Wall Street is pressing US regulators to loosen Basel capital rules even more than already planned, arguing that lighter requirements would cut trading costs and calm market swings. The push comes as banks face a tighter deadline to comply with the international standards, but critics warn that reducing capital buffers could leave the financial system more vulnerable to shocks.
The trade-off at the heart of the plea
At issue are the Basel III endgame rules, which require banks to hold more capital against trading assets and loans. The industry has long complained that the stricter requirements make it more expensive to trade, especially for clients. Now, with regulators already softening some provisions, banks are asking for more — specifically, lower capital floors and a longer phase-in period.
Backers of the easing say it would lower transaction costs for investors and dampen the kind of sharp price moves that have rattled bond markets recently. Less capital tied up in reserves means more liquidity sloshing through the system, they argue. But the same logic cuts the other way: thinner capital buffers mean a bank can absorb fewer losses before hitting trouble.
What the regulators have already done
The Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation proposed the Basel endgame rules in July 2023. After a flood of industry comment letters, they signaled in September 2024 that they would scale back some of the most onerous pieces — for example, giving banks more time to comply and reducing the impact on mortgage lending.
That concession didn't stop the lobbying. Trade groups like the Bank Policy Institute and the Securities Industry and Financial Markets Association have continued to meet with agency staff, pushing for further cuts. They argue the revised plan still goes too far and would hurt the U.S. economy.
Why the risk side matters
Regulators have a different worry. Lower capital requirements increase the chance that a bank failure could cascade through the system. The 2023 regional banking crisis, which felled Silicon Valley Bank and Signature Bank, is still fresh in memory — though those failures were tied to interest-rate risk, not trading books.
Still, the logic is the same: capital is the shock absorber. Shrink it, and a bump in the road can become a crash. The agencies have not yet said whether they will grant the industry's latest requests.
The debate isn't settled. The Fed, OCC, and FDIC are expected to release a final rule sometime in the first half of 2025. Wall Street will keep pressing until then — and regulators will have to decide how much risk they're willing to accept for the sake of lower trading costs.
