Federal Reserve to publish new Basel III proposals
13 March 2026 US
Image: chris/stock.adobe.com
In the coming weeks, the Federal Reserve System is to propose rules to implement the final phase of Basel III in the US.
Michelle W. Bowman, Vice Chair for Supervision at the Board of Governors of the Federal Reserve System, discussed the Fed’s approach to bank capital requirements at the Cato Institute in Washington D.C.
These changes are designed to eliminate overlapping requirements, right-size calibrations to match actual risk, and address long-standing gaps in the prudential framework — all to attain more efficient regulation and banks that are better positioned to support economic growth, while preserving safety and soundness.
As a result, the Fed has developed proposals to modify each of the four pillars of the regulatory capital framework for the largest banks: stress testing, the supplementary leverage ratio, the Basel III framework for risk-based capital requirements, and the global systemically important bank (G-SIB) surcharge.
Basel III proposals
The Basel III proposal builds on the 2017 Basel agreement while incorporating targeted adjustments to reflect US-specific aspects of banking and financial markets.
Bowman says finalising these reforms will provide the industry greater certainty for planning and management, and looks to promote broadly consistent international capital standards.
An important feature of this proposal is the elimination of duplicative capital calculations for the largest banks. Today, these banks must maintain two sets of risk-based capital ratios — one using the standardised approach and the other using internal model-based advanced approaches.
“Experience shows this duplication creates burden without providing corresponding benefits. Therefore, the proposal establishes a single approach to calculate the risk-based capital requirements for the largest banks,” she explained.
To better support the flow of credit to households and businesses, the revised framework aims to improve the risk sensitivity of requirements for lending activities. The proposal recognises loan-to-value ratios in mortgage capital requirements and reflects repayment history in retail lending.
Importantly, it does not add new capital penalties for mortgages or consumer lending and seeks public feedback on the appropriate role of private mortgage insurance. The proposal also differentiates requirements based on the credit quality of businesses, ensuring that capital treatment is aligned with risk.
The new framework includes standardised requirements for operational risk, consistent with international standards, but tailored to large US banks.
Activities that produce fee-based revenues and expenses, like credit cards, would have those revenues and costs accounted for on a net basis, rather than separately as in the Basel standard.
Staff analysis, said Bowman, indicates that certain activities, like wealth management and custody services, have historically exhibited lower levels of operational risk, and the proposed requirements are calibrated to reflect those differences.
The proposal also aims to strengthen capital requirements for banks' trading activities in a manner calibrated to unique US capital markets.
The methodology “better captures losses” under stressed conditions and reflects the risk of less liquid positions. It introduces a standardised calculation that applies consistently across firms, while “reducing burden” for banks with simple trading activities.
Relative to the Basel standard, the proposal aims to better recognise diversification across positions and extend the use of bank internal models where data are sufficiently robust, ensuring capital requirements are commensurate with risk.
In terms of credit valuation adjustment — which is the risk of losses on derivative positions from counterparty credit risk — a new capital requirement applies to banks with significant trading activity and material derivative portfolios, consistent with international standards.
The requirement focuses on bilateral transactions among large financial firms, avoiding unintended costs for commercial end users of derivatives including farmers and manufacturers.
Bowman also highlighted overlaps with stress testing. In her speech, she noted that stress testing, and the resulting stress capital buffer, complement the risk-based framework by adding granularity and risk sensitivity. However, overlaps between the stress test and the risk-based framework can produce excessive requirements for some activities.
Bowman stated: “In developing the Basel III proposal, we were mindful of these overlaps and evaluated the combined effect of the requirements in our impact analysis. In line with international standards and with a view toward improving risk sensitivity, the Basel III proposal increases capital requirements for operational risk and market risk.”
Standardised approach proposal
“While implementing Basel III requirements for large and internationally active banks are long overdue, it is equally important to update risk-based capital requirements for all banks.”
According to Bowman, the approach leverages a similar rationale — to reduce redundancy, simplify where possible, achieve better calibration of requirements relative to risk, and remove incentives for activities to migrate out of the banking system. The standardised approach proposal modifies risk-based capital calculations for most banks, improving risk alignment while preserving a simple framework.
The proposed changes address critical categories of bank lending, including mortgages, consumer lending, and business lending. These changes aim to moderately reduce requirements and align the standardised approach with the Basel III proposal.
As a result, this ensures greater consistency and a level playing field among all banks, noted Bowman. The changes better align requirements with risk, increasing efficiency, and ensure the availability of credit to households and businesses. At the same time, all US banks would remain subject to robust capital standards.
The standardised approach and the Basel III proposals remove any requirement to deduct mortgage servicing assets from regulatory capital. Instead, they assign a 250 per cent risk weight to these assets while seeking public feedback about the appropriate risk weight.
“This should reduce disincentives for participating in mortgage markets and servicing their mortgage originations, thereby addressing the mortgage activity migration to nonbanks over the past 15 years,” she added.
