BPInsights: December 6, 2025

Capital, Tailoring, Supervision: Highlights from Prudential Regulator Hearing

Regulators from the Federal Reserve, OCC, FDIC and NCUA testified this week before the House Financial Services Committee at a prudential regulatory oversight hearing. The hearing spanned a range of key regulatory topics, from supervision to forthcoming changes to the capital framework. Here are some highlights.

• Holistic Look at Capital. Rep. Andy Barr (R-KY), chair of the panel’s Financial Institutions Subcommittee, asked Vice Chair for Supervision Michelle Bowman, Comptroller Jonathan Gould and Acting FDIC Chairman Travis Hill to commit to “undertaking a holistic review of the capital stack to account for double counting and other duplicative capital regulations.” All of the principals confirmed they would do so. Barr asked if the agencies would issue a Basel proposal that predetermines a “capital neutral” outcome “even if some risks continue to be overcapitalized,” and Bowman responded: “We don’t have a preconceived notion about where we’ll land with our capital requirements based on this review … we’re looking at it from a risk-based approach by each factor and category.”
• Tailoring Regulations. In response to Chairman French Hill, who followed up on a recent Committee letter to the regulators seeking further tailoring of bank regulation, Vice Chair Bowman said: “I do plan to review our tailoring framework and our approach to ensure that it has the intended effect that Congress intended in S.2155, and we are evaluating indexing the thresholds, as we are considering broadly our work on the regulatory framework.”
• Treasury Market Liquidity. Rep. Frank Lucas (R-OK) asked Vice Chair Bowman how she would consider the implications of bank capital requirements on Treasury market liquidity, given recent liquidity concerns. “It’s critically important that all of the work that we’re doing does not result in impairing the ability of the banks and the economy to support the Treasury market and its functioning,” Bowman said. “So we’re certainly attuned to any risks that might be presented by the calibration of those proposals.”  
• Access to Financial Services. Rep. Brad Sherman (D-CA) asked the regulators about access to financial services for lawful but politically disfavored businesses, a frequent topic of discussion and the subject of a recent executive order. “It’s very important that all Americans have access to financial services, especially if they’re engaged in legal activities, and if they are engaged in disfavored activities, that should not disqualify them from banking services,” Vice Chair Bowman said.
• Material Risks in Focus. On MRA reform, the subject of a recent FDIC and OCC proposal, Comptroller Gould and Acting Chairman Hill noted the importance of striking a balance between defining clearer standards for supervisory actions and allowing examiners to identify material risks.
• Learn More. To read more about the hearing, click here.

Five Key Things

1. OCC, FDIC Rescind Leveraged Lending Guidance

The OCC and FDIC on Friday rescinded interagency guidance on leveraged lending, a 2013 measure that exerted scrutiny on banks’ participation in the leveraged lending market. These agencies also withdrew the related 2014 Frequently Asked Questions on implementing the guidance. Notably, the Fed did not join the OCC and FDIC in rescinding the leveraged lending guidance and FAQs at this time. Banks typically participate in this market by providing or arranging financing or facilitating the syndication process, or indirectly by lending to business development companies or debt funds.

• Regulatory Perimeter. “The 2013 Guidance and 2014 FAQs were overly restrictive and impeded banks’ application to leveraged lending of the risk management principles that guide their other business decisions,” the agencies said in a press release. “This resulted in a significant drop in leveraged lending market share by regulated banks and significant growth in leveraged lending market share by nonbanks, pushing this type of lending outside of the regulatory perimeter.”
• Economic Implications. The rescission of the guidance will enable banks to support more middle-market lending and thereby economic growth.
• Venture Lending Guidance. The OCC on Friday also updated guidance on venture loans — commercial loans to companies in an early, expansion or late stage of corporate development, such as startups. The updated guidance “reflects the OCC’s policy of not discouraging banks from engaging in prudent venture lending activities. Instead, it is the responsibility of the bank’s board and management to ensure that venture loans are consistent with the bank’s risk appetite, maintained within established risk limits, appropriately documented and underwritten, accurately risk-rated, and sufficiently reserved.” The previous guidance, based on an OCC bulletin that was rescinded on Friday as part of the update, choked off bank lending to innovative companies, BPI wrote in a blog post.

