Before the Storm, circa 1900. Creator: Ferdinand Katona.
Getty Images
Data released this week sends a clear and uncomfortable signal: the U.S. economy is becoming more fragile at precisely the wrong moment.
Growth is underperforming expectations. Gasoline prices have surged to a four-year high. Americans are saving less and spending more of their income on necessities. Beneath the surface, financial stress is building across households.
This is not a backdrop that calls for bank deregulation. It is one that demands resilience.
Yet, bank regulators are being pushed to move in the opposite direction.
Earlier this week, I wrote in my testimony for the House Committee on Financial Services that there is no serious quantitative case for weakening bank regulations today. That was true before the latest economic data—and it is even more true now.
The proposed revisions to Basel III arrive at a time of compounding risk:
Each of these risks alone would justify caution. Taken together, they argue overwhelmingly for stronger safeguards—not weaker ones.
And critically, current capital frameworks do not fully capture many of these emerging risks.
Significant risks are impacting most Americans, as well as challenging the future of banks’ financial health and stability. Even before the Iran war began on February 28, geopolitical risk was at a very elevated level due to tariff policy uncertainty and three key conflicts: Russian-Ukrainian conflict, Israel-Middle East, and China-Taiwan. The Iran war has intensified geopolitical risks, which are transmitted to American consumers, businesses, and financial institutions via higher inflation, market volatility, and cybersecurity threats.
GDP
Real gross domestic product (GDP) increased at an annual rate of 2.0 percent in the first quarter of 2026. This is higher than fourth quarter of 2025, when real GDP increased 0.5 percent, but it is lower than market estimates.
Inflation and Gasoline Prices
With gasoline prices at a four-year high, Americans understand how the Iran war has pushed up inflation.
Gasoline prices are at a 4-year high
AAA
Today’s personal income data showed that American consumer spending is increasingly going toward gasoline, food and healthcare—necessities. Moreover, according to Bank of America, gasoline prices have "soaked up nearly half the increase in tax refunds, reducing the scope for stimulus to boost spending."
Changes in Monthly Consumer Spending, March 2026
U.S. Bureau of Economic Analysis
Savings
Americans’ savings rate is now at 3.6% of disposable personal income; the last time that it was this low was July 2008 during the financial crisis. Real after-tax income and the savings rate have declined since April 2025.
Inflation is pushing savings rates to a low level
FRED
Unemployment
The unemployment rate was 4.3% in March 2026 with the labor force participation rate falling below 62% for the first time since the pandemic
Other Signs of Serious Strain
Use of buy now, pay later services for groceries is increasing, and 41% of BNPL users have been late on payments, which could hurt their consumer scores. Federal Reserve data also point to rising stress across major credit categories: the overall consumer loan default rate stands at 2.78% for all commercial banks; credit card delinquencies for accounts 90 days or more past due reached 7.10% in late 2024 and climbed to 20% to 23% in some low-income areas by late 2025; auto loan delinquencies rose to 2.90% in the third quarter of 2024 and continued increasing in 2025; serious student loan delinquencies spiked to 16.3% in the fourth quarter of 2025 after the payment pause ended; and 3.76% of mortgage balances were in some stage of delinquency as of the third quarter of 2025. At the same time, hardship withdrawals from 401(k)s have reached record highs, underscoring the growing financial pressure on many households.
Consumer Sentiment
It is no surprise that consumer sentiment is at a 74-year low. April’s data shows that every demographic group across age, income, and political party all posted setbacks in sentiment, as did every component of the index. This reflects the widespread and serious nature of the state of Americans’ financial health.
We should not be surprised that consumer sentiment is at a 74-year low
Gallup
And unfortunately, the forecast for the near-term is not optimistic. According to Gallup, Americans’ financial outlook for the remainder of 2026 is historically poor; a record 55% of American are saying their financial situation is getting worse. “While similar to last year’s 53%, this is up from 47% in 2024 and marks the fifth consecutive year more Americans say their finances are worsening rather than improving.” The only similar multiyear period when the larger share of Americans felt their financial situation was worsening was during the financial crisis.
Weakening bank capital requirements in this environment would not increase economic growth; it would make the next downturn more severe. Lower capital buffers reduce banks’ ability to absorb losses, forcing them to pull back lending precisely when households and businesses need credit most. This procyclical dynamic was a defining feature of the 2008 financial crisis, and it remains one of the clearest lessons of that period.
Today’s conditions—elevated consumer leverage, declining savings, rising delinquencies, and geopolitical instability—create a backdrop in which even a modest shock could propagate quickly through the financial system. In that environment, strong capital is not a constraint on growth; it is a prerequisite for sustained economic stability.
The choice facing policymakers is not between growth and regulation. It is between stable growth and amplified volatility. Weakening regulatory standards now would not spur lending—it would increase the likelihood that lending disappears when it is needed most. Strong capital is not a constraint on the economy. Loss absorbing capital is what keeps financial shocks from becoming economic crises.
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