US Banking Regulators Propose Reforms to Capital Requirements
On March 19, 2026, US federal banking regulators issued proposals to: (i) significantly revise the risk-based regulatory capital requirements for Category I and II banking organizations1 (the “Basel III Proposal”); (ii) change the risk weights that other banking organizations apply to credit exposures (the “Standardized Approach Proposal”); and (iii) change the method for calculating the capital surcharge for globally systemically important banking organizations (“G-SIBs”) (the “G-SIB Surcharge Proposal”, and collectively with the Basel III Proposal and the Standardized Approach Proposal, the “Proposals”).2
The Proposals are intended to be the final phase of the financial regulatory reforms undertaken by the Basel Committee on Banking Supervision (“BCBS”) in response to the Global Financial Crisis (“GFC”). In 2023, US federal banking regulators issued a proposal to implement Basel III that significantly differed from the internationally agreed-upon BCBS framework and would have significantly increased capital standards. That proposal failed due to widespread opposition by the US Congress, the banking industry, and Federal Reserve Governors.
The Proposals seek to finally complete the BCBS reforms while making other modifications to the post-GFC prudential regulatory framework. Only one Federal Reserve Governor voted against the Proposals, signaling that there is otherwise a general consensus supportive of the Proposals among the bipartisan Federal Reserve Board of Governors and that finalization is likely later this year.
Comments on the Proposals are due by June 18, 2026.
Overview
Under the Basel III Proposal:
- All Category I and II banking organizations would be:
- Subject to an expanded standardized approach for credit risk, a non-modeled approach for operational risk, an approach for credit valuation adjustment (“CVA”) risk, and a more restrictive hybrid approach for market risk; and
- Required to comply with the supplementary leverage ratio and countercyclical capital buffer requirements, include all components of accumulated other comprehensive income (“AOCI”) in the calculation of capital, and make certain other deductions and special treatments under the capital rules.
- All other US banking organizations with aggregate trading assets and trading liabilities equal to 10% or more of total assets or $5 billion or more would be required to comply with the more restrictive hybrid approach for market risk.
- All other US banking organizations with at least $1 trillion in notional derivative exposure (as adjusted for inflation) would need to hold capital under the new approach for CVA risk.
- Category III and IV banking organizations (as well as smaller banking organizations that do not use the community bank leverage ratio (“CBLR”) framework or the small holding company policy statement) would be able to opt into the expanded standardized approach for credit risk only if they opt into the other requirements that would apply to Category I and II banking organizations (e.g., a non-modeled approach for operational risk.)
Under the Standardized Approach Proposal, a new, more granular standardized approach for credit risk would otherwise apply to Category III and IV banking organizations, as well as smaller banking organizations that do not use the CBLR framework or the small holding company policy statement.
Key Initial Points
The Proposals combined exceed 1,500 pages and address nearly every section of the existing regulatory capital requirements. We plan to address them at length in future publications. Below, we highlight several initial key points related to securitizations, risk transfers, mortgages, credit cards and AOCI.
Securitization Items
The Proposals would make several changes to the capital requirements for securitizations.
First, the Basel III Proposal and Standardized Approach Proposal would retain a P-factor of 0.5 in the formula that is used to assign a risk weight to a banking organization’s exposure to a securitization for credit-risk capital purposes. This is consistent with the current rules and is a welcome change from the 2023 proposal, which would have set the P-factor at 1.0.
Second, the Basel III Proposal and Standardized Approach Proposal would reduce the risk weight floor for securitization exposures that are not resecuritizations from 20% to 15%. Under the current rules, a banking organization cannot assign a risk weight below 20% to a securitization exposure, even if the relevant formula otherwise would permit a banking organization to recognize a lower risk weight. A lower risk weight floor is more consistent with the international capital standards, and better reflects the risk-mitigating effect of securitization.
Third, the Basel III Proposal and Standardized Approach Proposal would expand the definition of “eligible clean-up call” to include clean-up calls exercisable when certain regulatory or tax events occur. This would permit the inclusion of clean-up calls that could be exercised upon the occurrence of (i) a regulatory event that significantly changes the risk-weighted asset amount for the securitization exposure, or (ii) a tax event that significantly changes the tax treatment of the securitization exposure under applicable tax laws. The events must represent final actions rather than proposed rules or legislation.
