Bank Regulatory Capital

Summary

On March 19, 2026, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued proposed rules to revise the U.S. regulatory capital framework to implement the standards that the Basel Committee on Banking Supervision published in December 2017 and January 2019 to finalize the post-crisis Basel III reforms and new market risk framework (the “Basel III Proposal”),[1] and to revise the current standardized approach (the “Standardized Approach Proposal”).[2] Also on March 19, the Federal Reserve proposed revisions to the capital surcharge applicable to U.S. global systemically important bank holding companies (the “GSIB Surcharge Proposal”).[3]

The Federal Reserve approved the proposals by votes of 6-to-1, with Governor Barr dissenting. The FDIC unanimously approved the Basel III Proposal and the Standardized Approach Proposal.

Compared to the July 2023 proposal to implement the Basel frameworks, the Basel III Proposal would narrow the categories of firms that would be required to apply the new expanded risk-based approach (“ERBA”) and to calculate credit valuation adjustment (“CVA”) and market risk capital requirements.[4] In particular, unlike the July 2023 proposal, which would have required all Category I through Category IV banking organizations to apply ERBA, the Basel III Proposal would require only Category I and Category II banking organizations to apply ERBA while allowing any firm to opt into ERBA as described below. Similarly, the July 2023 proposal would have required all Category I through IV banking organizations to calculate CVA and market risk capital requirements, but the Basel III Proposal would apply CVA and market risk capital requirements only to Category I and II banking organizations and other firms that meet specified levels of trading and derivatives activities, as described further below.

In addition, under the proposals, banking organizations would be subject to one set of risk-based capital ratios, in contrast to the current capital rule in which Category I and II banking organizations are required to calculate capital ratios under both the advanced and standardized approaches. Similar to the July 2023 proposal, the new proposals would require Category I through Category IV banking organizations to recognize most components of accumulated other comprehensive income (“AOCI”) in common equity tier 1 (“CET1”) capital, including net unrealized gains and losses on available-for-sale (“AFS”) securities. Firms other than Category I and Category II firms are not currently required to recognize AOCI in regulatory capital. The proposals would include a five-year transition period to phase in the recognition of most components of AOCI in CET1 capital for firms that do not currently do so.

Federal Reserve Vice Chair for Supervision Bowman noted that the proposals would “meaningfully improve the bank capital framework by addressing duplicative overlaps, matching requirements to actual risk, and comprehensively addressing long-standing gaps” in the framework.[5] Vice Chair for Supervision Bowman also argued that the proposals would “reduce incentives for traditional lending activities—like mortgage origination, mortgage servicing, and lending to businesses—to migrate outside of the regulated banking sector.”[6]

Comptroller of the Currency Jonathan Gould said the proposals would “simplify our regulatory framework by eliminating the need for calculating risk weights using multiple methodologies in parallel.”[7] FDIC Chairman Travis Hill noted that he expects that, “following a robust comment period, we will bring this process to a swift conclusion.”[8]

The agencies estimate that the Basel III and GSIB Surcharge Proposals, together with the stress testing changes that the Federal Reserve proposed in October 2025,[9] would decrease aggregate CET1 requirements for Category I and Category II holding companies by approximately 4.8 percent.[10] The agencies also note that “the combined impact of [the Basel III Proposal] and the GSIB surcharge proposal” would “yield lower required capital levels on average and for most individual banking organizations subject to the rules,”[11] which suggests that not all Category I and Category II banking organizations would have reduced capital requirements based on the combined effects of the Basel III and GSIB Surcharge Proposals.

