What is one challenge posed by FIRREA's risk-based capital standards?

The challenge posed by FIRREA's risk-based capital standards is that they can reduce available credit for borrowers. These standards were established to ensure that banks maintain sufficient capital to cover the risks associated with their lending activities. When a bank is required to hold more capital against higher-risk loans, it may become more cautious in its lending practices. This can lead to a tightening of credit availability, as banks might be less inclined to extend loans to borrowers perceived as higher risk.

This tightening can negatively impact those seeking credit, especially small businesses or individuals who may have less favorable credit profiles. As banks adjust their lending portfolios to align with these capital requirements, they may prioritize safer lending options to ensure compliance, inadvertently limiting access to credit for those who need it most. This aspect of FIRREA highlights the balance that must be struck between maintaining the financial stability of banks and ensuring that credit remains accessible to borrowers in the economy.