US bank regulators are set to unveil a revised draft of capital rules this month, overhauling how large banks assess their risks and allocate funds to absorb potential losses. The original ‘Basel Endgame’ rule, introduced in 2023, faced strong opposition from Wall Street, who argued it would negatively impact lending and the broader economy. Critics, however, contended that banks are adequately capitalised and the changes could weaken critical safeguards implemented after the 2007-09 financial crisis. The Basel Committee on Banking Supervision, a panel convened by the Bank for International Settlements (BIS), works to ensure regulators globally apply similar minimum capital standards, helping banks withstand loan losses during economic downturns.
Federal Reserve Vice Chair for Supervision Michelle Bowman stated that the new draft, along with adjustments to other capital rules, would modestly reduce capital requirements for many lenders. The U.S. proposal aims to refine how large banks measure risk, particularly in areas such as credit, market, and operational risk, ultimately influencing the capital they must set aside as a buffer against potential losses. For smaller banks, the plan introduces a new standardised risk measurement, potentially reducing their requirements and encouraging lending.
Bowman explained that the revised proposal would ‘right-size’ requirements to better reflect risks while minimising overlaps. It also provides relief for activities deemed less risky, such as mortgage lending. While Basel is still expected to slightly increase capital for the largest, riskiest banks, the combination of these changes and adjustments to the surcharge on risky global banks could result in a small reduction in capital for the biggest Wall Street institutions.
Despite these adjustments, some experts express concerns that diminishing capital and liquidity could weaken the financial system’s safeguards. Democratic Senator Elizabeth Warren has argued that the changes could put the economy at risk. The Fed plans to vote on the proposals soon, allowing the public to provide feedback. Finalising these complex drafts is expected to take several months.