With respect to the Standardized Approach Proposal, the agencies estimate that aggregate CET1 capital requirements of Category III and IV holding companies would be reduced by 5.3 percent, taking into account the proposed changes to the standardized approach, the recognition of AOCI and the proposed changes to the stress testing framework.[12] The agencies estimate that the Standardized Approach Proposal would reduce aggregate CET1 capital requirements by 7.9 percent for holding companies with between $10 billion and $100 billion in total consolidated assets and by 7.5 percent for holding companies below $10 billion.[13]

The agencies estimate that “three Category III or IV holding companies would see a reduction in capital requirements in the range of three to seven percent if they were to choose to apply the expanded risk-based approach [in the Basel III Proposal] instead of the concurrently proposed revised standardized approach.”[14] The agencies also estimate “that about a third of banking organizations below Category IV would see reductions in capital requirements of between five and ten percent if they were to apply the expanded risk-based approach, although only a small number might see a reduction in capital requirements greater than 10 percent.”[15] The agencies note, however, that “various features of the expanded risk-based approach that are appropriate for larger and more complex banking organizations, such as the requirements to adopt [the standardized approach for counterparty credit risk (‘SA-CCR’)] and reflect most elements of accumulated other comprehensive income in regulatory capital, may make the framework unappealing to many smaller banking organizations.”[16]

The GSIB Proposal would incorporate annual adjustments to the Method 2 coefficients to reflect real economic growth and inflation based on nominal U.S. gross domestic product growth.[17] The Basel III and Standardized Approach Proposals also would adjust a variety of dollar-based thresholds that determine the application of certain aspects of the capital rule to reflect inflation using the consumer price index for urban wage earners and clerical workers published by the U.S. Bureau of Labor Statistics (“CPI-W”).[18] Federal Reserve Governor Waller emphasized in his statement, however, that he thinks “it is critical to index bank size-related regulatory thresholds and the GSIB surcharge to nominal GDP rather than tie it to any CPI measure” because “[w]hat matters for assessing the systemic importance of a bank is its nominal size relative to the nominal size of the U.S. economy.”[19]

Notably, the impact and economic analyses in the Basel III Proposal—at 150 pages—are approximately ten times longer than those in the 2023 proposal. As discussed below, the Basel III Proposal contains a detailed discussion of the potential effects on competitiveness on internationally active banks, smaller banks and nonbank financial intermediaries. Reflecting the more receptive approach of current banking agency leadership toward bank consolidation, this discussion draws a link between the proposed simplifications and reductions in large bank capital requirements and the potential that this may foster the creation of “[m]ore Category I and II banking organizations,” which “could constitute a safer and more competitive financial landscape.”[20]

Comments on the proposals are due by June 18, 2026.[21]

Summary of the Proposals

The proposals collectively span over 1,800 pages and are highly complex and technical. Below is a summary of several notable elements.

Basel III Proposal

Scope: The Basel III Proposal would apply mandatorily only to Category I and Category II banking organizations, which would be required to apply ERBA for credit, equity and operational risk. All banking organizations subject to the regulatory capital rule would have the option to adopt ERBA in its entirety. A firm that is not required to apply ERBA may opt in to the application of ERBA with prior notice to the applicable supervisor at least four full calendar quarters before the quarter in which the change would take effect. The Basel III Proposal, in particular, notes that the proposed framework “would address potential concerns around competitive imbalances by allowing banking organizations of any size to elect to use the expanded risk-based approach.”[22]

Single stack: Each banking organization would be subject to one set of risk-based capital ratios (i.e., either ERBA or the standardized approach), with the applicable buffer requirement applied to that “single stack.” Currently, Category I and II banking organizations are subject to a “dual-stack” requirement, calculating capital ratios under the advanced and standardized approaches and with the lower of the two calculations serving as the binding ratio for purposes of minimum requirements under the capital rule and, for insured depository institutions, the prompt corrective action framework.[23] This “dual stack structure” dates back to the 2011 implementation of Section 171 of the Dodd-Frank Act, commonly known as the Collins Amendment.[24] The Collins Amendment requires that the “generally applicable risk-based capital requirements”[25] serve as a “floor” for the capital requirements applicable to any banking organization. The aspect of the Basel III Proposal permitting any banking organization other than Category I and Category II firms to elect to adopt ERBA appears to be designed to address competitive considerations and to satisfy this requirement in the Collins Amendment because the generally applicable risk-based capital requirements would include both ERBA and the revised standardized approach, and an institution would have flexibility to select the approach that it determines is most suitable for its business model and operations. In this way, given the discretion institutions would have, the generally applicable risk-based capital requirements in effect would be the lower of ERBA and the revised standardized approach, such that ERBA, as applied to Category I and Category II institutions, would not be lower than the Collins Amendment “floor.”

