Basel Capital Proposals Are Getting a Much-Needed Update
After years of back and forth, regulators finally have a new framework for how much capital banks must have on hand to weather a crisis. In March, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation jointly issued three notices of proposed rulemaking that rescinded the controversial 2023 Basel III Endgame proposal.
The previous Basel III Endgame iteration would have dramatically increased bank capital requirements in the United States. While this would increase financial institutions’ buffer against losses, it would have meant less capital available to freely lend to individuals and small businesses. In practice, this could have meant, at best, a squeeze on economic capacity for new market entrants, and at worst, a massive blow to the broader economy. These (now-defunct) proposed rulemakings were pushed forth despite the fact that more than 99 percent of American banks were already exceptionally well capitalized. Yet the previous requirements sought to push farther, in defiance of the fact that credit powers our nation’s economic engine so efficiently and effectively.
The 2023 proposal, championed by then-Vice Chair for Supervision Michael Barr, would have raised aggregate capital requirements for the largest banks by about 19 percent. This drew significant backlash at the time, with more than 350 comment letters and a coordinated industry campaign warning that the rule could push lending activity out of the regulated banking sector entirely. This author’s own 2024 op-ed cited this exact concern. For now, changing political tides have remedied this issue, with Barr’s departure in early 2025 and Michelle Bowman’s confirmation as his successor changing the trajectory almost overnight. Bowman was clear that her goal was a capital-neutral rule revision, citing lending capacity, efficiency, and regulatory certainty among her top priorities. With the new framework, capital reductions range from about 4.8 percent for the largest global systemically important banks to nearly 8 percent for banks under $100 billion in assets. In practical terms, this translates to significant lending capacity to fuel the engines of small businesses and other market makers.
The Fed board approved the new package on a 6-1 vote, with Governor Barr acting as the lone dissenter. In his statement, he warned the changes could “harm the resilience of banks and the U.S. financial system” and cautioned that market risk deviations from the international Basel standard risk a global race to the bottom on capital requirements. While those concerns likely stem from the 2008 financial crisis and its causes, Barr’s dissent repeats the same error that has defined capital requirements from the start: the assumption that a committee of regulators can calculate the “correct” level of risk-adjusted capital more accurately than the dispersed judgments of markets themselves. This, at its core, assumes that financial regulators are more capable of correct judgment in their individual decision-making than the collective wisdom of free markets, their pressures, and their failures. Simply, Basel’s uniform international minimums don’t eliminate that problem. Instead, they relocate the guesswork from the market to the regulator. Yet markets and consumers price bank risk continuously, and that feedback loop reacts faster than any regulatory body.
The comment period closed in mid-June, and several finer details remain up for debate. A final rule isn’t expected before late 2026, with a phased implementation likely beginning in 2027. But two things are worth keeping an eye on. First, whether the final rule holds the line on capital neutrality or drifts back toward increases as the comment record comes in. (Given the current political landscape, this is unlikely to be a major concern.) Second, how this interacts with the international landscape is still unclear. The Basel framework does not exist for the United States alone, and, in light of recent domestic changes, the European Union has pushed its own market-risk framework to January 2027, with the United Kingdom delaying its most complex modeling requirements to 2028. If Washington moves toward a lighter-touch standardized approach, European regulators are more likely to follow suit.
After years of regulatory whiplash, U.S. bank capital policy is heading toward greater simplicity, better risk-calibration, and lower compliance overhead. This matters far more than basic bank compliance. When capital is more readily available to be lent—instead of uselessly serving government requirements—homebuyers, small businesses, and the broader economy all benefit.