Fourth, the Basel III Proposal and Standardized Approach Proposal would clarify that a banking organization may recognize an exposure as a traditional or synthetic securitization only if the performance of the securitization exposure is expected to depend solely upon the performance of the underlying exposures. The preambles expressly state that a transaction would not satisfy this criterion if there is an expectation that any sources outside of the underlying exposures would fund the interest or principal payments due on the securitization exposures.
Fifth, the Basel III Proposal and Standardized Approach Proposal would eliminate the gross-up approach for calculating the risk weight that is assigned to a securitization exposure. This would mean that banking organizations would either need to have sufficient data to use the supervisory formula to assign risk weights, or use the fallback risk weight of 1250%.
Sixth, the Basel III Proposal and Standardized Approach Proposal would introduce a provision that would allow a banking organization to assign to a senior securitization exposure that is not a resecuritization exposure a risk weight equal to the weighted average risk weight of the underlying exposures, provided that the banking organization has knowledge of the composition of all of the underlying exposures (also referred to as the “look-through approach”). However, a banking organization that purchases or sells tranched credit protection, whether hedged or unhedged, referencing part of a senior tranche would not be allowed to treat the lower-priority portion that the credit protection does not reference as a senior securitization exposure.
Risk Transfer Items
The Basel III Proposal and Standardized Approach Proposal would codify several concepts related to credit-risk transfer trades that involve the issuance of credit-linked notes. This would be achieved through the introduction of a new type of credit-risk mitigant, to be known as an “eligible prepaid credit protection arrangement.” All exposure types, including securitizations, could rely on an eligible prepaid credit protection arrangement, which would permit banking organizations to recognize a credit-risk mitigation benefit up to the protection amount of the prepaid credit protection arrangement.
Under the Proposals, a prepaid credit protection arrangement would be required to meet specific requirements to be recognized for risk-based capital purposes as an eligible prepaid credit protection arrangement. Specifically, the Proposals would define an eligible prepaid credit protection arrangement as a prepaid credit protection arrangement that:
- Is written;
- Is unconditional;
- Covers all or a pro rata portion of all contractual payments due to be paid on the reference exposure or reference exposures;
- Provides that the amount and timing of payments due from the protection purchaser to the protection provider are incorporated into the arrangement and the arrangement only allows these terms to change in the event of a breach of the arrangement by the protection purchaser;
- Provides that entry of the protection provider into receivership, insolvency, liquidation, conservatorship, or similar proceeding does not change the amounts or timing of payments due from the protection purchaser under the arrangement;
- Is legally valid and enforceable under the applicable law of the relevant jurisdictions;
- Upon a failure by the obligor on one or more reference exposures to make a contractually required payment, or the occurrence of other credit events as described in the arrangement, allows the protection purchaser promptly to reduce the outstanding balance of the initial principal amount due to the protection provider by the loss of the protection purchaser on the reference exposures without input from the protection provider; and
- Does not increase the protection purchaser’s cost of credit protection in response to deterioration in the credit quality of any of the reference exposures.
The protection amount of an eligible prepaid credit-protection arrangement would be the effective notional amount of the prepaid credit protection, reduced to reflect any currency mismatch or maturity mismatch. The effective notional amount for an eligible prepaid credit protection arrangement would be the lesser of the contractual notional amount of the credit-risk mitigant and the exposure amount of the reference exposures, multiplied by the percentage coverage of the credit-risk mitigant.
Mortgage Items
The Proposals would make significant changes to the capital requirements for residential mortgages and some commercial mortgages.
First, the Basel III Proposal and Standardized Approach Proposal would create many new risk weights for residential real estate, some new risk weights for commercial real estate, and in both cases the application of the risk weights generally would be driven by dynamic3 loan-to-value (“LTV”) ratios, reliance on cash flows from the property, and the creditworthiness of the underlying borrower (see the comparative charts below for residential real estate). These more granular risk weights generally would be in line with the international capital standards and omit the punitive surcharges that had been included in the 2023 proposal. Notably, a banking organization would not be permitted to recognize private mortgage insurance when calculating the LTV ratio.