Indexing: Specified dollar-based thresholds that govern the application of several aspects of the capital rule would be adjusted to reflect inflation using CPI-W.[26]

Addressing overlaps with stress testing: In isolation, the Basel III Proposal would increase capital requirements for operational risk and market risk.[27] The Basel III Proposal notes that the Federal Reserve’s 2025 proposal to revise the stress testing models and scenarios would decrease the stress capital buffer requirement for operational risk and market risk, such that the “capital impact of these revisions would largely offset each other.”[28]

Definition of capital: The Basel III Proposal generally would maintain the existing definition of capital for Category I and Category II firms, except that it would eliminate the current requirement to deduct from CET1 mortgage servicing assets (“MSAs”) above specified thresholds, which is intended “to remove a regulatory disincentive for residential mortgage servicing and origination, reducing impacts on broader policy objectives regarding the U.S. housing market.”[29] Firms that are not Category I or Category II that opt in to ERBA would be subject to the definition of capital applicable to Category I and Category II firms, including the more stringent deductions framework and the requirement to recognize most elements of AOCI, such as net unrealized gains and losses on AFS securities, in CET1 capital.

Credit risk

• Bank exposures: Exposures to depository institutions, foreign banks and credit unions would be categorized as Grade A, Grade B and Grade C and would be assigned risk weights between 20 percent to 150 percent based on the type of exposure and specified indicators of creditworthiness, which in many cases will be higher than the risk weights that currently apply to these exposures under the standardized approach.
• Real estate exposures: A residential or commercial real estate exposure that satisfies criteria relating to underwriting would be assigned a risk weight of between 20 percent and 105 percent (residential) and between 60 percent and 110 percent (commercial) based on its loan-to-value (“LTV”) ratio and whether the exposure is dependent on the cash flows generated by the real estate.[30] Residential exposures with low LTV ratios generally would be assigned lower risk weights than under the current standardized approach. Because ERBA would not recognize private mortgage insurance in the determination of the LTV for purposes of risk-weight classifications, it is possible that some residential real estate exposures with high LTVs, as measured by ERBA, with a 50 percent risk weight under the current standardized approach could attract higher capital requirements when operational risk capital requirements are considered.
• Retail exposures: Exposures to natural persons or to small or medium-sized entities would be assigned a risk weight of between 45 percent and 100 percent depending on the product type and degree of portfolio diversification, which the Basel III Proposal suggests “would increase the credit risk sensitivity of the capital requirements” for these exposures.[31]
• Investment-grade exposures: An exposure to a company that is “investment grade” based on a banking organization’s internal ratings system would be assigned a 65 percent risk weight, in comparison to the 100 percent risk weight that currently applies under the standardized approach, provided that the banking organization’s internal credit risk rating system satisfies specified risk management and validation criteria.
• Off-balance sheet exposures: Consistent with the current rule, the amount of off-balance sheet exposures would be determined by multiplying the off-balance sheet component of the exposure by the applicable credit conversion factor (“CCF”). Under the Basel III Proposal, the unused portion of a commitment that is unconditionally cancelable would be assigned a CCF of 10 percent, in comparison to the 0 percent CCF that currently applies under the standardized approach and would continue to apply for covered banking organizations under the Standardized Approach Proposal. For commitments that are not unconditionally cancelable, the Basel III Proposal would not differentiate CCFs based on the original maturity of the commitment.
• “Commitment” definition: The current capital rule defines a commitment as “any legally binding arrangement that obligates” a banking organization to extend credit or purchase assets. The preamble to the Basel III Proposal notes that “[s]uch an arrangement is treated as a commitment even when the banking organization has the unilateral right to cancel the arrangement at any time.”[32] The Basel III Proposal “would revise the definition of commitment to clarify that any contractual arrangement under which a banking organization and an obligor agree to the terms applicable to one or more future extensions of credit, purchases of assets, or issuances of credit substitutes by the banking organization is a commitment, whether or not the arrangement is unconditionally cancelable.”[33]
