The Newly Proposed Rules on Banks’ Capital Requirements: Here’s the Thinking

The day some banks have been hoping for has finally arrived — almost.

U.S. banking regulators — including the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) — issued a series of proposals Thursday that, if officially approved after a 90-day comment period, will decrease capital burdens on U.S. banks. The rules date from the aftermath of the Global Financial Crisis (GFC) and more closely tie capital requirements to associated risk.

In readjusting the risk-based capital requirements, regulators announced that larger banks — generally those with at least $700 billion in average total assets — will see effects equivalent to an average 2.4 percent reduction in capital requirements, derived from a “1.4 percent increase due to the Basel III proposal, and a 3.8 percent decrease due to the G-SIB surcharge proposal,” according to the Commercial Real Estate Finance Council (CREFC). 

Global Systemically Important Banks, or G-SIBs, are banks whose failure could theoretically pose a threat to the international financial system. As such, those banks have been required to hold even larger percentages of minimum capital in reserve than others. Basel III is part of an international benchmark for banks’ capital requirements. 

For banks with $100 billion or more but less than the top category, the decrease will be 3 percent. Smaller banking organizations will see a decrease in capital requirements of 7.8 percent.

In a March 12 speech at the Cato Institute, a right-leaning think tank, Michelle Bowman, vice chair for supervision at the Federal Reserve Board, explained the rationale for the changes.

Bowman said the new approach seeks 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,” noting that “the result is more efficient regulation and banks that are better positioned to support economic growth, while preserving safety and soundness.”

The vice chair expressed the belief that “the global systemically important bank (G-SIB) surcharge” had become “disassociated from actual risk.” She added that many regulatory changes made following the GFC had been necessary, but “requirements that overly calibrate low-risk activities produce unintended consequences … [including] constraining credit availability, pushing activity into the less regulated non-bank sector, and layering on complexity and costs.”

These changes come at a time when alternative lenders often supersede traditional banks in many areas of commercial real estate lending, including accounting for roughly half of all new U.S. construction lending as of January 2026.

The new proposals seek to deal with this problem head-on.

“By improving risk-based capital requirements, the proposal would bolster the role of large U.S. banking organizations in supporting the broader economy,” the proposal reads. “The reforms that followed the 2007-09 financial crisis substantially increased the resilience of the U.S. banking system. However, in some cases, these post-crisis reforms have imposed burdens that contributed to the migration of some activities, such as mortgage origination and servicing, outside of the regulated banking sector. Revising the regulatory capital framework to better align requirements with risks — and in so doing easing requirements on some lower-risk, traditional banking activities — would contribute to U.S. banking organizations becoming better positioned to support the economy.” 

Bowman said that the Fed and its partners took a “bottom-up approach” to modernizing the capital framework.

“We did not begin by setting an aggregate ‘target’ and working backward,” said Bowman. “Instead, each requirement is evaluated on its merits — examining whether it is properly calibrated to risk, achieves its intended purpose, and avoids creating unintended outcomes.” 

Matthew Bornfreund, a partner at law firm Morrison Foerster who specializes in bank advisory and who was also an attorney at the Federal Reserve, believes that the new requirements, as expressed by Bowman in her Cato speech, achieve Bowman’s goals of more accurately reflecting the relationship between capital requirements and risk. 

“Vice Chair Bowman has repeatedly said that the intention was not to simply reduce the overall capital requirements on sort of an aggregate basis, but to make sure the individual capital components are better aligned to the actual reasons why we ask banks to hold capital,” said Bornfreund.

Sairah Burki, managing director and head of regulatory affairs and sustainability at the Commercial Real Estate Finance Council (CREFC), noted that certain aspects of the new proposal put the U.S. more in line with the international banking community.

“The change here is that they are going to seek to align the G-SIB surcharge with international jurisdictions,” said Burki. “The G-SIB surcharge appears to be too aggressive, so they’re trying to make it more consistent with what we’re seeing internationally.”

Burki also noted that, according to Bowman’s preview, the G-SIB surcharge will be indexed to economic growth.

“Banks won’t be penalized for inflationary scenarios,” said Burki.

Another new advantage for banks is the simplification of determinative formulas.

“An important feature of this proposal is the elimination of duplicative capital calculations for the largest banks,” Bowman said at Cato. “Today, these banks must maintain two sets of risk-based capital ratios: one using the standardized approach and another 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.”

Bornfreund said he believes Bowman’s approach is a reaction to that of the Biden administration, which, he said, had been in the process of finalizing Basel III when Silicon Valley Bank collapsed in March 2023.

“The Biden administration took the opportunity to try to address some of the things that came out of [the failure of] Silicon Valley, and it likely was not the appropriate forum to do that because it kind of muddied up whatever capital rules they were putting into place,” said Bornfreund. “They tried to solve too many problems with capital.”

Burki noted that the Biden administration’s proposal “would have raised capital requirements for banks generally between 16 and 19 percent,” attracting “an almost unprecedented level of pushback” from the banking industry.  

“The Biden administration got the message about a year later, and the vice chair of supervision at the Fed, Michael Barr, indicated in a speech at the Brookings Institution that they would redo the proposal,” Burki noted. “Shortly after that, however, there was a change in administration.”

Burki also said that the Biden proposal lacked a specificity that would have clarified the reason for the capital requirements it sought.

“One of the major criticisms of the proposal under the Biden administration was that it was lacking in analysis of the risks associated with [capital requirements], and why they came up with the requirements they came up with,” said Burki. “A lot of the pushback was, ‘Where’s your cost-benefit analysis? What is your rationale for these numbers? We don’t understand where these are coming from.’ So Bowman’s point, I think, is that they have been very intentional about closely examining the different assets and activities for which they’ll be assigning capital, and then moving out from there.”

That said, Bornfreund doesn’t see the new version of Basel III as any sort of rebuke to the Biden administration.

“They’re going back to first principles, when the Basel III regime was first put in place after Dodd-Frank,” said Bornfreund, referring to regulatory legislation born of the GFC. “They’re adjusting to some of the things we’ve now learned that aren’t actually efficient ways to manage bank risk. They’re adopting 10 years’ worth of learnings to make the system work better.”

Larry Getlen can be reached lgetlen@commercialobserver.com.