Public Comments on Basel Capital Proposal Due Soon

The Basel proposal represents over a decade of work, beginning in 2010 when the original Basel III standards were published. These standards were implemented in the United States starting in 2013, followed by updates in 2017. The initiative was largely driven by concerns that banks lacked sufficient capital to endure severe financial losses, particularly following the Global Financial Crisis.

The intent of these standards is to provide a level playing field for banks, though the U.S. has often adopted stricter requirements than international norms, including stress tests and the GSIB surcharge. Former President of the European Central Bank, Mario Draghi, stated that the Basel reforms aimed beyond merely increasing capital requirements.

As regulators assess the appropriate capital levels for banks, they face key questions. One major consideration is the balance between reducing the risk of bank failures and supporting economic growth, a concept known as “optimal capital.” Research indicates that a 1-percentage-point rise in capital requirements could reduce annual GDP by up to 16 basis points, translating to an estimated annual loss of around $42 billion in U.S. economic output.

Current capital levels are significantly higher than in previous years, with Common Equity Tier 1 capital reaching $1.6 trillion, or 12.8% of risk-weighted assets, for banks with over $100 billion in assets. This level of capital is seven times what banks were anticipated to lose in the Federal Reserve’s 2025 stress test.

Concerns remain that certain risks may be over-capitalized, particularly regarding overlaps between the Basel framework and stress tests. The proposal aims to enhance banks' participation in mortgage markets by aligning capital requirements more closely with risk. However, some provisions could make certain credit lines unviable due to high capital charges.

In July 2023, regulators released a capital proposal that could increase capital requirements by 16% on average, or about $160 billion. The response to this proposal has been largely negative, with over 97% of commenters expressing significant concerns, according to a study by Latham & Watkins. Comments from the Bank Policy Institute (BPI) highlighted issues such as excessive capital charges and a lack of economic justification.

By March 2026, a revised proposal will simplify the capital framework, promote better alignment of capital requirements with actual risk, and enhance the accuracy of market risk measurements. Adjustments for operational risks will also reflect varied banking activities.

As part of broader reform efforts, the revised proposal indicates an intention to improve capital requirement interactions. The Federal Reserve has also proposed increased transparency in stress tests and finalized changes to leverage ratios. As the EU and UK introduce their versions of Basel rules, their timelines may adapt to align with U.S. regulations.

Looking ahead, federal banking agencies will review the feedback received and aim to finalize the rule. Vice Chair for Supervision Michelle Bowman has expressed hopes for issuing the final Basel rule by the end of the year.