• In addition, the Basel III Proposal “clarifies that a contractual arrangement to extend credit, purchase assets, or issue credit substitutes, but which does not obligate the banking organization to do so, is also considered a commitment that is unconditionally cancellable.”[34]
• SA-CCR: The proposal would permit a banking organization to recognize cross-product netting arrangements between a banking organization and its client—including in respect of exposures of the banking organization as clearing member to its clearing member client—across repo-style transactions and derivatives. Cross-product netting arrangements would be reflected by treating repo-style transactions as forward derivative transactions for purposes of the standardized approach to counterparty credit risk.
• Cross-margining: The preamble to the Basel III Proposal notes that “[c]ross-margining agreements generally allow a clearing member to post initial margin to multiple central counterparties on a net basis, taking into account offsetting positions the clearing member holds with each central counterparty” and observes that “in recent years there have been significant developments, refinements, and increased adoption of cross-margining practices across the financial industry.”[35] The agencies explain that “[u]nder the current capital rule, clearing member banking organizations are not able to reflect the risk-offsets recognized by cross-margining programs”[36] in the calculation of capital requirements in respect of their contributions to the default fund of qualifying central counterparties (“QCCPs”).
• The proposal requests comment on whether to reflect cross-margining arrangements for purposes of determining a banking organization’s capital requirement in relation to QCCP default fund contributions in a manner that “would allow for the recognition of the risk-mitigating benefits of cross-margining programs and portfolio diversification” relative to the current capital rule.[37]
• Credit risk mitigation: The proposal would “largely incorporate the treatments for collateralized transactions, guarantees, and credit derivatives from the current capital rule’s standardized approach with enhancements to increase risk sensitivity”[38] and permit banking organizations to recognize the credit risk mitigation benefits of collateral using either the simple approach or the collateral haircut approach. Relative to the current capital rule, the proposal would modify several of the standard market price volatility haircuts that apply when recognizing financial collateral under the collateral haircut approach. The proposal also would introduce a new formula for calculating the exposure amount of eligible margin loans, repo-style transactions or netting sets under the collateral haircut approach “to improve the recognition of the risk-mitigating benefits of netting and portfolio diversification.”[39]
• Simple approach: Under the current standardized approach, among other requirements, financial collateral must be subject to a “collateral agreement” for at least the life of the exposure in order to apply the simple approach. To satisfy this requirement, a banking organization must have the right to exercise specified termination rights that would not be subject to stay or avoidance in insolvency proceedings of the counterparty except in limited circumstances. The Basel III Proposal would remove this requirement when applying the simple approach, which the preamble highlights “may not be relevant with respect to a loan”[40] and “has generally meant that a banking organization could not use the simple approach to recognize financial collateral in respect of collateralized loans because the exercise of a banking organization’s collateral rights with respect to a loan would often be subject to a stay in the bankruptcy or insolvency of a borrower under the applicable law.”[41] The proposal would implement adjustments to reflect any mismatch between the residual maturity of the mechanism by which the financial collateral is pledged and the residual maturity of the secured exposure.[42]
• Prepaid credit protection: Under the current capital rule, in order to recognize credit-linked notes that reference a loan portfolio or other on-balance sheet exposures as a synthetic securitization and credit risk mitigant, banking organizations have been required to request a reservation of authority from the agencies under the capital rule.[43] The proposal would explicitly recognize prepaid credit protection arrangements—including “fully funded credit-linked notes”—as an available type of credit risk mitigant subject to satisfying specified criteria.[44]
• Securitization exposures: The Basel III Proposal would apply a new securitization standardized approach as a replacement to the current standardized supervisory formula approach (“SSFA”), which would implement a risk-weight floor of 15 percent in comparison to the 20 percent floor that currently applies under the SSFA. The Basel III Proposal also would include a new framework for specified senior securitization exposures and non-performing loan securitizations. Eligible prepaid credit protection arrangements—including credit-linked note structures—could qualify as synthetic securitizations under this framework without banking organizations being required to request a reservation of authority.