The standardised approach proposal requires large banks to include elements of accumulated other comprehensive income (AOCI) in common equity Tier 1 capital. Further, the proposal invites public comment on the appropriate scope of mandatory AOCI recognition and sets a five-year phase in for this change to avoid a material immediate increase in capital requirements.
G-SIB proposal
Under the current framework, the largest, most complex banks are subject to a G-SIB surcharge, which is a capital requirement intended to mitigate the systemic risk posed by these banks. The new proposal aims to strengthen and modernise the calculation of this requirement in several ways.
1. The proposal updates the parameters — or coefficients — that determine the impact of firms' activities on the G-SIB surcharge. The proposal will realign this surcharge with the international method.
To ensure that surcharges do not unintentionally increase, the proposal indexes the surcharge to economic growth going forward. These changes keep this additional capital requirement calibrated to the systemic risks of our largest, most complex banks over time.
2. The proposal revises the surcharge component that accounts for risk associated with short-term funding, which was originally intended to represent 20 per cent of the surcharge. Instead, it represents roughly 30 per cent.
3. To reduce incentives to make year-end adjustments to balance sheets, the proposal requires G-SIBs to calculate certain systemic risk indicators as an average of their daily or monthly values, rather than the year-end value.
4. To reduce cliff effects and increase sensitivity to changes in a firm's risk profile, the proposal assigns surcharges in increments of 10bps rather than 50bps. The proposal improves the measurement of certain systemic indicators, aligning it with international standards.
The impact
“We expect the Basel III proposal to result in a small increase in requirements for the largest banks, similar to what is expected in the UK,” noted Bowan.
“The G-SIB surcharge proposal would result in a modest decrease in the surcharges, which addresses the recent increases in this requirement that deviated from risk. Together, these proposals would decrease the requirements by a small amount.”
According to the Fed, the changes should be viewed as part of a broad, careful review of capital requirements undertaken over the past nine months.
Recent changes to capital rules and accounting standards have significantly increased requirements for large US banks. They are now subject to new and generally higher requirements for potential credit losses and derivative exposures, Bowman explained.
Stress test losses also increase capital requirements, and balance sheet expansion in line with economic growth and inflation has increased G-SIB surcharges.
Smaller banks, which are more focused on traditional lending activities, will see slightly larger reductions in capital requirements, Bowman said. These changes aim to maintain resilience and provide flexibility to provide credit to US households and businesses.
Bowman concluded: “The proposals that will be published in the coming week will bring us closer to fulfilling the US commitment to implement the 2017 Basel III agreement and will complete the first step of our comprehensive review of the capital framework.”
Michelle W. Bowman, Vice Chair for Supervision at the Board of Governors of the Federal Reserve System, discussed the Fed’s approach to bank capital requirements at the Cato Institute in Washington D.C.
These changes are designed to eliminate overlapping requirements, right-size calibrations to match actual risk, and address long-standing gaps in the prudential framework — all to attain more efficient regulation and banks that are better positioned to support economic growth, while preserving safety and soundness.
As a result, the Fed has developed proposals to modify each of the four pillars of the regulatory capital framework for the largest banks: stress testing, the supplementary leverage ratio, the Basel III framework for risk-based capital requirements, and the global systemically important bank (G-SIB) surcharge.
Basel III proposals
The Basel III proposal builds on the 2017 Basel agreement while incorporating targeted adjustments to reflect US-specific aspects of banking and financial markets.
Bowman says finalising these reforms will provide the industry greater certainty for planning and management, and looks to promote broadly consistent international capital standards.
An important feature of this proposal is the elimination of duplicative capital calculations for the largest banks. Today, these banks must maintain two sets of risk-based capital ratios — one using the standardised approach and the other using internal model-based advanced approaches.
“Experience shows this duplication creates burden without providing corresponding benefits. Therefore, the proposal establishes a single approach to calculate the risk-based capital requirements for the largest banks,” she explained.
To better support the flow of credit to households and businesses, the revised framework aims to improve the risk sensitivity of requirements for lending activities. The proposal recognises loan-to-value ratios in mortgage capital requirements and reflects repayment history in retail lending.
Importantly, it does not add new capital penalties for mortgages or consumer lending and seeks public feedback on the appropriate role of private mortgage insurance. The proposal also differentiates requirements based on the credit quality of businesses, ensuring that capital treatment is aligned with risk.
The new framework includes standardised requirements for operational risk, consistent with international standards, but tailored to large US banks.
Activities that produce fee-based revenues and expenses, like credit cards, would have those revenues and costs accounted for on a net basis, rather than separately as in the Basel standard.
Staff analysis, said Bowman, indicates that certain activities, like wealth management and custody services, have historically exhibited lower levels of operational risk, and the proposed requirements are calibrated to reflect those differences.
The proposal also aims to strengthen capital requirements for banks' trading activities in a manner calibrated to unique US capital markets.
