Basel: Where Are We Now

Next Thursday, June 18, public comments are due on the federal banking agencies' Basel capital proposal. Global regulators agreed on the final set of Basel III standards in 2017, with the goal of ensuring that no country allows its banks to hold significantly less capital to gain a competitive advantage. Here's a recap of the long and winding road to finalizing these critical capital standards, which drive the cost and availability of credit for the economy. (To step back further and learn how capital works, click here.)

More Than 10 Years in the Making. The current Basel proposal is the culmination of more than a decade of work to conform bank capital requirements to international standards, starting in 2010 when global regulators published the original "Basel III" standards (implemented in the United States beginning in 2013), followed by updated Basel standards in 2017 that are the subject of the agencies "endgame" proposals. The effort followed post-Global Financial Crisis concerns that banks lacked sufficient capital to weather severe losses on loans and other financial assets.

The goal of the Basel standards was leveling the playing field, but not all regimes are the same: the U.S. capital framework has often ratcheted up, or "gold-plated," its stringency on top of international standards - for example, the stress tests, which produce a stress capital buffer, the U.S. approach to the GSIB surcharge and the "Collins Amendment" floor on the use of internal models.^[1] According to then-ECB President Mario Draghi, the purpose of the Basel reforms was never simply to raise capital requirements.

Essential Questions. As policymakers determine how much capital banks should maintain, it's important to keep in mind some fundamental questions:

• How much capital appropriately balances a reduced likelihood of bank failure and systemic crises with economic growth? This concept is known as "optimal capital." Over-calibrating capital requirements has tangible costs: a 1-percentage-point increase in capital requirements reduces annual GDP by up to 16 basis points according to a review of the academic literature by the Basel Committee on Banking Supervision. This estimate, which was not specific to the U.S., translates to a loss of about $42 billion in U.S. economic output per year.
• Do banks currently hold enough capital? Former Fed Chair Jerome Powell said in 2019 that banks' capital levels were "about right," and now they are much higher. Common equity tier 1 capital, the highest-quality form of bank capital is now $1.6 trillion, or 12.8% of risk-weighted assets for banks with more than $100 billion in total assets. This loss-absorbing capacity represents 7.1x what banks were estimated to lose during the Fed's 2025 stress test.
• Are certain risks being over-capitalized? BPI has previously expressed concern with overlaps between the Basel framework and the stress tests, namely for market risk and operational risk. These concerns are addressed but not fully resolved by the current proposal.
• How will higher capital requirements affect banks' participation in certain markets? One goal of the new proposal is to revive banks' participation in the mortgage market by improving the alignment of capital requirements with risk. In contrast, proposed changes for loan commitments could result in some lines of credit becoming unviable if capital charges on those lines are excessive.
• Are the proposed capital requirements based on thorough economic analysis, or are capital increases being reverse engineered without supporting evidence? This was a key question in the 2023 proposal, which failed to support its significant proposed increases in capital with robust data analysis. The new proposal includes extensive economic assessment.

July 2023: Proposal. In July 2023, the federal regulators issued a Basel capital proposal, spearheaded in large part by then-Federal Reserve Vice Chair for Supervision Michael Barr. The proposal would have imposed a 16% average increase in capital requirements, or about $160 billion.

January 2024: Concerns from All Corners. Responses were broadly negative and non-partisan, spanning affordable housing advocates, farmers, small business interests, as well as banks. More than 97% of commenters opposed the proposal or expressed significant concerns with it, according to a Latham & Watkins study.

In its comment letters, BPI flagged concerns with:

• Excessive capital charges for operational and market risk.
• Major overlaps with the stress tests, resulting in duplicative capital charges.
• Needlessly high risk-weights for high loan-to-value mortgages, which would lead to less mortgage credit for minority and lower-income homebuyers.
• A lack of legal justification or economic analysis underpinning the proposal.

Like many commenters, BPI called for a full-fledged reproposal of the Basel III Endgame standards.

March 2026: Revised Proposal Issued. On March 19, 2026, the banking agencies issued a revised proposal, which would:

• Simplify the framework by subjecting firms to a single set of risk-based capital calculations.
• Better align minimum capital requirements with risk.
• Adjust operational risk requirements to better reflect business activities, including investment management and custody services.
• Measure market risk more accurately by properly accounting for diversification and facilitating firms' use of robust internal models.
• Consider overlaps with the stress capital buffer requirement, particularly for operational risk and trading activities.
• Incentivize banks to engage in mortgage origination and servicing activity by adopting capital requirements tied to loan risk and removing limits for mortgage servicing assets.

Although the proposal marks a step in the right direction, there is room for improvement in ensuring proposals accurately reflect risks.

Part of the Big Picture. The revised proposal was one key element of Vice Chair Bowman's efforts to reform capital requirements more broadly by considering their interactions. The Fed has proposed changes to the stress tests to increase transparency; finalized changes to the enhanced supplementary leverage ratio to restore it to a backstop instead of a binding constraint. Meanwhile, the EU and the UK are also implementing their own versions of the Basel rules, in some cases delaying changes to align with the U.S. rulemaking timeline.

What's Next? The federal banking agencies will consider the comments they receive and finalize the rule. Vice Chair for Supervision Michelle Bowman has said she hopes to issue a final Basel rule by the end of the year.

[1] The "Collins Amendment" required the U.S. banking agencies to establish minimum leverage and risk-based capital requirements that were not less than the generally applicable leverage and risk-based capital requirements for insured depository institutions under the prompt corrective action regulations. They could also not be quantitatively lower than the above requirements in effect for insured depository institutions as of the date of enactment of the Dodd-Frank Act (July 21, 2010). See: https://www.collins.senate.gov/newsroom/senator-collins-introduces-amendment-impose-strong-capital-requirements-financial