Armed with a deregulatory agenda and a perceived mandate, the Trump administration will take aim at regulations that it says can stifle the business activity and impact of community banks according to a recent speech by Scott Bessent, secretary of the U.S. Department of the Treasury.
Speaking on Wednesday at the American Bankers Association (ABA) Summit in Washington, D.C., Bessent said that financial policy has served “large institutions” at the expense of smaller, community-focused banks.
“No more,” Bessent said. “This administration aims to give all banks the chance to succeed—whether it’s JP Morgan or your local mortgage and loan. It aims to get capital to Americans who need it most by getting bureaucracy out of the way.”
Bessent lauded the role of community banks in increasing access to the U.S. financial system, saying that “to ensure that Main Street matters more in bank regulation, I and the rest of the Treasury team will devote the necessary time and attention to the quite technical, substantive aspects of regulatory reform.”
Specifically in the realm of mortgages, Bessent was critical of the increasingly important role that independent mortgage banks (IMBs) are playing in the broader mortgage industry, saying that their rise imperils broader access to mortgage credit and risks reliable business lines for smaller institutions.
“When considering the effects of bank regulation on community banks, we should ask ourselves why so much financial activity has moved out of the regulated banking system,” he said. “For example, the shift of mortgage lending to nonbanks has undercut an important line of business for community banks.”
This shift, he said, is at least partially driven by regulation. In particular, “by outdated capital requirements on some exposures that are well in excess of the latest evidence on the actual risk of those exposures.”
Modernizing regulatory capital could reduce risks to financial stability if it focuses on “leveling the playing field between banks and nonbanks,” he said, while also enhancing “banks’ ability to support innovation and economic growth and improve their safety and soundness.”
He criticized the Basel III endgame proposal spearheaded by the Biden administration as “not, in my opinion, the right starting point for our modernization effort,” he said. “Important aspects of the Endgame standards cannot be explained or even understood because the Basel Committee offered little rationale.”
Competitive parity between bank and nonbank lenders remains an open question, but it’s one Bessent said is being actively tackled by Treasury and the White House.
“Modernizing regulatory capital likely would mean reduced capital requirements for mortgage loans and some other exposures that are core to the community bank model,” Bessent said. “Giving only large banks the benefit of the reduced requirements for those exposures, as actually contemplated under the Biden administration, would entrench their already dominant position.”
Instead, a possible solution could be to “give each bank that is not mandatorily subject to the modernized requirements the option, in its discretion, to opt in,” he said. “This is what I mean by ensuring Main Street matters more.”
