Agencies’ Capital Proposals Seek to Reduce Regulatory Burden and Extend Capital Relief to the Banking Industry at Large

On March 19, 2026, the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the Agencies) issued the long-awaited re-proposal to implement the Basel III Endgame framework, along with two other related proposals (collectively, the Proposals) intended to modernize the regulatory capital rules based on a “comprehensive, bottom-up review of the capital framework”:¹

1. A proposal that would modify the U.S. standardized approach in the capital rules applicable to all banking organizations, with a subset of the new rule applicable to Category III and IV firms (the Standardized Approach Proposal)²
2. A proposal that would revise the risk-based capital requirements applicable to the largest, most internationally active firms and to firms with significant trading activity (generally Category I and II firms) (the Basel III Endgame Proposal)³
3. A proposal issued by the Federal Reserve alone that would revise the calculation of the capital surcharge for global systemically important banking organizations (GSIBs) (the GSIB Surcharge Proposal)⁴

This Advisory discusses the key elements of these proposals, with a particular focus on the Standardized Approach Proposal, along with key takeaways for banks and other industry participants.

Key Elements of the Standardized Approach Proposal

The Standardized Approach Proposal would recalibrate both the definition of capital and the measurement of risk-weighted assets in ways that may reduce overall capital requirements for many Category III and IV firms (generally U.S. banking organizations with at least $100 billion in total assets and foreign banking organizations with at least $100 billion in combined U.S. assets) while increasing sensitivity to market conditions and introducing more differentiated risk weights across asset classes.⁵

The Standardized Approach Proposal would also modernize regulatory capital and the standardized approach for all banking organizations, including:

• Changes to risk-based capital treatment of certain exposure categories
• Changes to promote mortgage origination and servicing by organizations in a risk-appropriate manner
• Introduction of a loan-to-value-based approach for assigning risk weights to certain residential mortgage exposures
• Modification of the definition of regulatory capital by removing the threshold-based deduction for mortgage servicing assets (MSAs) for all banking organizations (including banking organizations that apply the community bank leverage ratio framework)
• Reduction of the risk weight applicable to corporate and “other” exposures
• Changes to dollar-based regulatory thresholds to reflect inflation and to ensure that such thresholds preserve, in real terms, their intended application over time

Definition of Regulatory Capital

Mortgage Servicing Assets

The definition of regulatory capital would be modified by eliminating the current deduction threshold for MSAs⁶ and instead applying a 250% risk weight.⁷

This proposed change is intended to support mortgage origination activity while maintaining risk sensitivity. It would apply across banking organizations subject to the capital rule, including those operating under the community bank leverage ratio framework.⁸

Accumulated Other Comprehensive Income

Category III and IV firms would be required to include most accumulated other comprehensive income in common equity tier 1 capital, thereby eliminating the current opt-out option.⁹ This change would be phased in over five years.¹⁰

Because accumulated other comprehensive income reflects unrealized gains and losses — primarily on available-for-sale securities — this aspect of the Standardized Approach Proposal would make capital ratios more sensitive to interest rate movements and market conditions.¹¹

Revisions To Risk-Weighted Assets

Corporate and “Other” Exposures

The risk weight for corporate exposures would be reduced from 100% to 95%, and a 90% risk weight would be assigned to assets not otherwise specifically assigned a different treatment.¹² The Agencies estimate that these changes would reduce risk-weighted assets by approximately 7% for corporate exposures and 10% for other assets.¹³

Residential Mortgage Exposures 

For residential mortgage exposures, a more risk-sensitive framework would be introduced based on characteristics of the underlying loans, including loan-to-value ratios and whether repayment depends on property-generated cash flows (e.g., rental payments).¹⁴ Lower-risk loans may receive risk weights as low as 25%, while higher-risk loans may receive risk weights up to 110%.¹⁵

The Agencies estimate that this change would reduce mortgage risk-weighted assets by approximately 30%.¹⁶

Commitments and Off-Balance Sheet Exposures

The definition of “commitment” would be revised to clarify that contractual arrangements for future extensions of credit, asset purchases, or credit substitutes constitute commitments regardless of whether they are unconditionally cancelable.¹⁷

In addition, current maturity-based credit conversion factors would be replaced with a generally applicable 40% conversion factor,¹⁸ which would eliminate maturity-based structuring incentives.

