Fed: Banks King in Small Business Funding

“Currently, banks hold roughly $600 billion in business loans that were originated under $1 million,” said Federal Reserve Vice Chair for Supervision Michelle W. Bowman. “Banks are the primary financing channel for small business funding.”

Bowman was speaking at a Consumer Bankers Association (CBA) event. She offered impressive stats about banks in small business lending.

“Although large banks are less concentrated in small business lending, they are also a significant source of small business credit,” she said. “As of the second quarter of 2025, the largest banks—those with over $700 billion in assets—provided about 18 percent of business loans below $1 million, and 33 percent of business loans below $100,000.”

Despite this, she acknowledged that credit is still tight and offered ideas for how the Fed could ease capital requirements on banks making small business loans. They are below:

In the standardized approach proposal, the risk weight for corporates would decrease from 100 percent to 95 percent. The proposed changes are currently subject to an open comment period, and we encourage stakeholder feedback on this and other changes.

The Basel III proposal would make three changes. First, for small business loans exceeding $1 million, the proposal would generally reduce the risk weight from 100 percent to 65 percent for small businesses considered to be investment grade by the lending bank. This would free up capital that banks can use to extend additional credit to small businesses. It could also make larger loans more available and more affordable for growing companies that need capital for expansion, equipment purchases, or hiring.

Second, for small business loans less than $1 million, the proposal would generally reduce the risk weight by 25 percentage points—from 100 percent to 75 percent. This more accurately reflects the lower risk of the diversified portfolios of smaller loans.

Third, for small business credit cards specifically, the proposal would provide regulatory capital treatment that is more aligned with the actual risk of those exposures than the current rules, and relying more heavily on repayment history. We are also seeking comment on whether the proposed treatment of unused credit lines appropriately reflects the risk of these exposures.”