US Basel III Endgame: Key changes, impacts and where to begin

The NPRs introduce broad, sweeping revisions to the entirety of the existing regulatory capital framework for all banks (including BHCs and IHCs of FBOs) above the $100 billion asset threshold (large banking organizations). The proposed changes are aimed at improving the “strength and resiliency” of the banking system while also improving transparency and consistency in banks’ capital frameworks across the industry. The proposal also signals a shift away from tailoring, by applying a consistent set of requirements to all large banking organizations.

Additionally, for the first time in the history of US Basel
rulemaking, the regulators have shared estimated impacts from proposed changes. These changes are estimated to result in a 16% increase to CET1 capital levels and a 20% increase to RWA for large bank holding companies (with US G-SIBs and IHCs seeing the highest increases).

Higher capital requirements are likely to disadvantage global banks domiciled in the US and constrain lending capacity and capital markets and trading activities for all banks, implying competitive benefits for NBFIs. While ostensibly the NPR simplifies US regulatory capital implementation, the deviation from the international Basel framework will be of significant concern. The largest US banks will have to deal with the operational burden of maintaining parallel calculation and reporting systems for significant jurisdictions. An uneven playing field is emerging with some banks impacted more than others (e.g., application of AOCI, operational risk impacts on some business models, G-SIB surcharge impacts). The elimination of advanced approaches for credit and operational risk also puts in question the significant investment in risk management, data, controls, compliance, and validation infrastructure stood up by advanced US banks. Many of these concerns were also noted by voting members as the proposal was approved by the agencies.

The Basel III NPR allows banks a transition period of three years, starting July 1, 2025 with a fully phased-in date of July 1, 2028 and includes an extended 120-day comment period eliciting inputs from the industry. While the rulemaking will evolve, this article provides our initial take on key changes in the proposals, associated impacts, implementation considerations, and areas for banks to focus and begin mobilizing on immediately.