2. Proposed 2026 Stress Test Scenarios Improve Transparency, But Leave Key Questions on Fed Discretion

The Federal Reserve’s proposed 2026 stress test scenarios reflect a welcome effort to enhance transparency and public accountability, the Bank Policy Institute, American Bankers Association, Financial Services Forum, Securities Industry and Financial Markets Association, International Swaps and Derivatives Association and Institute of International Bankers said in a comment letter submitted on Monday. 

The associations commend the Fed for, for the first time, publishing its proposed 2026 stress test scenarios for public comment and for articulating a more detailed scenario design policy, including guides and a macro model that describe how key variables are calibrated. These actions respond constructively to longstanding calls for the Fed to bring its stress testing models and scenarios into the Administrative Procedure Act’s notice-and-comment framework and reflect a serious effort to increase public insight into the process. Still, the scenarios, which in many cases replicate scenarios from past stress tests and were established before the new Fed guidelines, would benefit from some revisions. For example, the scenarios and associated models that the Federal Reserve uses to design the scenarios often compress the timelines of observed stress periods to achieve peak-level stress calibrations over a shorter number of quarters than is reflected in historical precedents.

Open questions remain on how the Fed will exercise its discretion on scenario design in practice. Greater clarity and firmer guardrails on how that discretion is applied year to year would further bolster the framework’s credibility and ensure that bank capital requirements are based on a coherent and plausible foundation.

“The Enhanced Transparency NPR and the publication of the Proposed 2026 Scenarios for public comment represent an improvement in the overall transparency and accountability of the Federal Reserve’s stress testing processes. However, the proposed framework would grant inordinate discretion to the Federal Reserve, without requiring sufficient explanation for its design choices year-to-year,” the associations stated in the letter.

3. BoE Lowers Assessment of Optimal Capital Requirements

The Bank of England announced a decrease in its assessment of optimal bank capital requirements this week to 13 percent (for banks’ tier 1 ratio) and 11 percent (for common equity tier 1), the estimated levels that balance financial stability benefits with lending. The downward revision owed to a updated staff study of optimal capital, judgement that some U.K. banks were less systemic, the strong bank performance in the UK stress tests, and improvement in risk measurement.

• The BoE Perspective. Sarah Breeden, deputy governor of the Bank of England for financial stability, explained the rationale for these numbers in a Financial Times op-ed this week. “Estimating this benchmark requires some heroic calculations … Our updated analysis suggests that optimal bank capital lies between 10 per cent and 14 per cent,” Breeden wrote. “Given the shape of the financial system today and the risks it faces, we judge 11 per cent as appropriate. But, as bank capital aficionados know, measures of risk-weighted assets are not perfect. They are essentially a tally of a bank’s assets but adjusted for the varying degrees of perceived risk attached to them. The collapse of Silicon Valley Bank showed how gaps in the measures — such as taking into account interest rate risk in the banking book — can matter a lot. To account for these, we add 2 percentage points, bringing our benchmark to 13 per cent.”
• A Closer Look. BPI has examined optimal capital in several previous notes, including in 2023, when regulators attempted to justify proposed higher capital requirements by inaccurately framing banks’ capital levels at that time as on the “low end” of optimal. The 2023 BPI analysis rebutted that mischaracterization and outlined major conceptual shortcomings in several estimates of optimal capital. In such studies, the way authors account for changes in bank regulation and how they estimate costs and benefits of higher capital have profound implications for the ultimate optimal-capital estimates. The 2023 BPI literature review found that U.S. bank capital levels were at or above the midpoint of the optimal range. Since 2017 BPI has called out the Bank of England analysis of optimal capital as particularly well done, in part because the analysis has consistently recognized the contributions of all the post-crisis reforms to bank regulations.

