Banking Regulations Overhaul: Discard Your Basel Schedule, Two Significant Changes Have Occurred.
The Basel III revamped capital requirements proposal, initially expected in September, is currently being reconsidered and is set to be re-proposed in a less restrictive form by Q1 2026, led by Federal Reserve Vice Chair for Supervision Michelle Bowman.
The original 2023 Basel Endgame proposal, which included a nearly 20% increase in capital requirements for large US banks, faced fierce opposition from the banking industry. Key opponents include the banking industry itself, which argued that further increases could hamper lending, market-making, and shift financial activity abroad. The American Bankers Association and Treasury Secretary Scott Bessent criticized the 2023 proposal for creating two sets of capital rules, one “modernized” and one legacy, which they saw as flawed and skewed against large banks. They advocate for a single set of capital standards that would also benefit smaller banks.
Supporters of higher capital requirements argue that increased capital enhances bank safety without significantly affecting lending or market-making and strengthens the resilience and competitiveness of the US financial system.
The debate revolves around balancing financial stability, compliance with international standards, and economic impacts, with the re-proposal aiming for a more moderate approach after strong industry resistance.
Notable figures in the opposition include Consumer Financial Protection Bureau Director Rohit Chopra, who is reported to have privately described the compromise on capital requirements as a giveaway to Wall Street banks. If Chopra's opposition to the proposal is confirmed, it could potentially change the dynamic.
The FDIC board, led by Chair Martin Gruenberg, has emphasized regulatory cooperation and looks forward to the agencies working together to bring Basel III to a conclusion. However, if confirmed, a nominee to lead the FDIC could replace Gruenberg, who agreed to resign this spring in the wake of a damning investigation of the regulator's culture. Vice Chair Travis Hill of the FDIC board has long expressed similar sentiments.
At least one Democratic senator, Elizabeth Warren, has come out against the Basel revision, calling it a "Wall Street giveaway". Three Democrats on the FDIC board could potentially overrule the Republicans.
In a recent FDIC board meeting, discussions focused on fintech-bank relationships and bank merger scrutiny, but not changes to the Basel proposal. The Fed's outsized role in creating revisions to the Basel proposal rewrite left the FDIC and OCC with little voice on the matter.
If a majority of House members and senators oppose the rule, the next White House occupant could sign off on it. The latest revision of the Basel proposal requires U.S. banks to hold 9% more capital than they currently do, which is less than half of the 19% increase proposed in the July 2023 first draft. If the revised proposal is finalized, it could be rescinded using the Congressional Review Act up to 60 days after finalization, which would be Jan 18.
The earliest a finalized rule could be in place, given a 60-day comment period, is Nov. 19, but opponents may argue that new comments would not have been taken into account. The revamp of the Community Reinvestment Act, which was issued by former OCC chief Joseph Otting without sign-off from the Fed or FDIC, then promptly resigned, adds another layer of complexity to the ongoing discussions.
- The re-proposed Basel III revamped capital requirements, set to be introduced in Q1 2026, faces opposition from various sectors, including the banking-and-insurance industry, due to concerns that it could hamper business and finance activities.
- Politics and policy-and-legislation are heavily involved in the debate surrounding the revised Basel III proposal, with figures such as Federal Reserve Vice Chair Michelle Bowman and Consumer Financial Protection Bureau Director Rohit Chopra playing key roles.
- General news outlets are closely monitoring the revised Basel III proposal, as it could significantly impact the finance sector, with potential changes to capital requirements for large and small banks, and the entire US business ecosystem.