Equity risk: In contrast to the July 2023 proposal, which would have removed the 100 percent risk-weight bucket for non-significant equity exposures that currently applies under the capital rule and eliminated the 100 percent risk-weight treatment for the effective portion of a hedge pair, the Basel III Proposal would retain the current non-significant equity exposures bucket and hedge pair treatment.[45]

Operational risk: The Basel III Proposal would remove the current models-based approach for operational risk and implement a standardized approach for operational risk, which would be based on inputs from a banking organization’s financial statements through calculation of the business indicator component. The business indicator component, the inputs for which would be based on three-year rolling averages, would be the sum of (i) an interest, lease and dividend component and (ii) a noninterest component. In contrast to the July 2023 proposal, the proposal would not include an internal loss multiplier, which as proposed in July 2023 would have potentially increased operational risk requirements based on historical loss experience.[46]

• Noninterest component: In a departure from the Basel standard, the Basel III Proposal would provide for netting of income and expenses in the noninterest component calculation.[47] With respect to the noninterest component, the Basel III Proposal also would reduce by 70 percent relative to the Basel standard the calculation of noninterest income and expenses associated with investment management, investment services and non-lending treasury services to “reflect the lower operational risk that these activities have presented historically.”[48]
• Operational losses: The Basel III Proposal would incorporate total operational losses within the noninterest component of the calculation.[49]

Market risk: The Basel III Proposal would replace the existing VaR-based method for calculating market risk capital requirements with new standardized and models-based methodologies based on “an expected shortfall-based measure that better accounts for extreme losses.”[50] A banking organization would be required to obtain prior supervisory approval to apply the models-based measure, which would be applied at the individual trading desk level.

• Scope of application: Category I and Category II holding companies would be automatically subject to market risk capital requirements. Market risk capital requirements also would apply to their depository institution subsidiaries and other banking organizations with aggregate trading assets and trading liabilities (excluding customer and proprietary broker-dealer reserve accounts) of at least (i) $5 billion (adjusted to reflect CPI-W) based on a four-quarter average or (ii) 10 percent of quarter-end total assets.
• Boundary: The Basel III Proposal would modify the “boundary” between market risk covered positions and positions subject to the standardized approach or ERBA, including to expand the scope of market risk covered positions to specified equity positions in investment funds, net short risk positions of at least $20 million (adjusted to reflect CPI-W) and certain internal risk transfers.
• Diversification: Compared to the Basel standard and July 2023 proposal, the Basel III Proposal would calculate market risk capital requirements using an adjustment that would “appropriately capture implied diversification benefits between model-eligible and model-ineligible positions across trading desks.”[51]
• Models-based approach: To apply the models-based approach, a banking organization would be required to conduct and successfully pass a backtesting requirement and a profit and loss attribution (“PLA”) requirement at the trading desk-level, subject to a three-year transition period during which the models-based approach may be used and there would not be automatic capital consequences based on PLA test results. Under this framework, the banking organization would submit quarterly PLA test results to its primary supervisor.[52]

CVA risk: The Basel III Proposal would implement a basic approach and standardized approach to determine CVA risk capital requirements, which address the “valuation change of [over-the-counter] derivative contracts resulting from the risk of the counterparty’s defaulting prior to the expiration of the contracts.”[53]

