Regulators Scrapped the Basel Endgame and Proposed Giving Capital Back

In June the Federal Reserve, the OCC and the FDIC formally withdrew the 2023 Basel III endgame framework and replaced it with three proposed rules running past fifteen hundred pages. The direction reverses: where the old proposal would have required large banks to hold more capital, the new one lowers requirements across every category of institution.

The agencies' own estimates put the aggregate common equity tier one reduction at roughly 4.8% for the largest banks, 5.2% for the mid-sized ones, and 7.8% for community banks. The surcharge applied to globally systemic institutions would fall by about 40 basis points on average, some $23 billion in aggregate.

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What capital requirements actually constrain

Regulatory capital is not money sitting idle in a vault. It is the share of a bank's assets funded by equity rather than borrowing, and it determines how much lending a given equity base can support. Lower requirements mean the same shareholder capital can carry a larger balance sheet, or the same balance sheet can be run with less equity and the excess returned to shareholders.

That second path is what the equity market cares about. A bank freed from holding a percentage point of capital it no longer needs has a choice between growing the loan book and buying back stock, and in a slow-growth lending environment the buyback tends to win.

The proposal also makes structural changes that matter unevenly. It replaces the dual-track standardized and advanced approaches with a single expanded risk-based approach for the largest institutions only, introduces an explicit operational risk charge for the first time, and swaps the deduction for mortgage servicing assets for a 250% risk weighting.

Why the regional banks are the interesting part

Whitmore's Watchlist:
KRE (SPDR S&P Regional Banking ETF): Regional bank exposure, the group whose relative capital burden changes most under the proposal.
KBWB (Invesco KBW Bank ETF): A broader bank index weighted toward the large institutions on the other side of that comparison.
JPM (JPMorgan Chase & Co.): The clearest single read on how the systemic surcharge recalibration lands at the top of the industry.

The largest banks get the surcharge relief and the new expanded approach. Everyone else gets the reduction without the extra machinery, and community banks get the largest percentage relief of all. That narrows a gap that has been widening since the last crisis, when compliance cost was a fixed burden that small institutions carried less efficiently than large ones.

Whether it translates into earnings depends on something the rule cannot control: loan demand. Capital relief lets a bank lend more; it does not create borrowers. With the 30-year mortgage above 6.5% and business borrowing costs anchored by a policy rate near 4%, the constraint on regional bank growth right now is on the demand side of the balance sheet, not the capital side.

The mortgage servicing change is the exception worth watching, because it is a direct benefit to the banks that retain servicing rights, and it arrives when servicing portfolios are unusually valuable: nobody is refinancing, so the servicing runs longer than the models assumed.

The part that only shows up later

Capital rules are a trade between resilience and return, and this proposal moves the dial toward return. That is defensible after a decade without a systemic banking failure, and the 2023 regional bank episode is a reminder of what the other side of the trade looks like when rates move faster than balance sheets can adjust.

The operational risk charge is the one genuinely new obligation in the package, and it points the other way from the headline relief. It puts an explicit capital cost on the risk of process failures, fraud and technology outages, which for banks with large payments, custody or trading operations is not a rounding error. Net relief at the aggregate level can still mean a higher bill for a particular business line.

The proposal is not final. Comment periods, revisions and litigation all sit between a proposed rule and an effective one, and the last attempt at rewriting these standards took years and ended in withdrawal. Positioning as though lower requirements are already in force would be premature.

Whitmore's Take: Lower capital requirements improve bank returns most when there is demand to lend into, which is the piece currently missing. Worth separating the regulatory tailwind from the lending cycle when reading bank earnings this autumn.

Written by Daniel Whitmore
Millionaire Insiders