In April the banking agencies adopted a rule, effective July 1, cutting the capital a community bank needs to use the simplified framework Congress told them to build in 2018, from 9 percent of its assets to 8. A bank that elects that framework and clears that number is deemed well capitalized without ever running the risk-based tests that ask what those assets are.
In July the 21st Century ROAD to Housing Act raised from $3 billion to $6 billion the asset ceiling below which a bank can be examined every 18 months instead of every 12. On September 10 the Federal Reserve, the FDIC and the Comptroller wrote the new line into their rules, effective immediately, making about 188 more institutions eligible and bringing the total to 4,016.
The two rules turn on the same two words. Well capitalized is what April lets a bank be called without the risk-based tests. Well capitalized is what September requires before an examiner stays away for a year and a half. Neither rule mentions the other, and nobody had to plan it. The agencies write both definitions, so they can change what the examination rule requires without ever amending it.
The 188 and the 4,016 count institutions eligible for the longer cycle. The capital framework is a separate and much larger population, and the April rule was written to grow it. In the middle of 2025, with the requirement still at 9 percent, fewer than half the organizations that qualified had elected it. The agencies cut the number to 8 to address concerns that the framework "discouraged broader adoption," and estimate that 95 percent now qualify.
All of that is about qualifying. Nobody has asked whether these are the right lines to draw. Capital absorbs a bank's losses, and looking is how anyone knows what the capital is standing against. The longer interval should be earned by capital, which is the thing that carries a bank between visits. It is granted by asset size, which carries nothing.
The relief is real
A yearly examination is a real cost for a small bank with a plain balance sheet, and hours spent on a sound bank are hours not spent on a weak one. But the line was $1 billion a decade ago and $3 billion in 2018, and each step has been argued from the one before it.
The agencies had a choice, and made one
The statute permits the longer cycle rather than requiring it, and a separate subsection lets each agency decide by regulation whether to extend it past banks rated outstanding to banks rated merely good. Those are the top two grades examiners assign, in that order. The agencies took that option in 2018 and took it again now.
They have conceded the risk twice, in 2018 and again on September 10, acknowledging that a longer cycle creates a window in which problems can develop before being detected, then answering that six more months for small, well-rated banks should not "appreciably" increase the risk of failure.
Appreciably. In eight years nobody has said what that word is worth in dollars to the insurance fund.
The file between visits, and what the visit adds
What runs between visits cannot replace the visit. The Federal Reserve says its surveillance screens run on the quarterly call reports banks file and on examination data. Both survive a longer cycle and one ages, but the deeper problem is that the filing reports loans the bank has graded itself. Whether those grades are honest is what an examiner goes there to answer.
Two Federal Reserve Board economists, Marcelo Rezende and Jason Wu, compared banks just above and just below earlier versions of this line, where the cutoff decides examination frequency and little else. Cutting 100 days off the interval cut problem loans by 28 percent. Evidence that the visit does something, produced by the institution now doing less of it.
The premium runs on a grade that ages
The FDIC builds a small bank's deposit insurance premium from eight measures. Seven come off the quarterly call report the bank files itself. The eighth is the examiner's marks, the only input the bank does not produce, and management carries a quarter of it. No filing anywhere produces a management grade.
That eighth measure changes only when an examiner walks in. A grade set 17 months ago prices exactly like one set last week.
The fund does not lose its money on the day a bank fails. It loses it over the months the bank was sliding while its last examination still said it was sound.
On state charters, the federal check comes every third year
The federal examiner and the state alternate, so at 18 months apiece the federal look now comes every third year, and half the grades feeding the premium will be set by the state.
That would not matter if both graded alike. Economists writing in the Quarterly Journal of Economics, two at Federal Reserve Banks, found federal supervisors downgrade about twice as often as state ones, with the widest gaps on sensitivity to risk and on management, the heaviest examiner input in the premium. States more lenient than the federal benchmark have measurably higher bank failure rates.
Well capitalized is a floor, not a cushion
The obvious answer is that these banks are healthy, which is why they qualify. True, and it is a statement about the last examination. The agencies note that 8 percent sits well above the 5 percent that ordinarily marks a bank as well capitalized, and it does. But a number higher than a floor is still a floor. Neither asks whether a particular bank's equity fits its own book, and the 8 percent was never meant to: it is the price of admission to a simpler filing, now wired into how often an examiner comes.
April also stretched the grace period from two quarters to four, and inside it a bank continues, in the agencies' words, "to meet the capital ratio requirements to be considered well capitalized" at anything above 7 percent. That is where the deeming does its real work. A bank whose loans risk-weight at the usual four-fifths of assets holds tier 1 capital worth 10 percent of risk-weighted assets at 8 percent leverage, and 8.75 at 7. The risk-based tests ask for 10, and the simplified route is what excuses the difference.
So take a state-chartered bank of $5.9 billion, carrying the second grade, running just above 7 percent for a year under the grace period, three years from the federal examiner who last set its grades. Give it commercial real estate at 311 percent of tier 1 capital and its loan loss allowance, which was the median for banks its size at the end of 2025. It clears every condition in the rule.
Four fixes, and none needs a new law
The agencies and the industry will both say the $3 billion line ran eight years without incident. Those years ran on extraordinary federal support, and the commercial real estate deterioration that began in 2023 arrived only at the end of them. The expensive failures of 2023 happened at banks examiners were already inside, which is an argument about what supervisors do once they arrive, not whether they go.
The agencies should publish what the longer interval is expected to cost the insurance fund, in dollars. They made the safety finding that the change would not appreciably raise the risk of failure, and they have eight years of experience with the last extension to price it against. Nobody should expect the comment file to move the $6 billion. In 2018 they took comments and adopted the interim rule without a single change, and this time they took no comment at all before issuing it, certifying that they "do not expect public objection."
They should hold the 18-month cycle to banks rated outstanding. The statute sets the line for the second grade at $200 million and leaves anything above that to the agencies. They chose $6 billion, and what they did by regulation they can undo.
Everything so far works on the examination rule. The definition is the other lever. Congress set the band at 8 percent to 10, the agencies picked 9 in 2019, and in April they took the floor. Raising it back to 9 would tighten the examination gate without touching the examination rule.
The last fix is the one the ceiling cannot deliver. Only Congress can move $6 billion, but the statute permits the longer cycle rather than requiring it, and nothing obliges the agencies to grant it to every bank that merely clears the well capitalized line. They can condition it on capital instead: a bank that wants 18 months could be asked to hold the 9 percent the agencies themselves called adequate until April, against a balance sheet the risk-based tests have actually looked at.
Examine them less. But first, make them hold more.