• Scope of application: CVA risk capital requirements would apply to (i) Category I or Category II holding companies, (ii) a subsidiary depository institution of Category I or Category II banking organization that is subject to the proposed market risk capital requirements and (iii) any other banking organization subject to the proposed market risk capital requirements that engages in over-the-counter derivative contracts with an aggregate gross notional value of at least $1 trillion (adjusted to reflect CPI-W) over the prior four quarters.[54]
• CVA risk covered positions: Covered positions subject to CVA risk requirements would include derivative contracts that are not cleared transactions or, in contrast to the July 2023 proposal, not exposures of a clearing member banking organization to its clearing member client (i.e., client-facing derivative transactions). Securities financing transactions also would not be subject to CVA risk capital requirements.[55]

Disclosure: The Basel III Proposal would introduce new qualitative disclosure requirements based on the proposal and remove “most of the existing required quantitative disclosures, which would instead be included in regulatory forms.”[56] The agencies “anticipate separately providing revisions” to the FFIEC 101 and FFIEC 102 forms, with anticipated corresponding revisions to the Federal Reserve’s FR Y-9C, FR Y-14A, FR Y-14Q and FR Y-15 reports.[57] The Basel III Proposal would also introduce a new requirement for GSIBs to disclose information regarding the terms and features of its regulatory capital instruments and other instruments eligible as total loss-absorbing capacity (also referred to as “TLAC”), including information about unique identifiers such as CUSIPs.[58]

GSIB Surcharge Proposal

A GSIB currently must calculate its GSIB surcharge under both Method 1, which is based on the Basel framework, and under Method 2, which is unique to the U.S. The Method 1 calculation is based on aggregate global measures for the relevant systemic indicators that are recalculated annually. Method 2 currently uses fixed values that were generally calibrated using data from 2012 and 2013.[59]

• Method 2 coefficients: The GSIB Surcharge Proposal would update the fixed Method 2 coefficients for four of the five indicators—size, interconnectedness, complexity and cross-jurisdictional activity—through a one-time downward adjustment by a factor of 1.2 “to reflect changes in the financial system and economy since the introduction of the framework.”[60] Going forward, the GSIB Surcharge Proposal would annually adjust the Method 2 coefficients to reflect real economic growth and inflation based on a three-year moving average of annual nominal U.S. gross domestic product growth.[61]
• Short-term wholesale funding indicator: Method 2 currently includes a measure of short-term wholesale funding that is based on the ratio of a banking organization’s (i) average weighted short-term wholesale funding amount to its (ii) average risk-weighted assets over the preceding four quarters.
• The GSIB Surcharge Proposal would modify the short-term wholesale funding indicator such that a banking organization’s short-term wholesale funding score would be equal to its average weighted short-term wholesale funding amount multiplied by a fixed coefficient value and would no longer be based on the ratio of such funding to the banking organization’s average risk-weighted assets. The Federal Reserve notes that these revisions would “simplify the calculation of the indicator” and “address an effect of the current calculation, which can produce results not aligned with risk.”[62]
• The coefficient value for the short-term wholesale funding category would be calibrated such that the indicator comprises approximately 20 percent of Method 2 scores, a significant reduction from the current calibration, under which “the short-term wholesale funding score has constituted approximately 30 percent of aggregate method 2 scores across U.S. GSIBs since the adoption of the GSIB framework.”[63]
• Averaging: Under the current GSIB surcharge framework, banking organizations report specified data values as of the end of a reporting quarter, which the Federal Reserve indicated “may not accurately reflect a firm’s systemic risk profile.”[64] Accordingly, to “reduce the effects of temporary changes to indicator values around measurement dates,”[65] the proposal would require GSIBs to report specified indicators as averages of daily or monthly values rather than point-in-time measurements and would require the calculation of Method 1 and Method 2 scores using average values over a calendar year rather than as of December 31.[66]
• Method 2 surcharge increments: The GSIB Surcharge Proposal would modify the current 0.5-percentage point increments in the Method 2 surcharge to 0.1-percentage point increments to “increase the sensitivity of a firm’s surcharge to its systemic risk profile and reduce cliff effects.”[67] The score ranges and GSIB surcharge increments would not change for purposes of Method 1.
• Systemic indicators: The GSIB Surcharge Proposal would amend several systemic indicators, including to update the definition of “financial institution” for purposes of the interconnectedness category to include savings and loan holding companies, private equity funds, asset management companies, exchange-traded funds and other asset management entities that engage in similar activities.[68] The Federal Reserve also would update the cross-jurisdictional activity indicator—which is an input both to the GSIB Surcharge and the Federal Reserve’s regulatory tailoring framework[69]—to include derivative exposures.[70]
• Implementation: The proposed amendments to the capital rule and FR Y-15 form and instructions would take effect two calendar quarters after the date of adoption of a final rule.[71]