4. Bessent Weighs in on Private Credit, Fed Balance Sheet

Treasury Secretary Scott Bessent observed this week in a media interview that the Fed has migrated from “a monetary interest rate function” to “a balance sheet function, which I can tell you no one understands.” Still, he recommended some flexibility for the Fed to use its balance sheet as a tool to mitigate major financial instability. He expressed concern about the growth of private credit, which could exacerbate turmoil during economic downturns as such lenders tend to pull back more aggressively than banks in stressed times. The growth of private credit is a consequence of overly stringent bank regulation, he said, noting that “we have been working with the regulators to create more credit in the regulated banking system.”

• Fed Reform. Bessent this week also floated potential changes in Federal Reserve governance, such as a requirement for regional Fed presidents to have lived in their district for at least three years.

5. Who Will Be the Next Fed Chair?

Multiple media outlets this week reported that National Economic Council Director Kevin Hassett is the leading candidate for the next Federal Reserve chair nominee after Jerome Powell’s term expires in May. In addition, Bloomberg reported this week that Treasury Secretary Scott Bessent may be tapped to lead the NEC in addition to his current position. President Trump said recently that he plans to announce his pick for Fed chair in early 2026. Other candidates include Fed Governors Christopher Waller and Michelle Bowman, former Fed Governor Kevin Warsh and BlackRock’s Rick Rieder.

In Case You Missed It

Journal Retracts Paper that Formed Basis of Central Bankers’ Climate Models

The academic journal Nature this week retracted a study by Maximilian Kotz, Anders Levermann and Leonie Wenz after significant flaws were revealed in its modeling. The study underpinned the “damage function,” a linchpin of an international central banking group’s scenario design for bank climate risk assessments. BPI published analyses in 2024 and 2025 that flagged problems and inaccuracies in the damage function, and the Network for the Greening of the Financial System, the central banking consortium, recently added a prominent notice to its materials, warning about issues with the paper in question.

Traversing the Pond

Here’s what’s new in international banking policy.

• Basel Market Risk Speech. The Bank of England’s Phil Evans discussed the UK’s forthcoming implementation of updated Basel market risk capital standards in a speech on Wednesday. Evans reviewed the UK’s goals for the rollout and outlined areas for the Prudential Regulation Authority to review in the future. “[W]e have tried to write the FRTB rules in as clear a way as we can. But there is no avoiding that they are quite involved,” he said. “And no matter how clearly we try and write the rules, there will be aspects that firms want to clarify with us. By this, I don’t mean re-opening. We need a strong focus on getting the package across the line now, rather than continually re-opening. But clarifying is a distinct and very legitimate need.”
• BoE Private Markets Stress Tests. The Bank of England this week launched a stress test for private markets, such as private equity and private credit. The initiative, known as a systemwide exploratory scenario exercise, will focus on how private markets operate under stress and the implications for UK financial stability and the economy.
• EU Fraud Protection Rules. European Union authorities agreed on rules – the Payment Services Regulation and the Third Payment Services Directive – that aim to harmonize payment services and strengthen fraud prevention across the bloc, as well as ensuring fair competition.
• Financial Stability Report. The Bank of England’s Financial Policy Committee released its latest Financial Stability Report this week outlining key risks to the financial system, including geopolitical tensions, fragmented markets and pressures on sovereign debt markets. Read the report here.

OCC Files Amicus Brief Supporting National Bank Act Preemption of a Cal Interest-on-Escrow Law in Ninth Circuit Case

Last week the OCC filed an amicus brief in support of Flagstar Bank in its request for a rehearing in the Ninth Circuit case, Kivett v. Flagstar Bank. In November, Flagstar Bank requested that the entire Ninth Circuit reconsider a panel’s decision that it could not deviate from Circuit precedent dating back to 2018 that requires national banks to make interest payments for mortgage escrow accounts under California state law. In 2024, the SCOTUS remanded the case back to the Ninth Circuit “for further consideration” in light of its landmark National Bank Act preemption decision in Cantero v. Bank of America, N.A.