The risk weights for residential real estate under the Basel III Proposal would be slightly lower than the risk weights under the Standardized Approach Proposal to reflect the fact that banking organizations subject to the Basel III Proposal must calculate a separate, additional capital charge for operational risk.
Similarly, the Basel III Proposal would have new, lower risk weights for commercial real estate, while in contrast, commercial real estate exposures under the Standardized Approach Proposal would receive a relatively high 95% risk weight (reduced from the current 100% risk weight).
Current Residential Real Estate Risk Weights
| Mortgage Type | Risk Weight |
|---|---|
| FHA/VA-guaranteed | 20% |
| Qualifying first-lien residential | 50% |
| Statutory multifamily mortgages | 50% |
| Pre-sold construction | 50%/100% |
| All other | 100% |
| Past due | 100%/150% |
Proposed Residential Real Estate Risk Weights
| Mortgage Type | Basel III Proposal Risk Weights | Standardized Approach Proposal Risk Weights |
|---|---|---|
| FHA/VA-guaranteed mortgages | 20% | 20% |
| Statutory multifamily mortgages | 50% | 50% |
| Pre-sold construction | 50%/100% | 50%/100% |
| Non-HVCRE ADC | 100% | 100% |
| Not CF Dependent4, LTV ≤ 50% | 20% | 25% |
| Not CF Dependent, 50% < LTV ≤ 60% | 25% | 30% |
| Not CF Dependent, 60% < LTV ≤ 80% | 30% | 35% |
| Not CF Dependent, 80% < LTV ≤ 90% | 40% | 45% |
| Not CF Dependent, 90% < LTV ≤ 100% | 50% | 55% |
| Not CF Dependent, LTV > 100% | 70% | 75% |
| CF Dependent, LTV ≤ 50% | 30% | 35% |
| CF Dependent, 50% < LTV ≤ 60% | 35% | 40% |
| CF Dependent, 60% < LTV ≤ 80% | 45% | 50% |
| CF Dependent, 80% < LTV ≤ 90% | 60% | 65% |
| CF Dependent, 90% < LTV ≤ 100% | 75% | 80% |
Second, the Basel III Proposal and Standardized Approach Proposal request comment on whether the requirements should recognize the risk-mitigating effect of private mortgage insurance when assigning risk weights to residential real estate. While they do not propose recognition of the risk-mitigating effect in the text of the requirements, this request for comment may be evidence of their open-mindedness to reconsidering this position.
Third, the Basel III Proposal and Standardized Approach Proposal would change the capital requirements for bank exposures to mortgage servicing rights (“MSRs”) by removing the requirement that a banking organization deduct from its common equity tier 1 (“CET1”) capital the amount of MSRs that exceeds 10% or 25% of the organization’s CET1 capital.5 Instead, exposures to MSRs would be risk-weighted at 250%. Further, the removal of the threshold-based deduction for MSRs would apply to banking organizations that are subject to the CBLR framework, even though they are not subject to risk-based capital requirements.
Credit Card Items
The Proposals would make several changes that affect credit card exposures.
First, the Basel III Proposal (but not the Standardized Approach Proposal) would create a new risk weight of 45% for regulatory retail transactor exposures that is expected to cover many consumer credit card exposures. Consumer credit card exposures that do not qualify as “transactors” would have a 75% risk weight. These risk weights would be a reduction from the approach in the current capital rules, which generally assign a 100% risk weight to all non-mortgage retail/consumer exposures. For the Standardized Approach Proposal, consumer credit cards generally would receive a 90% risk weight, which is a modest reduction from the current approach.
Second, the Basel III Proposal (but not the Standardized Approach Proposal) would impose less favorable treatment for undrawn commitments by raising the credit conversion factor for unconditionally cancelable commitments from 0% to 10%.6 This change may have a significant impact on consumer credit cards, which historically have qualified for a 0% credit conversion factor by having credit lines that are unconditionally cancelable.7 The Standardized Approach Proposal would retain the 0% credit conversion factor unconditionally cancelable commitments, which should maintain the status quo for many consumer credit card exposures.8
The Basel III Proposal and Standardized Approach Proposal also would impose capital requirements on undrawn commitments that have no express contractual maximum amount or preset limit, as is common with consumer credit cards. Under the Basel III Proposal and Standardized Approach Proposal, a banking organization would first identify the largest drawn amount by a retail/consumer obligor over the prior 24 months, and then calculate the commitment amount by first subtracting the current drawn amount from the largest drawn amount and then multiplying this difference by the applicable credit conversion factor.
