Fed and FDIC propose raising insider lending caps

The Federal Reserve and FDIC have both proposed raising the dollar thresholds that govern how much credit banks can extend to their own executives, directors, and major shareholders. The current limits, set in 1978, have not been adjusted for inflation in nearly five decades. Both agencies released notices of proposed rulemaking on July 31, 2026, and will accept public comments for 60 days after the proposals appear in the Federal Register.

What Regulation O actually restricts

Regulation O exists to prevent self-dealing at banks. It caps how much credit a bank can extend to its insiders: executive officers, directors, principal shareholders, and their related interests. The rule requires board approval for certain loans and imposes reporting requirements to ensure transactions with insiders happen at arm's length.

The problem is that dollar thresholds frozen since 1978 have become absurdly restrictive. A cap that made sense when the median home price was $55,000 functions very differently when that figure exceeds $400,000. Community banks, in particular, have struggled because their board members and executives are often local business owners with legitimate borrowing needs.

Why community banks pushed for this

Federal Reserve Vice Chair for Supervision Michelle Bowman framed the proposal as a recruitment issue. Community banks often cannot attract qualified board members because those same people, typically successful local business owners, would face restrictive lending caps if they joined. The current thresholds turn a board seat into a financial liability.

“This rule recognizes that value by providing clearer, more straightforward standards that protect against potential conflicts of interest while supporting effective governance.”

— Michelle W. Bowman, Federal Reserve Vice Chair for Supervision

The Fed's proposal would update the dollar thresholds and index them to economic growth going forward. That automatic adjustment would prevent another 50-year gap between updates.

Points of contention

Not everyone on the Fed board is fully comfortable. Governor Michael Barr voted to release the proposal but flagged tradeoffs he wants public input on. His first question: should the indexing be tied to nominal GDP or the consumer price index? The choice matters. GDP captures economic growth broadly; CPI tracks inflation more directly. Over long periods, the two diverge significantly.

Barr also raised a thornier issue involving passive asset managers. When firms like BlackRock or Vanguard hold equity in both a bank and its corporate borrowers, does that create an insider relationship under the rule? The current regulation does not cleanly address this. Barr wants input on how the revised rule should handle these indirect ownership structures.

The FDIC's parallel proposal aligns its thresholds with whatever the Fed finalizes. The agency stated this would "standardize compliance and avoid disparate treatment between FDIC-supervised institutions and other insured depository institutions." Both boards approved their respective proposals unanimously.

A separate push on mutual bank capital

The Fed also announced Friday that it aims to modernize rules for mutual banks and their ability to raise capital. The agency characterized existing rules as "overly burdensome and complex." This is a distinct rulemaking from the Regulation O changes but reflects the same underlying push: streamline regulations that have calcified over decades.

The 60-day comment period begins once the proposals appear in the Federal Register. For community banks, this is an opportunity to push for higher thresholds or more favorable indexing. For larger institutions, the passive-manager question deserves attention before the rule finalizes.

Source: PYMNTS | / PYMNTS