage points, but Barr warned that this weakens the reliability of the tests and leaves room for manipulation.
The Fed has not yet detailed other reforms, such as reducing the additional capital buffers it requires of the largest US banks. The United States is expected to reduce this amount to bring it in line with the lower global standard imposed on other banks considered systemically important.
One of the eagerly awaited parts of Bowman’s agenda is the implementation of the so-called Basel III rules, capital standards approved by a panel of global regulators based in the Swiss city. These changes are expected early next year to implement reforms to bank capital requirements for the first time since the 2008 crisis.
Barr proposed a stricter version of the rules a few years ago, but after intense industry lobbying, that version was abandoned.
Bowman expects to introduce his watered-down version of Basel III rules, which are likely to be more palatable to Wall Street, in early 2026. Observers expect these to be broadly capital neutral for most US lenders.
“Every bank in the United States, especially the big banks, wants to implement Basel III,” said Daniel Pinto, vice president of JPMorgan. Pinto said at an event in Frankfurt this month that the revised US proposal should keep bank capital “fairly stable than it was.”
He added that this “creates a situation where we have between $50 billion to $60 billion of excess capital because we were prepared for the worst-case scenario of Michael Barr’s interpretation.”
The 13 largest U.S. banks already have about $200 billion in excess capital above regulatory minimums, according to Rebecca Poff, an investment strategist at JPMorgan. “Deregulation should allow banks to allocate this excess capital to loan growth, share and dividend buybacks, and mergers and acquisitions,” she says.
European regulators fear that the United States will not fully adhere to the Basel Convention, although Bowman confirmed that the country will do so. The United Kingdom and the European Union have postponed their implementation, awaiting the American model.
The Fed also announced that it would relax the rating system for large financial institutions, reducing operational restrictions on banks deemed poorly managed. Bowman says supervisors focused too much on “identifying indicators,” leaving aside risks that could actually lead to the bank’s collapse.
Consulting firms such as Alvarez and Marsal estimate that deregulation could free up approximately $140 billion in capital and increase returns on US bank stocks by up to 6%. British banks will also benefit, as capital requirements are expected to fall by 8%. European banks are likely to be hit: the same study forecasts a 1% increase in requirements.
In the UK, the Bank of England is expected to soon present a review of capital requirements, and authorities are already beginning to signal flexibility. Pressure is also growing in Europe, where banks fear losing more space to American competitors.
As Michelle Bowman works to redesign the US regulatory landscape in favor of banks, she is raising alarms among regulators that other countries may feel obligated to follow the movement – threatening to weaken protections created to avoid another crisis.
Ashley Alder, head of the UK Financial Conduct Authority, summed up the risks: Cycles of regulatory tightening after crises tend to be followed by periods of easing “until the next crisis.”