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Basel III in reverse: US regulators hand capital back to the banks

The final stage of Basel III was meant to raise the capital of the largest US banks by 19%. Under the Fed's new leadership, the March 2026 re-proposal instead delivers net relief of about $87.7bn, alongside the reform of the leverage ratio and the softening of stress tests. An analysis of a rollback, its rationale, and the risk it displaces.

10 min read#banks#regulation#systemic risk#private credit#fed#us politics
dated revision: July 15, 2026French originalprimary sourcesno tracker

A prudential reform rarely ends up as the opposite of its stated intent. Yet that is the fate of the final leg of the Basel III accords in the United States. Designed after 2008 to strengthen the capital of the largest banks, the “Basel III endgame” has been turned into an instrument of capital relief, after a change of leadership at the Fed and sustained pressure from the industry. The move is not confined to this text. It extends to the leverage ratio and the stress tests, forming a coordinated loosening of the constraints that weighed on systemic banks.

From +19% to net relief

The trajectory is striking. The first proposal, published in July 2023 under Fed Vice Chair for Supervision Michael Barr, aimed to raise the capital of the largest banks by about 19%, as Brookings recalls. Facing an outcry from the industry and Congress, a September 2024 re-proposal had already brought the increase down to around 9%. The arrival of Michelle Bowman at the Fed’s supervision post, in June 2025, tipped the file.

On 19 March 2026, the federal agencies unveiled an entirely recalibrated version. Officially, it is meant to be “capital-neutral” and better aligned with actual risk. In practice, according to the law firm Simpson Thacher, it delivers net relief of about $87.7bn in common equity, and cuts the aggregate requirement of the largest banks by roughly 6%. The text passed on a Fed vote of six to one. The dissenting voice is that of Michael Barr, architect of the original version, who flagged, according to Freshfields, more than twenty material downward deviations from the international Basel standard. The consultation runs until 18 June 2026, for finalisation expected in late 2026 and entry into force in 2027.

The promised increase, then the giveback Change in the capital requirement of the largest banks, by version of the text. 0 +19% 2023 proposal (Barr) +9% 2024 re-proposal -6% 2026 re-proposal Net relief of about $87.7bn. Sources: Brookings (2023), Simpson Thacher, Freshfields (2026).
From a 19% increase in 2023 to net relief of about 6% in 2026: the text changed sign. Sources: Brookings, Simpson Thacher, Freshfields.

The leverage ratio loosened: the eSLR reform

Risk-weighted capital is not the only lock eased. The enhanced leverage ratio, the eSLR, which imposes on systemic banks a capital floor independent of risk weighting, was reformed in parallel. In a proposal of 25 June 2025, the Fed, presented by Michelle Bowman, proposed recalibrating the eSLR buffer to set it at half of each bank’s systemic surcharge, instead of a fixed 2% flat rate. The rule was finalised in late 2025, for application on 1 April 2026.

The scale of the relief shows in its distribution. According to the FDIC, the recalibration reduces required Tier 1 capital by about 1.4%, or $13bn, at the holding-company level, but by 27% on average, or $213bn, at the level of the bank subsidiaries. The stated aim is to make the eSLR a backstop rather than a binding constraint, and to give banks back capacity for activities deemed low-risk: intermediation of the Treasury market and repo financing. One nuance deserves noting, because it tempers the most alarmist reading: unlike the temporary regime of 2020, the reform does not exclude Treasuries or reserves from the ratio’s denominator; it has merely put that exclusion out for comment.

Where the leverage relief lands Reduction in required Tier 1 capital from the eSLR reform, in billions of dollars. ~13 holding-company level -1.4% of Tier 1 ~213 bank-subsidiary level -27% on average
The bulk of the freed margin sits at the bank-subsidiary level, where market-making and repo financing are booked. Source: FDIC.