The OCC argued in its brief that the case should be reheard because the Ninth Circuit’s 2018 decision (Lusnak v. Bank of America) was incorrectly decided and because the case has important implications for national bank preemption, a legal principle dictating that the National Bank Act preempts state laws that “prevent” or “significantly interfere” with the exercise of a national bank’s powers.  The OCC pointedly asserted that, in upholding the Lusnak precedent, the Ninth Circuit panel failed to apply preemption principles mandated by the SCOTUS in Cantero and committed statutory interpretive errors. The OCC brief ultimately concludes that laws such as the California interest-on-escrow law at issue in Kivett should be preempted under the NBA because they are “more akin” to those laws that the SCOTUS has found to be preempted for national banks (i.e., as opposed to those laws that the SCOTUS has found not to be preempted). BPI and its trade association partners filed a brief in support of the rehearing petition as well.

The Crypto Ledger

Here’s the latest in crypto.

• DOJ Seizes Crypto Scam Website. The U.S. Department of Justice seized a domain used by a Southeast Asian crypto scam syndicate, marking an early victory for the national Scam Center Strike Force, a U.S. government effort launched recently to combat fraud and scams. “American consumers are under attack from sophisticated criminal networks and hostile nation-states to the tune of over $12 billion per year,” BPI Head of BITS Heather Hogsett said in an American Banker article about the seizure.
• Banking Regulators Moving Toward GENIUS Implementation. Prudential regulators at the House Financial Services oversight hearing this week said they are moving forward on rules implementing the GENIUS Act. The Fed is working with the other agencies to develop rules enabling banking organizations to issue and transact in stablecoins.
• Post-GENIUS Landscape Remains Uncertain. The stablecoin ecosystem and its impact on markets remain uncertain after the enactment of the GENIUS Act, according to analysts in a Bloomberg article this week. Implications such as the sector’s effect on demand for Treasuries are still an open question, according to the article.

House Panel Releases ‘Debanking’ and Digital Assets Report

The House Financial Services Committee released a staff report this week titled “Operation Choke Point 2.0: Biden’s Debanking of Digital Assets.” The report argued that the Biden Administration engaged in an effort to debank lawful digital asset businesses by using vague risk concepts and informal regulatory pressure. This approach weaponized bank supervision to pursue political and policy preferences, according to the report, comparing it to the Obama-era Operation Choke Point campaign. The report drew from documents issued by the banking agencies and SEC under the prior administration, congressional testimony and media reports.

• Recommendations. The report describes account closures as a problem driven by regulatory requirements and excessive regulatory discretion and makes several recommendations for regulatory changes. It recommends reform of the CAMELS rating system, particularly the Management (M) component. The report also recommends: (i) the SEC must modernize securities laws to support digital assets activities, (ii) the Executive Branch must effectively implement the GENIUS Act, and (iii) the banking agencies should provide clarity on digital assets activities through notice and comment rulemaking. The report urges Congress to pass market structure legislation to provide a statutory framework for digital assets activities, as well as several bills aimed at supervision process reforms (including the CLARITY Act, FIRM Act, SAFE Guidance Act, HUMPS Act, and FAIR Exams Act).
• Vague Concepts and Broad Mandates. The report alleges that prudential regulators and the SEC relied on vague concepts like “reputational risk” and broad mandates to issue interpretive letters, policy statements and other guidance to discourage banks from serving crypto firms or engaging in crypto-related activities. It cites specific policies like the SEC’s Staff Accounting Bulletin 121 that effectively precluded the banking sector’s engagement in digital asset activities.
• Current Landscape. The report draws a contrast between the Biden-era approach and the Trump Administration’s efforts to end “politicized debanking,” such as withdrawing this prior guidance, sunsetting Federal Reserve’s special crypto “novel activities” programs, removing “reputational risk” from supervisory frameworks, and launching efforts at the SEC to move from “regulation by enforcement” toward clearer rules of the road. 

Things to Watch Next Week

• The House Financial Services Financial Institutions Subcommittee holds a hearing on Thursday on right-sizing the bank capital framework.
• The House Financial Services Committee holds a hearing on Wednesday on enabling 21^st-century AI innovation in financial services.
• OCC Comptroller Jonathan Gould discusses digital asset priorities at the Blockchain Association Policy Summit on Monday.

HSBC Taps Nelson as New Chair

HSBC announced this week that the Board has appointed Brendan Nelson as Group Chair. Nelson has served as interim Group Chair since Oct. 1, 2025.