Standardized Approach Proposal

The Standardized Approach Proposal would revise aspects of the risk-based capital framework under the standardized approach, with a focus on “improving the calibration and risk sensitivity of risk weights that are particularly material to covered banking organizations’ lending activities.”[72]

• Scope: The proposed standardized approach would apply to banking organizations that are not Category I or Category II firms or do not elect to use ERBA, as contemplated by the Basel III Proposal. For banking organizations that have elected to apply the community bank leverage ratio framework, only the elimination of the threshold deduction for MSAs would apply.
• AOCI: Category I and Category II banking organizations currently are required to recognize most elements of AOCI in regulatory capital, including net unrealized gains and losses on AFS securities, while all other banking organization may opt out of this requirement. The Standardized Approach Proposal would require Category III and Category IV banking organizations to include most AOCI components in CET1 capital, consistent with the current AOCI treatment for Category I and Category II firms.[73] Category III and Category IV firms that do not currently recognize AOCI in regulatory capital would reflect AOCI over a five-year period from the effective date of a final rule.
• Residential mortgage exposures: The Standardized Approach Proposal would implement a more granular treatment for assigning risk weights to residential mortgage exposures under the standardized approach based on the loan-to-value ratio and whether the exposure is dependent on the cash flows generated by the real estate.[74] These risk weights, which would range between 25 percent and 110 percent, would be higher than the risk weights that would be assigned under ERBA in the Basel III Proposal. The agencies explained that “in contrast with the proposed expanded risk-based approach, there is not a separate operational risk-based capital requirement” in the standardized approach.[75] Accordingly, “the proposed risk weights for residential mortgage exposures under [the Standardized Approach Proposal] would not account exclusively for credit risk” and “[t]he difference in risk-weights between the two proposals is, therefore, explained by the differing approaches for how risk categories, such as specific credit and operational risk-based requirements, factor into each proposal’s methodology for assigning risk weights.”[76] Because the revised standardized approach would not recognize private mortgage insurance in the determination of the LTV for purposes of risk-weight classifications, it is possible that some residential real estate exposures with high LTVs, as measured by the revised standardized approach, could attract higher risk weights than under the current capital rule. For example, a residential mortgage exposure with an LTV between 90 and 100 percent that currently qualifies for a 50 percent risk weight would have a 55 percent risk weight under the Standardized Approach Proposal.
• Corporate exposures and other assets: The risk weight for corporate exposures would be reduced from the current 100 percent under the standardized approach to 95 percent.[77] The agencies note that the calibration of the proposed 95 percent risk weight was based on a data analysis indicating a weighted-average credit risk weight of 85 percent for corporate exposures, assuming a 65 percent risk weight for investment grade corporate exposures.[78] The risk weight applicable to the other assets category, which reflects exposures to individuals, other real estate owned and other exposures not otherwise specifically assigned a different risk weight, would be reduced from 100 percent to 90 percent, based on a data analysis indicating a weighted-average credit risk weight of 77 percent.[79] In both cases, the higher risk weights relative to those suggested by the data analysis “would reflect a nominal add-on to account for operational risk.”[80]
• Indexing: The agencies would implement an indexing methodology to adjust specified thresholds that govern the application of several aspects of the standardized approach based on CPI-W.[81]
• Counterparty credit risk, credit risk mitigation, securitization: The Standardized Approach Proposal would implement targeted adjustments to the counterparty credit risk, credit risk mitigation and securitization frameworks in a manner broadly aligned with the Basel III Proposal.[82]