Securitization and Risk Transfer

A revised standardized approach would be introduced for securitization exposures and would expand recognition of certain credit risk mitigation techniques, including guarantees and eligible prepaid credit protection arrangements.¹⁹

The Agencies estimate that these changes would reduce risk-weighted assets for securitization exposures by approximately 18% and may support broader use of securitization and risk transfer strategies.²⁰

Estimated Impact of the Standardized Approach Proposal

The Agencies estimate that the Standardized Approach Proposal would reduce aggregate risk-weighted assets by approximately 8.6% for covered depository institutions and 8.8% for covered holding companies.²¹

After taking into account the inclusion of accumulated other comprehensive income, the Standardized Approach Proposal is estimated to decrease common equity tier 1 capital requirements by approximately 6.4% and 4.8%, respectively.²²

For Category III and IV firms specifically, the Agencies estimate reductions in risk-weighted assets of approximately 9% to 10%, with corresponding reductions in common equity tier 1 requirements of approximately 3% to 5% after accumulated other comprehensive income effects.²³

The impact will vary across institutions. Firms with significant mortgage portfolios may experience comparatively greater reductions in risk-weighted assets, while firms with substantial securities portfolios may face increased capital volatility. Institutions with significant commitment-based activities may see more mixed effects.

Basel III Endgame Proposal

The Basel III Endgame Proposal would restructure the risk-based capital framework for Category I and II firms by replacing the current dual-calculation requirement with a single set of risk-based capital ratios calculated under a new “expanded risk-based approach.”²⁴ Under the existing framework, Category I and II firms must calculate two sets of risk-based capital ratios: one using the U.S. standardized approach (which generally applies to all U.S. banking organizations) and one using the advanced approaches (which rely on firms’ internal models).²⁵ The proposal would eliminate the advanced approaches entirely on the grounds that the expanded risk-based approach, bolstered by the stress capital buffer requirement, provides more robust and consistent requirements.²⁶ The expanded risk-based approach would include standardized risk-weighting methodologies for credit, equity, and operational risks that are designed to improve consistency across large banking organizations while better capturing the risk characteristics of various exposures.²⁷

The Federal Reserve estimates that the Basel III Endgame Proposal, standing alone, would increase common equity tier 1 capital requirements for Category I and II firms by approximately 1.4%, driven primarily by higher requirements for trading activities, which would be largely offset by decreased requirements for traditional lending activities.²⁸

GSIB Surcharge Proposal

The GSIB Surcharge Proposal, issued by the Federal Reserve, would revise the methodology used to calculate the additional risk-based capital buffer requirement that applies to GSIBs. The proposal is designed to improve the measurement of systemic risk and better align surcharges with each GSIB’s systemic risk profile.²⁹ The GSIB Surcharge Proposal is expected to decrease common equity tier 1 capital requirements for GSIBs by approximately 3.8%, reflecting the updated coefficients used in the surcharge formula and a revised short-term wholesale funding calculation.³⁰

Key Takeaways

• The proposed changes are strikingly different from the last proposal for Basel III capital rule changes in 2023, which was heavily criticized over concerns that it would result in higher capital requirements that would ultimately result in less available credit for small businesses and lower-income families.³¹ The new proposal, on the other hand, is expected to have the opposite effect and, according to Vice Chair Bowman, “would reduce incentives for traditional lending activities — like mortgage origination, mortgage servicing, and lending to businesses — to migrate outside of the regulated banking sector.”³²
• The newly proposed capital reform package represents the most consequential recalibration of post-crisis prudential standards in over a decade, with meaningful implications for bank merger activity and capital markets. The proposals would lower aggregate common equity tier 1 capital requirements for banks of all sizes. For merger and acquisition activity, lower required capital ratios directly compress the regulatory friction that has historically made large bank combinations expensive to execute — acquirors must maintain capital adequacy throughout the deal process, and easing those thresholds effectively widens the universe of financially viable merger transactions, particularly among mid-size regionals seeking scale. For the largest firms, the modest increase from revised Basel III calculations would be more than offset by a recalibrated GSIB surcharge, freeing balance sheet capacity that could just as readily be deployed toward strategic acquisitions as toward organic lending. On the capital-raising front, the proposals could potentially unleash billions of dollars for lending, share buybacks, and dividends — but this dynamic cuts both ways: banks that previously needed to access equity markets to satisfy elevated buffers will face reduced urgency to dilute shareholders, which may actually reduce primary equity issuance even as it improves secondary market valuations.
• The Agencies are eager to receive comments to understand the public’s view of the proposals.³³Overall, there is general support for the proposals, or at least for seeking comment on the proposals, but Federal Reserve leadership is not completely aligned. Federal Reserve Governor Michael Barr issued a statement opposing the proposals, referring to the “significant reductions in capital requirements” under the proposals as “unnecessary and unwise.”³⁴ In the main press release of the Agencies, it is acknowledged that the proposals in the aggregate would modestly decrease the amount of overall capital in the banking system, but “capital levels would still be substantially higher than they were before the financial crisis.”³⁵ It will be important for the public to provide comments to support a cost-benefit analysis in adopting final rules. 

Comments on the three proposed rules are due by June 18, 2026.³⁶ Given the scope of the proposed changes and their interaction with other ongoing rulemakings, affected institutions may wish to begin assessing the potential implications for capital planning, balance sheet composition, and product strategy.

© Arnold & Porter Kaye Scholer LLP 2026 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.