Featured Summary:
- Washington’s proposed capital reforms could reduce costs for major banks, but borrowers may not receive the savings through lower loan rates
- Europe is adjusting Basel III market-risk requirements to prevent competitive disadvantages for its banks
- Basel III’s capital and liquidity safeguards are intended to reduce banking crises that can restrict credit and damage economies
- Countries with resilient banks and developed domestic capital markets have more financing options when global borrowing conditions deteriorate
The Federal Reserve, FDIC and OCC proposed revisions to U.S. bank capital requirements on March 19, including changes to risk-based calculations and rules affecting the country’s largest lenders.
The OCC estimates that minimum binding capital requirements would fall 6.9% under the proposed standardized approach for banks it supervises and 3.4% under the expanded risk-based approach for its largest banks.
Federal Reserve Governor Michael Barr opposed the proposals, warning that the combined changes, including adjustments to stress tests, would leave banks with less capital to absorb losses.
The Federal Reserve’s July lending survey found stronger demand for business loans among large and midsized companies, with little change among smaller firms.
Banks reported narrower loan spreads. Borrowing rates also reflect the Fed’s monetary policy and banks’ funding costs, which the capital proposals do not directly change.
The European Commission adopted temporary adjustments to Basel III banking rules for trading activities in June, citing competitive pressures from other major financial markets.
On October 5, the Basel Committee reported further progress among its 27 member jurisdictions in adopting the final standards.
The regulatory changes could reduce costs for major banks, but American businesses and households have no assurance that the savings will reach them through cheaper credit.
The question for regulators is how far capital requirements can fall without leaving lenders more exposed to financial losses.
Washington Moves to Ease Bank Capital Requirements
Large internationally active U.S. banks would calculate risk-based capital under a single framework instead of two.
The proposed rules also revise capital charges for corporate lending, mortgages and trading activities.
Mortgage servicing assets would receive more favorable capital treatment, reducing the regulatory cost of holding them.
Some large regional banks would be required to recognise unrealized gains and losses on securities when calculating regulatory capital.
Federal Reserve Governor Christopher Waller backed the revisions, citing the costs imposed by existing requirements on lending and mortgage activity.
Michael Barr objected to the treatment of trading risks and the exclusion of Basel III’s output floor, which limits the capital reductions banks can obtain from internal risk models.
The Federal Reserve’s July lending survey found that banks generally maintained their approval standards for commercial and industrial loans.
Among lenders that eased terms, competition from banks and nonbank institutions was cited more frequently than expected improvements in capital or liquidity positions.
In August, Nvidia announced partnerships with Apollo, BlackRock, Blackstone, Brookfield, Goldman Sachs and KKR aimed at mobilizing more than $500 billion for AI infrastructure over time, drawing on institutional investors outside conventional bank lending.
The proposed changes could reduce capital costs for certain banking activities. The Federal Reserve’s lending survey identifies competition as a factor in easing loan terms, but does not establish how the proposed reforms would affect borrowing rates.
Europe Adjusts Basel III Trading Rules to Protect Bank Competitiveness
The European Commission’s revised market-risk requirements will apply from January 2027 through December 2029. A temporary multiplier will limit the increase in capital charges on affected trading activities.
The Commission had twice postponed the Fundamental Review of the Trading Book over differences in implementation among major financial markets.
The United Kingdom plans to delay parts of its market-risk framework beyond January 2027, while the U.S. timetable remains uncertain.
Banks directly supervised by the European Central Bank held a Common Equity Tier 1 capital ratio of 16.00% in the second quarter of 2026, with a liquidity coverage ratio of 154.91%.
The ECB reported that 7% of surveyed banks, on a net basis, tightened lending standards for businesses during the quarter. The average cost of new corporate borrowing stood at 3.80% in July.
The ECB reported tighter credit standards in car manufacturing and energy-intensive industries, where higher operating costs have increased financial pressure on borrowers.
The Commission’s temporary adjustments concern international trading activities rather than the capital requirements governing ordinary business lending.
European banks will continue to face credit risks from companies affected by higher energy costs.
Basel III Banking Rules Aim to Limit the Damage From Financial Crises
Basel III requires banks to hold capital against losses, limits leverage and sets liquidity requirements for periods of funding stress.
The Basel Committee’s 2022 evaluation found that implemented reforms had strengthened bank resilience and reduced systemic risk.
Earlier Bank for International Settlements research put the median cumulative economic cost of systemic banking crises at 63% of GDP in present-value terms, based on historical studies.
Losses on mortgage-related assets spread through financial institutions during the 2008 crisis, disrupting funding markets and forcing governments to support banks.
Lehman Brothers’ collapse intensified the crisis as confidence in major financial institutions deteriorated.
Silicon Valley Bank and Signature Bank failed in March 2023, prompting U.S. authorities to protect uninsured depositors under a systemic-risk exception.
The FDIC subsequently estimated that approximately $16.7 billion would need to be recovered through a special assessment on banks.
A 2011 assessment by the Basel Committee and Financial Stability Board modelled an increase of five to six basis points in lending spreads over an eight-year transition for every additional percentage point of capital required of systemically important banks.
Basel III cannot prevent inflation, currency depreciation or energy supply disruptions. Weaker capital positions, however, can leave banks less able to withstand the financial losses those pressures may cause.
Cheaper Credit Will Depend on More Than Capital Relief
Federal Reserve policy, inflation expectations and bank funding costs will continue to influence borrowing rates, regardless of changes to capital requirements. Lenders also assess the financial strength of businesses seeking credit.
Major American corporations can raise funds through bond markets and institutional investors. Smaller firms have fewer alternatives when banks tighten lending.
Developed domestic capital markets give countries greater access to local financing for investment.
Economies without substantial institutional investor bases remain more dependent on foreign lenders and international borrowing conditions.
U.S. bank capital reforms cannot resolve federal debt pressures or determine the dollar’s exchange rate, which are influenced by broader fiscal and monetary conditions.
Reducing capital requirements may lower costs for banks, but lasting access to credit requires lenders with sufficient financial strength to withstand losses.
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