The methodology “better captures losses” under stressed conditions and reflects the risk of less liquid positions. It introduces a standardised calculation that applies consistently across firms, while “reducing burden” for banks with simple trading activities.
Relative to the Basel standard, the proposal aims to better recognise diversification across positions and extend the use of bank internal models where data are sufficiently robust, ensuring capital requirements are commensurate with risk.
In terms of credit valuation adjustment — which is the risk of losses on derivative positions from counterparty credit risk — a new capital requirement applies to banks with significant trading activity and material derivative portfolios, consistent with international standards.
The requirement focuses on bilateral transactions among large financial firms, avoiding unintended costs for commercial end users of derivatives including farmers and manufacturers.
Bowman also highlighted overlaps with stress testing. In her speech, she noted that stress testing, and the resulting stress capital buffer, complement the risk-based framework by adding granularity and risk sensitivity. However, overlaps between the stress test and the risk-based framework can produce excessive requirements for some activities.
Bowman stated: “In developing the Basel III proposal, we were mindful of these overlaps and evaluated the combined effect of the requirements in our impact analysis. In line with international standards and with a view toward improving risk sensitivity, the Basel III proposal increases capital requirements for operational risk and market risk.”
Standardised approach proposal
“While implementing Basel III requirements for large and internationally active banks are long overdue, it is equally important to update risk-based capital requirements for all banks.”
According to Bowman, the approach leverages a similar rationale — to reduce redundancy, simplify where possible, achieve better calibration of requirements relative to risk, and remove incentives for activities to migrate out of the banking system. The standardised approach proposal modifies risk-based capital calculations for most banks, improving risk alignment while preserving a simple framework.
The proposed changes address critical categories of bank lending, including mortgages, consumer lending, and business lending. These changes aim to moderately reduce requirements and align the standardised approach with the Basel III proposal.
As a result, this ensures greater consistency and a level playing field among all banks, noted Bowman. The changes better align requirements with risk, increasing efficiency, and ensure the availability of credit to households and businesses. At the same time, all US banks would remain subject to robust capital standards.
The standardised approach and the Basel III proposals remove any requirement to deduct mortgage servicing assets from regulatory capital. Instead, they assign a 250 per cent risk weight to these assets while seeking public feedback about the appropriate risk weight.
“This should reduce disincentives for participating in mortgage markets and servicing their mortgage originations, thereby addressing the mortgage activity migration to nonbanks over the past 15 years,” she added.
The standardised approach proposal requires large banks to include elements of accumulated other comprehensive income (AOCI) in common equity Tier 1 capital. Further, the proposal invites public comment on the appropriate scope of mandatory AOCI recognition and sets a five-year phase in for this change to avoid a material immediate increase in capital requirements.
G-SIB proposal
Under the current framework, the largest, most complex banks are subject to a G-SIB surcharge, which is a capital requirement intended to mitigate the systemic risk posed by these banks. The new proposal aims to strengthen and modernise the calculation of this requirement in several ways.
1. The proposal updates the parameters — or coefficients — that determine the impact of firms' activities on the G-SIB surcharge. The proposal will realign this surcharge with the international method.
To ensure that surcharges do not unintentionally increase, the proposal indexes the surcharge to economic growth going forward. These changes keep this additional capital requirement calibrated to the systemic risks of our largest, most complex banks over time.
2. The proposal revises the surcharge component that accounts for risk associated with short-term funding, which was originally intended to represent 20 per cent of the surcharge. Instead, it represents roughly 30 per cent.
3. To reduce incentives to make year-end adjustments to balance sheets, the proposal requires G-SIBs to calculate certain systemic risk indicators as an average of their daily or monthly values, rather than the year-end value.
4. To reduce cliff effects and increase sensitivity to changes in a firm's risk profile, the proposal assigns surcharges in increments of 10bps rather than 50bps. The proposal improves the measurement of certain systemic indicators, aligning it with international standards.
The impact
“We expect the Basel III proposal to result in a small increase in requirements for the largest banks, similar to what is expected in the UK,” noted Bowan.
“The G-SIB surcharge proposal would result in a modest decrease in the surcharges, which addresses the recent increases in this requirement that deviated from risk. Together, these proposals would decrease the requirements by a small amount.”
According to the Fed, the changes should be viewed as part of a broad, careful review of capital requirements undertaken over the past nine months.
Recent changes to capital rules and accounting standards have significantly increased requirements for large US banks. They are now subject to new and generally higher requirements for potential credit losses and derivative exposures, Bowman explained.
Stress test losses also increase capital requirements, and balance sheet expansion in line with economic growth and inflation has increased G-SIB surcharges.
Smaller banks, which are more focused on traditional lending activities, will see slightly larger reductions in capital requirements, Bowman said. These changes aim to maintain resilience and provide flexibility to provide credit to US households and businesses.
Bowman concluded: “The proposals that will be published in the coming week will bring us closer to fulfilling the US commitment to implement the 2017 Basel III agreement and will complete the first step of our comprehensive review of the capital framework.”
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