Stress tests with less bite

The third pillar of the loosening touches the stress tests, which set the stress capital buffer and, in turn, the banks’ ability to pay dividends and buy back shares. Following a lawsuit filed in late 2024 by the industry, the Fed agreed to open its scenarios and models, long opaque, to public comment. The proposal of late October 2025, welcomed by the Bank Policy Institute, also plans to smooth the results over time to reduce the volatility of requirements from one year to the next. In parallel, a revision of the systemic surcharge, planned by Bowman according to Sullivan & Cromwell, is set to lower requirements modestly further. Each brick, taken in isolation, looks technical. Added together, they hand banks a substantial capital margin, partly destined for shareholders.

The regulators’ bet

The official justification is not baseless, and it deserves to be taken seriously. The first argument is competitive neutrality. By raising the cost of capital on certain exposures, the 2023 version mechanically pushed activity toward the less-regulated non-bank sector. Easing the constraint would let banks stay in the credit game, notably mortgage credit, rather than ceding ground to funds.

The second argument concerns the Treasury market. A leverage ratio that penalises holding safe assets discourages banks from intermediating US debt, at the risk of thinning liquidity when it is most needed. The March 2020 episode, when the Treasury market dislocated for want of dealer balance-sheet capacity, serves as the reference for this reasoning. Recalibrating the eSLR to free up that capacity aims to avoid a repeat of such a freeze, an objective that even cautious observers deem legitimate.

The objections

The opposite reading is just as argued, and it begins inside the Fed itself. Barr’s dissent is no mere formality: to flag more than twenty downward deviations from the Basel standard is to say that the reform departs from the international consensus built after 2008. The core criticism is the timing. Easing capital just as the credit cycle is mature, valuations are stretched and private-credit defaults are rising, is to remove a shock absorber right before it is needed.

Procyclicality is the heart of the risk. Capital requirements that ease at the top of the cycle leave a thinner cushion when the turn comes, exactly when losses materialise. The same rules, now looser, then become hard to tighten in a hurry without amplifying the credit contraction. Today’s loosening mortgages tomorrow’s room for manoeuvre.

The private-credit paradox

The subtlest point lies in the interaction with the non-bank sector. The hard 2023 version was called, by the ABA Banking Journal, a gift to private credit: by raising the cost of bank capital, it pushed credit toward funds escaping the same oversight, a shift we documented in the migration of credit risk. The 2026 relief could, in theory, reverse part of that movement and bring activity back into the bank perimeter, better capitalised and better supervised.

The effect remains ambiguous, however, because the two worlds are now linked. US banks had lent close to $300bn to the private-credit sector by mid-2025 according to Moody’s, a subject developed in our stocktake of private credit at mid-2026. Handing capital back to banks does not cut this thread; it may even lengthen it, if the freed margin funds more lines to non-bank actors. The risk is not simply repatriated into a safer compartment: it circulates between the two, and the reform acts on only one end of the chain.

The signals to watch

A few markers will say what face this new regime takes. The final Basel III endgame text expected in late 2026, first, and the real scale of the relief once the consultation closes. The volume of the large banks’ share buybacks next, which will measure how much of the freed margin is returned to shareholders rather than retained. The trajectory of financing lines extended to private credit, to see whether the returned capital feeds the non-bank sector. And the resilience of the Treasury market under stress, the only real test of the regulators’ central argument.

The bet is clear, even if it is not stated this way. The authorities are wagering on banks freer to move, able to intermediate sovereign debt and win back ground from shadow credit, without the lower cushions being paid for at the next shock. The opposite bet, that of Barr and part of the economics profession, is that a financial system stripped of its capital at the top of the cycle finds out too late, when the cushion is missing. Between the two lies precisely the definition of a shock no one knows how to date.

Sources

This article is journalistic analysis and does not constitute investment advice. Regulatory data is cited as of the date of its sources.

This analysis is not investment advice.

// cite this analysis

l0g, “Basel III in reverse: US regulators hand capital back to the banks”, l0g.fr, published July 15, 2026, updated July 15, 2026, https://l0g.fr/en/analysis/basel-iii-rollback-us-regulators-bank-capital/

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