High levels of capital are a competitive advantage for banks.
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U.S. banks are the envy of the world because of our banks regulations, which have led them to earn high credit ratings. Those high credit ratings help banks reduce their borrowing costs. If you deregulate, banks will take more risks, become less safe, and their cost of borrowing will rise — costs they will pass directly to American consumers, small businesses, and municipalities in the form of higher rates on every loan and credit product they need.
This is not a theoretical proposition. It is documented by decades of empirical research, confirmed by the rating agencies themselves, and visible in the actual credit ratings that U.S. banks carry today. Banks guard their ratings jealously, because the higher the rating, the more banks save when they borrow from each other or when they issue short- and long-term debt. The better capitalized and more liquid banks are, the higher their credit ratings are. When banks are deregulated and they take more risks, their ratings often suffer. Even before rating agencies put them on notice, bond traders sell bank bonds — which signals to the market that these traders are worried about banks' credit quality.
The three Notices of Proposed Rulemaking (NPRs) published by the Federal Reserve, the OCC, and the FDIC on March 19, 2026 — which would collectively reduce Common Equity Tier I (CET1) capital requirements by approximately 4.8% for the largest banks and 5.2% for mid-size banks — therefore carry a consequence that regulators and legislators must confront directly: lower capital means weaker ratings, and weaker ratings mean higher borrowing costs, ultimately passed to Main Street.
Banks need high quality capital.
World Bank
The Bank for International Settlements has produced some of the most rigorous evidence on this topic. BIS Working Paper No. 558 — "Why Bank Capital Matters for Monetary Policy" — found that higher bank capital is directly associated with lower debt funding costs and higher growth in both debt funding and lending volumes. The paper's key finding is that both macroeconomic and supervisory objectives — unlocking bank lending and maintaining sound banks — are better served by well-capitalized institutions.
The BIS paper quantified this effect: given that debt funding represents roughly nine-tenths of total bank liabilities, the impact of capital on overall funding cost is substantial. A back-of-the-envelope calculation in the paper indicates that greater retention of net income as retained earnings would almost pay for itself through lower cost of debt — even assuming the cost of equity is quite high. More capitalized banks, in short, are cheaper to fund.
Capital adequacy is an important part of a credit rating framework.
FitchRatings
The quantitative evidence on the spread between credit ratings and borrowing costs is extensive and consistent. Research from the Office of Financial Research (2014) measured the cost of each rating notch across a large sample of corporate bond issuances and found a statistically significant spread penalty of 20 to 30 basis points for every one-notch downgrade — roughly 10% of the sample's mean yield spread of 210 basis points. The investment-grade boundary carries an outsized effect.
BIS Working Paper No. 747 — "How Do Credit Ratings Affect Bank Lending Under Capital Constraints?" — found that a downgrade raises spreads by approximately 22 basis points, while an upgrade lowers them by only 13 basis points. The downgrade effect is roughly 70% larger than the upgrade benefit, confirming a structural asymmetry: the cost of losing a rating notch materially exceeds the savings from gaining one.
Research by Professors Adelino and Ferreira (Wharton/NYU Stern), using sovereign downgrades as a natural experiment, found that banks pulled down by sovereign ceiling rules saw CDS spreads widen by 45 to 65 basis points, and long-term and interbank funding fell 3 to 5 percentage points more than for non-downgraded peers.
Karam et al. (IMF/CEPR), examining 80 U.S. bank downgrades during the Global Financial Crisis, found persistent declines in wholesale and uninsured deposit funding — with the sharpest effects at the investment-grade to speculative-grade threshold. The Federal Reserve Board (2025), using 1.25 million mortgage loans and nearly 285,000 credit card accounts, confirmed a strong negative relationship between credit ratings and loan spreads across all product types.
Schematic of Financial Profile
Moody's
Recent Basel analyses showed greater improvements for banks globally that were more heavily impacted by the Basel III reforms — suggesting that the reforms were an important driver of increased resilience. Greater resilience did not come at the expense of banks' cost of capital: banks more heavily impacted by the reforms also saw a greater decrease in their cost of capital. There is no robust evidence that banks with lower initial CET1 ratios had lower loan growth than their peers.
Globally, bank lending grew in aggregate after the Basel III reforms, both for banks above and below the initial median of a given regulatory ratio — for each of the four regulatory ratios analyzed. Increases in capital requirements do not have to lead to cuts in lending, especially since banks can shed riskier assets to reduce their risk weights.
In 2020, World Bank researchers found that bank capital can help banks smooth the supply of credit during crisis years: in times of economic turmoil, banks with larger capital buffers are somewhat protected from cuts in lending. Countries with better-capitalized banking systems in 2006, prior to the financial crisis, experienced higher lending growth during and after the crisis.
Professors Stephen G. Cecchetti and Kermit L. Schoenholtz at Money and Banking have documented this clearly: higher capital did not slow the economy, and BIS research established that better-capitalized banks experience lower funding costs, higher growth of debt funding, and higher growth of lending volumes.
Professor Juliane Begenau's research at Stanford Graduate School of Business points to the mechanism: when banks are better capitalized, their probability of default declines, which leads to a decline in banks' borrowing costs. Credit rating agencies, lenders, and bond investors react favorably when banks' credit quality is higher. The reduction in cost of borrowing, in turn, allows banks to continue lending — and in fact lend more than when their credit quality was poorer.
The Federal Reserve Bank of Philadelphia has also found that better-capitalized banks create more funding liquidity and lend more, even during times when cash deposit balances are falling.
As of April 26, 2026, globally systemically important banks and large regional banks in the U.S. carry credit ratings ranging from A- to AA — the product of years of stronger regulation, higher capital, and better supervision. These ratings translate directly into lower borrowing costs across the system.
Banks in the A range are considered of high credit quality with a strong capacity for timely payment of financial commitments. Banks in the AA range carry a remarkably high credit quality with a very strong capacity for timely payment of financial commitments, not significantly vulnerable to foreseeable events.
These ratings did not arise accidentally. They are the direct consequence of the Basel III and Dodd-Frank framework that required banks to hold more capital, undergo rigorous stress tests, and maintain stronger liquidity buffers. From 2010 to today, U.S. bank assets grew from $11.7 trillion to $25.3 trillion — an increase of 116%. Net income reached record highs. And banks earned these metrics not despite regulation, but because of it.
A standard argument deployed against strong bank regulation is that the United States "gold plates" its rules, making big banks less competitive than foreign rivals. This claim does not survive scrutiny. American banks are not weakened by rigorous regulation — they are strengthened by it. Until very recently, U.S. banks were the envy of the world precisely because they were better regulated, better supervised, and more rigorously examined than their international peers. That reputation is a competitive asset.
The evidence is conclusive and consistent across decades, institutions, and countries. Well-capitalized banks earn better credit ratings. Better credit ratings lower the cost of borrowing. Lower borrowing costs enable banks to lend more — and to lend better. This virtuous cycle is not an artifact of favorable conditions: it held during the COVID-19 pandemic, during the 2023 banking stress, and through every cycle since Basel III began being implemented.
The March 2026 NPRs, if finalized as proposed, risk interrupting this cycle. S&P has warned of potential capital reductions and increased systemic risk. Fitch has warned of heightened ratings sensitivity for less-capitalized institutions. Moody's has characterized the broader deregulatory direction as credit negative across the board. These are not advocacy positions — they are analytical judgments from institutions whose sole function is to assess creditworthiness.
Note: A lot of this article is from my written testimony before the House Committee on Financial Services at a hearing entitled “Prioritizing Main Street: Evaluating the Impact of Capital Proposals on Economic Growth and American Communities.”
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