Effect on Competitiveness

The Basel III Proposal discusses several potential competitive effects of the proposal, both among banking organizations and between banking organizations and nonbank firms.

• Consolidation and barriers to entry: In the Economic Analysis section of the Basel III Proposal, the agencies highlight that the “proposed rules, through a potential reduction in the overall level of required capital, removal of complexity and burden from the requirement to simultaneously internally model credit and operational risk, and increased certainty from a single set of risk-based requirements, should lessen the extent to which becoming a Category I or II banking organization may be seen as undesirable.”[83] The agencies go on to note that insofar as the proposed revisions to the capital rule foster the creation of additional Category I and II banking organizations, this “could constitute a safer and more competitive financial landscape.”[84] In particular, the agencies note that, although “other jurisdictions have seen some churn in which institutions are systemically important enough to be deemed GSIBs, the eight U.S. bank holding companies identified as GSIBs by the Financial Stability Board in 2012 remain the only U.S. GSIBs today, and no additional Category II banking organizations have emerged following the creation of the current tier definitions.”[85] The agencies note that, “[w]hile somewhat paradoxical, the growth and consolidation of some large regional banks into Category I or II banking organizations could actually provide more competition in the lending and trading markets,” which the agencies note can be conducted only by “banking organizations of the largest scale.”[86]
• Non-bank financial intermediaries: The Basel III Proposal includes a discussion of potential competitive effects in relation to nonbank firms. The agencies observe that “differential effects of the proposal across business activities, as well as differences across nonbanks, may contribute to reversing the migration of some activities toward banking organizations.”[87] With respect to mortgages and related servicing activities, the agencies highlight that “the proposed lower risk weights for most mortgages may encourage banking organizations to hold more of these loans in their portfolios, while the proposed removal of the MSA deduction treatment may lead them to expand their originate-to-distribute lending operations.”[88] On the other hand, “the proposed increase in risk-weighted assets for market risk, as well as an increase in some credit conversion factors and operational risk-weighted assets attributed to the interest and fee income associated with credit lines, may incentivize some liquidity provision in financial markets to shift towards nonbanks.”[89] In general, the agencies note that “by encouraging the migration of certain activities back towards banking organizations, the proposal is expected to support financial stability.”[90]
• Foreign banks: The agencies note that Bank for International Settlements data “reveal that the effective average risk weights used by foreign banks subject to the Basel standards as implemented in other jurisdictions are materially lower than the risk weights that Category I and II banking organizations currently apply across several exposure categories.”[91] The agencies note that although “the proposed risk weights in those exposure types would still exceed global averages, the downward calibrations would bring them much closer in line, reducing anti-competitive disparities with global competitors while still maintaining the comparatively stronger levels of capital at Category I and II banking organizations that have resulted in greater resilience relative to their global peers.”[92]
• Smaller banks: The agencies note that “[o]n an exposure-by-exposure basis, the proposed revised capital requirements [under ERBA] would sometimes be lower than those in the standardized approach, even inclusive of associated operational risk requirements.”[93] The agencies highlight, however, that several factors “mitigate any concern that the proposal would create competitive inequity overall between Category I and II banking organizations and smaller banks,” including that any firm may elect to adopt ERBA.[94]