The US Basel III Endgame Reproposal: A Guide to the New Capital Relief, the Expanded Risk-Based Approach, and the 2027 Implementation

After nearly three years of intense industry lobbying and regulatory gridlock, the United States' implementation of the international Basel III capital standards has undergone a dramatic reversal. On March 19, 2026, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) formally rescinded their controversial 2023 capital proposal, replacing it with a comprehensive reproposal that fundamentally alters the math for American banks.[1]

The original July 2023 framework—often dubbed the "Basel III Endgame"—sought to increase aggregate capital requirements for the largest U.S. banks by roughly 19 percent. That plan faced unprecedented pushback from the banking sector, which argued the hikes would choke off lending and push activity into the unregulated shadow banking sector. The new 2026 package abandons those increases entirely, instead delivering an estimated $87.7 billion in system-wide Common Equity Tier 1 (CET1) capital relief.[2]

Under the reproposal, the capital burden decreases across the board. Global Systemically Important Banks (G-SIBs), classified as Category I and II institutions, will see their CET1 requirements drop by approximately 4.8 percent. Large regional banks in Categories III and IV will experience a 5.2 percent reduction, while smaller community and regional banks are slated for a 7.8 percent cut. Regulators frame this relief as a modernization effort that recognizes the substantial capital buffers banks have already built over the last decade.[2][4]

At the heart of the new framework for the largest institutions is the Expanded Risk-Based Approach (ERBA). Historically, Category I and II banks had to calculate their capital ratios using two parallel systems—an advanced internal-models approach and a standardized approach—and bind themselves to whichever required more capital. The ERBA eliminates this dual-stack burden, replacing it with a single, highly granular calculation method.[3]

The ERBA also strips away the use of banks' internal models for calculating operational risk—the risk of loss from inadequate internal processes, system failures, or external events. Instead, it mandates a standardized "business indicator" based on the volume and complexity of a bank's lending, investing, and financing activities. This ensures that two banks with identical portfolios cannot arrive at wildly different capital requirements simply because one has a more aggressive internal risk model.[3][4]

Perhaps the most economically significant shift in the reproposal is its treatment of residential mortgages. Under the current U.S. standardized framework, almost every residential mortgage carries a blunt 50 percent risk weight, meaning a prime borrower with a 30 percent loan-to-value (LTV) ratio requires the same capital buffer as a riskier borrower with a 90 percent LTV. This inefficiency drove banks out of the mortgage market over the last decade, ceding massive market share to non-bank lenders.

The 2026 ERBA introduces LTV-sensitive risk weights that range from 20 percent for the lowest-risk owner-occupied mortgages up to 70 percent for the riskiest exposures. By aligning capital costs with actual credit risk, the rules improve the return on equity for bank-originated mortgages from roughly 7 percent to over 13 percent. Industry analysts note this is a competitive inflection point that will likely pull significant mortgage origination and servicing activity back onto traditional bank balance sheets.

The reproposal also offers major relief for Mortgage Servicing Assets (MSAs). Previously, MSAs were subject to a punitive, threshold-based deduction from CET1 capital, which penalized banks for holding large servicing portfolios. The new rules eliminate this deduction entirely, substituting it with a flat 250 percent risk weight. This change applies across all bank categories and is explicitly designed to promote mortgage servicing by regulated depository institutions.[2][4]

While the package is broadly favorable to the industry, it does contain a strict new mandate for regional banks—a direct regulatory response to the spring 2023 collapse of Silicon Valley Bank. Category III and IV banks (generally those with $100 billion to $250 billion in assets) will now be required to include Accumulated Other Comprehensive Income (AOCI) in their regulatory capital calculations.[2]

AOCI inclusion means these regional banks must recognize unrealized gains and losses on their available-for-sale securities portfolios. When interest rates rise and bond values fall, these unrealized losses will now directly erode a bank's regulatory capital. To prevent an immediate shock to the system, the agencies have proposed a five-year phase-in period for the AOCI requirement, beginning at 20 percent recognition in 2027 and reaching full implementation by 2032.[2]

Corporate lending also sees adjustments under the new rules. The reproposal reduces the risk weight for general corporate exposures from 100 percent down to 95 percent. For banks using the ERBA, exposures to investment-grade corporate obligors—defined by strict capacity-to-repay criteria—will receive an even lower 65 percent risk weight. This enhanced capital efficiency is expected to empower banks to compete more aggressively with private credit funds in the corporate lending space.[2][4]

The U.S. pivot toward capital relief creates a notable divergence with international peers. While the Federal Reserve scales back its requirements, the European Union and the United Kingdom are moving forward with stricter implementations of the Basel standards. The EU's CRR3 framework, which took effect in early 2025, enforces an output floor that steadily increases capital requirements through 2030, potentially giving U.S. banks a structural advantage in global capital markets.[1]

With the public comment period having closed on June 18, 2026, the agencies are currently reviewing hundreds of industry submissions. Regulators have indicated that the final rules will take effect two calendar quarters after their official adoption, placing the start of the transition period firmly in early 2027. For treasury and risk teams across the financial sector, the focus has now shifted from lobbying against the rules to optimizing balance sheets for the new ERBA reality.[2][3]