Seventeen years after the global financial crisis, regulators are reassessing bank capital requirements to maintain lender competitiveness and stimulate economies. The United States is leading this shift, potentially reducing capital lenders must hold. This move has sparked concerns about a global retreat from regulations designed to bolster financial system safety, particularly as market bubble and financial stability risks intensify. Understanding how bank capital requirements differ across major markets reveals potential winners and losers in this evolving landscape.
While regulators globally generally adhere to the Basel regulatory regime established post-2008, variations exist in implementing the latest rules, known as the “Basel III Endgame.” The European Commission and the Bank of England have postponed implementing key elements, particularly those governing banks’ trading activities, awaiting further developments in the U.S. While capital ratio requirements appear similar on paper in the Euro zone, Britain, and the U.S., different approaches to risk-weighting add complexity. Unlike the UK and Euro zone, U.S. banks cannot rely on internal models to set risk weightings, often resulting in stricter constraints for larger banks.
In the U.S., regulators are looking to delay or revise existing capital regulations, arguing for better tailoring to actual risks. Proposals include tweaking leverage rules and overhauling the annual stress tests for large banks, potentially reducing capital set aside for hypothetical losses. These changes could significantly increase U.S. banks’ lending capacity. However, some banks may choose to increase payouts to investors or fund acquisitions instead. The European Central Bank (ECB) announced plans to simplify its rule book while maintaining capital levels. The Bank of England (BoE) also recently lowered its system-wide estimate of capital requirements, signalling a measured adjustment.
Conversely, Japan’s banking regulator has proceeded with implementing the finalized Basel III framework. Switzerland aims to tighten rules on what qualifies as capital. Country-specific frameworks, such as Britain’s ring-fencing regime, further complicate the picture. According to economist Enrico Perotti, supervisory enforcement often outweighs headline capital ratios, especially in the U.S., where the emphasis is shifting toward easing regulatory burdens on banks. The nuances in these approaches highlight the intricate balance regulators must strike between ensuring financial stability and fostering economic growth.
