Bowman outlines capital rule changes to boost small business lending

Federal Reserve Vice Chair for Supervision Michelle W. Bowman underscored the vital role of small businesses, calling them 'the backbone of our economy.'

In 2023, these firms employed 59 million Americans, representing nearly half of all private-sector jobs and contributing 44 percent of gross domestic product.

New business creation has consistently exceeded pre-pandemic levels, with research highlighting their disproportionate role in job and productivity growth.

Access to capital and credit is crucial for their success.

Community and smaller regional banks are key players, holding nearly one-third of business loans under $1 million.

Large banks also provide significant credit, accounting for 18 percent of loans below $1 million as of Q2 2025.

Despite this, credit conditions remain tight, with 9 percent of banks tightening standards in Q3 2025 due to economic uncertainty.

Small businesses, however, show optimism, with 44 percent expecting to increase investment and 42 percent planning to increase staffing.

The regulatory framework is crucial for small business credit.

Currently, small business loans are risk-weighted at 100 percent under standardized capital rules.

The Federal Reserve Board and other regulators recently proposed changes to modernize this framework.

The standardized approach proposal would reduce the risk weight for corporates from 100 percent to 95 percent.

The Basel III proposal includes three key adjustments: risk weights for small business loans exceeding $1 million would decrease to 65 percent for investment-grade businesses.

For loans less than $1 million, the risk weight would reduce to 75 percent.

Small business credit cards would also receive capital treatment more aligned with their actual risk.

These proposed changes are open for public comment, with stakeholder feedback actively sought.