Wall Street banks are poised to secure a regulatory reprieve after the United States Federal Reserve signalled plans to ease proposed capital rules that had threatened to significantly increase the buffers lenders must hold against potential losses.
Speaking at the Cato Institute in Washington on Thursday, Michelle Bowman, the Federal Reserve’s vice chair for supervision, said regulators will soon release revised proposals to scale back elements of the so-called Basel “endgame” framework.
The adjustments would modestly reduce overall capital requirements for large U.S. banks compared with earlier drafts, marking a sharp shift from the tougher regime proposed in 2023.
The move represents a significant victory for the banking industry, which mounted an extensive lobbying campaign against the original proposal.
That plan, introduced by Bowman’s predecessor Michael Barr, would have raised capital requirements for the largest lenders by roughly 16% on average, with some banks warning the increase could approach 20%.
Capital requirements determine how much equity and liquid assets banks must hold to absorb potential losses during economic stress.
The framework under review forms the final stage of the international Basel III Endgame standards agreed by the Basel Committee on Banking Supervision following the 2007–09 global financial crisis.
The rules are intended to strengthen banks’ resilience by standardising how credit, market and operational risks are measured.
Bowman said the revised proposal would “right-size” requirements by eliminating overlapping rules and better aligning capital buffers with actual risk exposure.
She also signalled changes to the surcharge applied to the largest globally systemic banks, which regulators argue has become misaligned with economic growth since it was last calibrated in 2015.
Combined with adjustments to leverage ratios and greater transparency in the Fed’s annual stress tests, the changes would reduce capital requirements for the largest lenders “a small amount”, Bowman said.
The Federal Reserve board is expected to vote on the proposal next week, after which regulators will open a 90-day consultation period.
The banking industry has long argued that overly stringent capital rules restrict lending to households and businesses.
A research note from Morgan Stanley estimated U.S. banks currently hold more than US$175 billion in excess capital, suggesting regulatory clarity could unlock additional lending or share buybacks.
Trade groups welcomed Bowman’s remarks.
In a joint statement, the American Bankers Association, Bank Policy Institute and Financial Services Forum said the proposal appeared to reflect a more risk-sensitive approach to capital regulation, while noting that the detailed draft would determine its practical impact.
Critics warn the revisions could weaken safeguards introduced after the financial crisis.
Elizabeth Warren, the ranking Democrat on the Senate Banking Committee, said the changes would create “a weak rule” that fails to address structural flaws in the capital framework and could leave the economy exposed to future shocks.
Some academic research has challenged banks’ claims that higher capital requirements constrain lending.
A study analysing more than a decade of Federal Reserve lending data by Stephen Cecchetti of Brandeis International Business School found little evidence that stronger capital buffers reduced credit availability.
Even with the proposed revisions, finalising the rules could take months.
Regulators, including the Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency, must jointly approve the framework, which is likely to remain a focal point in the broader debate over balancing financial stability against economic growth.
