Banking Regulators Propose Capital Framework Revisions

The Federal Reserve Board ("FRB"), together with the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC"), proposed coordinated revisions to the U.S. bank regulatory capital framework.

The revisions include: (i) changes to risk-based capital requirements for large and internationally active firms; (ii) modifications to the capital surcharge for global systemically important banking organizations ("GSIBs"); (iii) updates to the U.S. standardized approach for risk-weighted assets; and (iv) an assessment of related information collection implications under the Paperwork Reduction Act ("PRA").

These four distinct but interrelated proposals are as follows:

1. Basel III Proposal. The proposal would simplify capital requirements for Category I and II firms by replacing the current dual framework with a single "expanded risk-based approach." This approach standardizes the calculation of credit and operational risk, introduces more risk-sensitive measures, and adds a dedicated operational risk capital requirement. It also revises the market risk framework by raising applicability thresholds while retaining internal models subject to supervisory approval.
2. GSIB Surcharge Proposal. The proposal would revise the GSIB surcharge framework to better align capital surcharges with firms’ actual systemic risk profiles, particularly by recalibrating Method 2 to reflect economic growth and inflation. It would adjust key coefficients (including through ongoing GDP-based indexing), modify the treatment of short-term wholesale funding, and require the use of averaged data to reduce incentives for temporary balance sheet adjustments. The proposal also introduces more granular surcharge increments to reduce "cliff effects" and improve risk sensitivity.
3. Standardized Approach Proposal. The proposal would revise the U.S. standardized approach to risk-weighted assets to improve risk sensitivity while maintaining its overall simplicity. It introduces more granular and risk-based treatments for key exposures, including residential mortgages (e.g., use of loan-to-value ratios), and adjusts certain risk weights to better reflect underlying credit risk. The proposal also changes the treatment of mortgage servicing assets by replacing the deduction threshold with a flat risk weight and "requires Category III and IV banking organizations to recognize ... Accumulated Other Comprehensive Income in ... regulatory capital," subject to a phase-in period."
4. Information Collection and PRA Notice. The notice outlines proposed revisions to regulatory reporting, recordkeeping, and disclosure requirements under the PRA to align with the banking regulators' capital framework proposals. It also assesses the resulting administrative and paperwork burden impacts and includes adjustments to ensure compliance with PRA requirements.

Taken together—and in conjunction with previously proposed stress testing changes—the FRB estimates that these proposals would reduce aggregate common equity tier 1 capital requirements across banking organizations. Specifically, CET1 requirements are projected to decline by approximately 4.8 percent for Category I and II firms, 5.2 percent for Category III and IV firms, and 7.8 percent for smaller banking organizations, with the latter driven primarily by revisions to the standardized approach.

Comments on the capital proposals are due by June 18, 2026. Comments on the PRA notice are due 60 days after publication in the Federal Register.

Statements

• FRB Chair Jerome H. Powell backed the proposals, characterizing them as a prudent recalibration of post-financial crisis rules. He noted that (i) the Basel III proposal would improve risk capture while simplifying compliance, (ii) the standardized approach proposal would better align capital with traditional lending risks and reflect lessons from the 2023 regional bank stress, and (iii) the GSIB surcharge proposal would refine systemic risk measurement and avoid unintended increases as banks grow with the economy.
• FRB Vice Chair for Supervision Michelle W. Bowman supported the proposals, framing them as a data-driven modernization that reduces complexity, better aligns capital with actual risk, and limits incentives for lending to migrate to the nonbank sector. She acknowledged targeted deviations from the 2017 Basel III agreement to accommodate U.S.-specific legal constraints, including limits on the use of external credit ratings, and emphasized that such tailoring is consistent with Basel flexibility.
• FRB Governor Michael S. Barr dissented from the proposals, arguing the combined package—together with recent stress test and leverage ratio changes—would reduce tier 1 capital requirements for the largest banks by approximately $60 billion, which he characterized as unnecessary and harmful to financial stability. He criticized the GSIB surcharge recalibration and Basel III deviations as weakening risk sensitivity, including by reducing the weight on short-term wholesale funding and departing from key elements of the international accord. He warned the changes could undermine global capital standards and leave the U.S. banking system more vulnerable.
• FRB Governor Stephen Miran supported the proposals, noting they improve risk sensitivity while reducing regulatory burden that can constrain lending. He emphasized the need to balance resilience with avoiding excess requirements and stated that right-sizing the framework supports the Fed’s broader mandate.
• FRB Governor Christopher Waller argued that the proposals improve the risk sensitivity of capital requirements without unnecessarily increasing them and appropriately account for interactions with the stress test. He expressed support for changes to mortgage origination and servicing capital treatment and broader standardized approach revisions that better align requirements with traditional lending risk. He also emphasized that regulatory thresholds should be indexed to nominal GDP rather than CPI-W (i.e., adjustments to inflation using the consumer price index for urban wage earners and clerical workers) to avoid distortions and supported the GSIB surcharge proposal’s approach to address both current and historical calibration issues.