US Banking Agencies Rescind the 2023 Basel III Endgame in Sweeping Capital Overhaul

For the past decade, if you applied for a residential mortgage, you likely dealt with a nonbank lender rather than a traditional neighborhood bank. That shift was not an accident of the free market; it was the direct result of post-2008 capital rules that heavily penalized traditional banks for holding mortgage servicing assets. Now, that era of banking regulation appears to be ending, and the local bank branch may soon be back in the business of funding your home, marking a significant shift in how everyday Americans access credit. On March 19, 2026, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency jointly issued a sweeping proposal that formally rescinds the controversial 2023 Basel III Endgame framework. The new package, which closed for public comment in June 2026, represents the most significant rewrite of United States bank capital requirements in more than a decade, fundamentally altering the regulatory landscape that has governed the financial sector since the 2008 crisis.[1]

The 2026 proposal is a clear admission by regulators that the previous trajectory of capital rules had become too complex and economically restrictive. By replacing the 2023 framework, the agencies are effectively unwinding the final, most punitive layer of post-2008 financial reform in favor of a system that prioritizes lending capacity over absolute capital maximization. This pivot reflects a growing consensus that overly stringent capital buffers were beginning to choke off traditional economic intermediation, forcing riskier activities into the less-regulated shadow banking sector. The centerpiece of the new regulatory regime is the complete elimination of the so-called dual-stack calculation. Under the old rules, the largest United States banks were forced to calculate their risk-based capital requirements using two entirely different methodologies—a standardized approach and an advanced internal-models approach—and then hold capital against whichever number was higher. This redundant system created massive compliance overhead and often resulted in unpredictable capital demands that hindered long-term strategic planning for major financial institutions.

The 2026 proposal scraps this redundant dual-stack system entirely. In its place, the banking agencies have introduced the Expanded Risk-Based Approach, a single-stack framework that mandates a standardized methodology for credit, equity, and operational risk. By stripping away the internal models that regulators found opaque and difficult to supervise, the new approach aims to create a more transparent, comparable, and predictable capital regime across the entire banking sector, ensuring that all institutions are playing by the exact same mathematical rules. The net result of this sweeping simplification is a projected decrease in the total amount of capital banks must hold in reserve. According to agency estimates, the combined effect of the Expanded Risk-Based Approach proposal, revised stress-testing parameters, and updated surcharge frameworks will lower aggregate Common Equity Tier 1 capital requirements by approximately 4.8 percent for the largest Category I and II bank holding companies. This reduction frees up tens of billions of dollars that can theoretically be deployed into the broader economy through corporate and consumer lending.

The regulatory relief is even more pronounced for smaller institutions. For Category III and IV regional banks, the revised standardized approach is projected to reduce Common Equity Tier 1 requirements by roughly 3.0 percent at the holding company level and 4.7 percent for depository subsidiaries. This reduction is largely driven by a more granular, loan-to-value-based framework for residential mortgages, which significantly lowers the capital burden for safe, traditional lending and allows regional banks to operate with leaner, more efficient balance sheets. Perhaps the most consequential change for everyday consumers is the revised treatment of Mortgage Servicing Assets. The previous regulatory framework imposed a highly punitive deduction threshold: if a bank's mortgage servicing assets exceeded 10 percent of its Common Equity Tier 1 capital, the excess had to be deducted entirely from its regulatory capital. This strict rule effectively drove traditional banks out of the mortgage servicing business, ceding the market almost entirely to nonbank financial companies that operate outside the traditional regulatory perimeter.

The 2026 proposal eliminates this threshold-based deduction entirely, fundamentally changing the economics of home lending. Instead, all mortgage servicing assets will be assigned a uniform 250 percent risk weight. While this risk weight remains elevated compared to standard commercial loans, it removes the hard cap on mortgage servicing, providing a massive structural incentive for traditional banks to re-enter the residential mortgage market, compete directly with nonbank lenders, and potentially lower borrowing costs for everyday homebuyers. The strongest counter-argument to this sweeping regulatory overhaul is that it dilutes the critical safety buffers erected after the 2008 financial crisis. Critics and systemic risk hawks argue that lowering aggregate capital requirements by nearly 5 percent across the largest institutions inherently reduces the banking system's shock-absorbing capacity. Furthermore, by removing the advanced internal models, regulators are trading risk-sensitivity for simplicity, potentially masking complex, idiosyncratic tail risks in the trading books of the world's most interconnected financial institutions.[1]

However, the banking agencies firmly maintain that the new framework is not a deregulation, but a necessary recalibration. While overall capital levels may drop modestly, regulators emphasize that they remain substantially higher than pre-2008 levels, ensuring the system remains robust. Furthermore, the introduction of a standardized operational risk charge—which did not exist in the previous framework—ensures that banks are explicitly required to hold capital against non-financial threats like cyberattacks, systemic IT failures, and massive litigation settlements. The proposal also comprehensively overhauls the market risk framework, notably raising the threshold for compliance from $1 billion to $5 billion in trading assets and liabilities. This targeted adjustment effectively exempts many regional and mid-sized banks from complex, resource-intensive market risk calculations. By lifting this burden, regulators are allowing smaller institutions to focus their capital and operational resources on traditional community lending rather than maintaining the expensive compliance infrastructure required for large-scale trading operations.

To balance these capital reductions and maintain systemic safety, the agencies are simultaneously closing a major regulatory loophole for regional banks. The proposal eliminates the Accumulated Other Comprehensive Income opt-out for Category III and IV banks. These institutions will now be required to recognize unrealized gains and losses on available-for-sale debt securities in their regulatory capital, matching the strict requirement already in place for the largest banks and ensuring that their balance sheets accurately reflect current market interest rates. The path forward for the banking industry remains highly complex and operationally demanding. The public comment period for the massive 1,500-page proposal officially closed on June 18, 2026, and the financial sector is now anxiously awaiting the final rule. Given the sheer scale of the changes, including the indexing of dollar-based thresholds to inflation and the necessary alignment of federal reporting forms, the implementation phase is expected to stretch over several years, requiring massive investments in banking infrastructure.

Ultimately, the 2026 capital overhaul represents a profound philosophical pivot by United States banking regulators. By rescinding the 2023 Basel III Endgame, the agencies are acknowledging that the relentless pursuit of absolute capital safety had begun to choke off traditional economic intermediation. The new Expanded Risk-Based Approach attempts to strike a more pragmatic, sustainable balance: keeping the global banking system resilient while ensuring that the local bank branch can actually afford to lend to its surrounding community. This shift signals a new era where regulatory simplicity and economic growth are weighed equally against the demands of systemic risk prevention, fundamentally rewriting the rulebook that has governed Wall Street for the last fifteen years.[2]