Fed Reforms Would Give Banks More Liquidity, But Murky Outlook Could Slow The Flow

The Federal Reserve's proposal to loosen the handcuffs placed on banks in the wake of the Global Financial Crisis marks a major shift in oversight that could unlock up to $175B in new capital for commercial real estate — should lenders choose to spend it. 

The central bank’s proposed reforms would lower capital requirements, cutting the amount of equity institutions have to hold against their assets, giving banks more space to lend. Fed officials say the policy shift is meant to encourage lenders to push more money into the economy, and banks have already been warming back up to commercial real estate lending.

But the regulatory relief, currently in a 90-day public review period, is not happening in a vacuum. Large investors are moving more cautiously amid historic levels of macroeconomic unpredictability coupled with geopolitical uncertainty as war spreads across the Middle East.

Banks may soon have more capital to deploy, but they’ll have the entire world of capital markets at their fingertips, and it’s far from certain that money managers will choose to bet on commercial real estate. 

“There is a tremendous amount of capital sitting on the sidelines given the unprecedented volatility in the markets,” said Keegan Vaughn, an acquisitions analyst with Eastham Capital. “A reduction in reserve requirements would increase liquidity in the banking system but would not necessarily produce a flood of capital into CRE.”

The changes target rules known as Basel III Endgame, a regulatory framework borne out of global efforts to stabilize markets during the Great Recession that banks have been chipping away at and lobbying to ease for years.

If adopted, the reforms would amount to an infusion of billions of dollars of available capital from banks into markets. Regulators estimate that banks with more than $700B in assets would see capital requirements fall by 2.4% under the new rules, according to Trepp. 

There are three broad reforms being proposed by the Fed that would collectively lead to the lower capital requirements, as outlined by the Federal Deposit Insurance Corp.

The first would streamline what the Fed calls "duplicative" methodologies for large banks calculating their capital requirements in line with the international standards set out under Basel III Endgame. 

The reforms would also increase emphasis on loan-to-value ratios as a variable for calculating risk. The third reform would apply only to the largest financial institutions and would adjust the additional requirements those banks have to hold in order to absorb losses. 

The changes would empower banks to pump more money into the economy, Fed Governor and Vice Chair for Supervision Michelle Bowman said during a speech at the Cato Institute on March 12, a week before the reforms were formally proposed.

“The result is more efficient regulation and banks that are better positioned to support economic growth, while preserving safety and soundness,” she said. 

But the reforms are being proposed as the U.S. continues its bombing campaign in Iran and masses more troops in the Middle East. Analysts say President Donald Trump is pursuing a dual-track strategy that’s leveraging threats of total destruction against high-stakes negotiations. 

The approach, perhaps by design, leaves tremendous ambiguity about how the White House sees the war unfolding. The uncertainty is giving investors, who are already navigating an ever-shifting tariff landscape, another reason not to make a deal.

“Banks and other institutions will come in and be more aggressive, but I don't think it's an immediate waterfall of banks closing more deals,” said Evan Denner, who manages the capital markets division at Marcus & Millichap.

Transaction volume has accelerated — Altus Group tracked $560B in sales in 2025, up 14.4% year-over-year — but still lagged pre-pandemic averages in the fourth quarter by roughly 5%. Bank origination was up 74% year-over-year in 2025 and already matches the pre-2020 average, according to Newmark, suggesting banks have returned to lending in the space. 

Multifamily assets have long been the core asset class for bank lending, and the sector's lackluster performance amid a wave of new construction is giving banks more reason to wait. The growing divide in office asset performance makes all but the best buildings less attractive to banks. 

“There’s also concern around, at least in certain asset classes, the fundamentals of real estate,” Denner said, specifically pointing to oversupplied multifamily markets. “It's not like, ‘Hey, Basel III, this is great, more capital to deploy, let's go.’ I think it's, ‘Hey, Basel III, we have more capital that we should cautiously look to deploy into select markets and asset classes.’”

Not everyone is convinced banks will be so judicious. Real estate investment consultant Adam Gower expects the change will unlock a significant chunk of new bank lending, enough to drive commercial real estate prices upward. 

“You're going to see more liquidity. You are going to see a steepening of this recovery curve,” said the 30-year veteran of the industry, who has lately focused on artificial intelligence in real estate at GowerCrowd, his consultancy. 

Loosening the requirements put in place after the Great Recession is overtly designed to bring lending back into the market, Gower said. 

“As soon as you find bringing liquidity back into the market, what do real estate guys do? They borrow more,” he said. “It's going to inflate values but stay prudent. Don't overlever, because, if you look at history, these kinds of inflationary periods usually have sharp downturns at the end of them.” 

Moody’s Ratings said in a March 23 note that the regulatory shift would be seen as credit negative on balance, but results by bank would vary widely based on their portfolio and how they used the new liquidity. The proposed rules allow banks to take greater risk and shift the focus to material financial risks as opposed to risk management, Moody’s analysts wrote. 

Among the options, banks could choose to operate with higher capital ratios, a positive for their credit ratings, or they could increase share buybacks and dividends, a negative credit move. 

“Broadly speaking, we believe it is likely that many banks could reduce capital above the lower minimum requirements through higher shareholder distributions, though some could increase risk-weighted assets and activities as well,” Robin Oh, vice president in the financial institutions group at Moody’s Ratings, said in an email. 

Some of the largest lenders are set to see the largest reductions to their risk-weighted assets, a key variable in determining capital requirements, while the portfolio size would grow at two lenders, American Express and Capital One, according to an analysis by bank intelligence platform AtriumData.ai. 

CitiBank, Wells Fargo, Bank of America, JPMorgan Chase, Morgan Stanley, UBS, Goldman Sachs, Raymond James and several other large banks would see double-digit reductions to their RWA calculation, according to AtriumData estimates.

While it’s not a foregone conclusion that banks will take advantage of that new source of capital, Gower expects that money managers will want to put capital to work.

The associated boost to liquidity could help close the gap between what sellers want for a property and what buyers are willing to pay when factoring in debt service, which could help unlock market activity. But it will also increase the credit risk in the system.

He suspects that the less experienced lenders may be the first to overextend.

“The seasoned pros will understand to be conservative going into this cycle, they'll focus on fundamentals,” he said. “The newer players who have less institutional memory will be more cavalier.”