Third, the Basel III Proposal would change the capital requirements for operational risk by replacing the current approach that relies on internal estimates with a more standardized, non-modeled approach. These requirements would apply only to Category I and Category II banking organizations. While the full scope of changes to the operational risk capital requirements will be covered in a later publication, we note that the Basel III Proposal is not an improvement over the 2023 proposal because it would not permit banking organizations to net credit card fee income against credit card fee expenses when assessing the magnitude of their exposure to operational risks, even though it would permit favorable netting of similar non-interest items for investment management and non-lending treasury services activities.
Accumulated Other Comprehensive Income
The Standardized Approach Proposal would require Category III and IV banking organizations to include most elements of AOCI in CET1 capital.9 Currently, only Category I and Category II banking organizations are required to include AOCI in CET1 capital, which generally has the effect of reducing the organization’s CET1. Category III and IV banking organizations would be subject to a five-year transition period for phase-in recognition of AOCI in CET1 capital.
Broader Takeaways
Overall, the Proposals would result in small decreases in aggregate capital levels for the US banking system with the smallest banking organizations seeing the largest decreases. The aggregate CET1 capital requirements of Category I and II banking organizations would decrease by approximately 2.4% under the Proposals (a 1.4% increase due to the Basel III Proposal and a 3.8% decrease due to the G-SIB Surcharge Proposal), while the aggregate CET1 capital requirements of Category III and IV banking organizations would decrease by approximately 3.0% and of smaller, non-CBLR banking organizations by approximately 7.8% under the Standardized Approach Proposal.
The Proposals also should make US capital requirements more risk-sensitive, reducing distortions in credit allocation and improving credit availability, particularly with respect to mortgage lending. Further, the finalization of the Basel III rules should provide long-sought certainty about US capital requirements, which should facilitate bank capital and long-term strategic planning.
We will be providing further analysis of other specific provisions of the Proposals in the coming days.
1 Category I banking organizations are US-domiciled bank holding companies identified as G-SIBs and their depository institution subsidiaries. Category II banking organizations are banking organizations with at least $700 billion in total consolidated assets or at least $75 billion in cross-jurisdictional activity and their depository institution subsidiaries. Category III banking organizations are banking organizations with total consolidated assets of at least $250 billion or at least $75 billion in weighted short-term wholesale funding, nonbank assets, or off-balance sheet exposures and their depository institution subsidiaries. Category IV banking organizations are banking organizations with total consolidated assets of at least $100 billion that do not meet the thresholds for a higher category and their depository institution subsidiaries. See 12 C.F.R. § 252.5.
2 FDIC, Board Meeting (Mar. 19, 2026); Federal Reserve, Board Meeting (Mar. 19, 2026); OCC, News Release 2026-16 (Mar. 19, 2026). The US federal banking regulators consist of the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC”).
3 When calculating the LTV ratio, the loan balance would be reduced as the loan amortizes. The value of the property generally would be maintained at the value measured at loan origination. A banking organization would not be permitted to recognize private mortgage insurance when calculating the LTV ratio.
4 "CF Dependent" refers to whether the banking organization’s exposure depends on the cash flows generated by the real estate (e.g., rental property).
5 Requiring a deduction from CET1 capital effectively assigns a 1250% risk weight to an exposure.
6 Section X of the preamble to the Basel III Proposal states that the credit conversion factor for “certain low-utilization retail exposures” would be set at 5%. This change is not reflected in the main body of the preamble or the proposed rule text.
7 This change, along with the proposed change in the Basel III Proposal and Standardized Approach Proposal to establish a single 40% credit conversion factor for all commitments that are not unconditionally cancelable, may negatively affect certain types of mortgage warehouse lending facilities and certain committed facilities supporting asset-backed commercial paper programs.
8 The preamble to the Standardized Approach Proposal notes that the credit conversion factor for unconditionally cancelable commitments under the supplementary leverage ratio is and would remain 10%.
9 Other banking organizations that opt into the capital requirements under the Basel III Proposal also would be required to include AOCI in the calculation of CET1 capital, subject to a five-year transition period.
