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Change remains a constant in financial services regulation
Read "our take" on the latest developments and what they mean.
The capital endgame begins, again
What happened? On March 19th, the banking agencies released several proposals that would amend the capital requirements for banks of all sizes:
| Proposal | Applicability1 |
| A joint proposal to implement the U.S. formulation of Basel III endgame, the final international capital standards agreed in Basel in 2017. It would create a new expanded risk-based approach (ERBA) for the largest banks to calculate risk-weighted asset (RWA) capital requirements for credit risk, operational risk, market risk, and certain derivatives-related exposures. | Applies to Category I, or U.S. global systemically important banks (GSIBs), and Category II. Other banks can choose to opt in. The market risk framework applies to firms with large trading businesses. |
| A joint proposal to revise the U.S. standardized approach, the simpler risk-based capital framework that applies to most banks outside the Basel III endgame regime. It would primarily update credit risk requirements and capital definition, including changes to mortgage, retail, and corporate exposures, the treatment of mortgage servicing assets, and requiring Category III and IV firms to reflect most accumulated other comprehensive income (AOCI) in regulatory capital, subject to a transition. It would not introduce the full operational risk framework included in Basel III endgame, while market risk would continue to apply only to firms with significant trading activity. | Applies to banking organizations that remain on the standardized approach, including Category III and IV firms and smaller banks. |
| A Fed-only proposal to revise the GSIB surcharge framework, including how the surcharge is measured and calibrated so it better reflects firms’ systemic risk and is less affected by economy-wide growth, year-end balance-sheet management, and other features of the current methodology. | Applies to U.S. GSIBs. |
What would the proposals do?
The proposals would reduce capital requirements across all firm categories on an all-in basis.
The agencies described the proposals as a holistic review intended to modernize the capital framework while retaining its robustness, reduce burden, and address unintended effects. On an all-in basis, including the proposals and related stress test changes, the Fed stated that aggregate common equity tier 1 requirements would decline by:
- 4.8% for Category I and II firms,
- 5.2% for Category III and IV firms,
- 7.8% for smaller banks.
The agencies intentionally considered overlap across minimum capital, stress testing, and the GSIB surcharge.
The agencies stated that they considered interactions across the framework, particularly for operational risk and trading activities. For Category I and II firms, the combined impact reflects:
- +1.4% increase from the Basel III endgame proposal
- -3.8% reduction from the GSIB surcharge proposal, and
- -2.4% reduction from previously proposed stress test changes.
For Category III and IV firms, the agencies estimate:
- -6.1% reduction from revised risk weights,
- +3.1% from accumulated other comprehensive income, and
- -2.2% from stress test changes, for a net -5.2%.
More granular credit risk weights with different impacts across asset classes.
The proposals revise credit risk treatment under both the standardized approach and ERBA. Specifically:
- Residential mortgages would move to loan-to-value (LTV)-based risk weights, ranging from 25% to 75% under the standardized approach and 20% to 70% for traditional mortgages under ERBA, with LTV updated for amortization while property values are generally held at origination;
- Corporate exposures would have the standardized risk weight reduced from 100% to 95%, while under ERBA, investment-grade exposures would receive a 65% risk weight based on internal credit assessment;
- Commercial real estate would also generally receive a 95% risk weight under the new standardized approach, but would receive LTV-based treatment under the expanded approach, with risk weights ranging from 70% to 110%; and
- Other retail exposures would see the standardized risk weight reduced from 100% to 90%, while ERBA applies a regulatory retail framework with risk weights of 75% or lower for qualifying exposures.
Revised market risk framework with narrower scope and a more usable path to internal models.
The proposal’s market risk capital requirements would apply to Category I and II firms and to other banks with average aggregate trading assets and liabilities of at least $5 billion or 10% of total assets, up from the current $1 billion threshold.
The proposal would replace the current market risk rule with a new framework that uses a standardized measure as the default approach and allows banks to use internal models for eligible trading desks. Within that framework, the proposal would:
- Replace value-at-risk with an expected shortfall measure and liquidity horizons that vary by risk factor;
- Require model approval, backtesting, and profit and loss attribution testing (PLAT) at the trading-desk level, with a three-year PLAT transition period before results trigger regulatory consequences;
- Bifurcate non-modellable risk factors that meet pre-defined qualitative criteria into a new risk factor category;
- Capture diversification benefits across model-eligible and non-model desks;
- Permit, with supervisory approval, a cap under which the models-based measure can equal the standardized amount.
New standardized operational risk requirement with tailored treatment for certain fee-based activities.
ERBA would introduce an explicit operational risk capital requirement. Under the Basel standard, the business indicator is built from three components: an interest, lease, and dividend component; a services component; and a financial component. The proposal instead retains the interest, lease, and dividend component but replaces the Basel services and financial components with a single noninterest component.
In that noninterest component, the proposal would net noninterest expenses against noninterest income, rather than looking only at revenue, and would apply a 70% reduction to the noninterest income and expenses from investment management, investment services, and non-lending treasury services included in that component. The proposal explains this adjustment is based on historical analysis showing that operational losses are materially lower for those businesses. The proposal also no longer includes the internal loss multiplier, which the 2023 proposal included and would have allowed to scale up operational risk RWA for firms with substantial operational loss events in the look back period.
A separate standardized approach proposal now covers Category III, IV, and banks with under $100 billion in assets.
Unlike the 2023 proposal, which would have applied ERBA to banking organizations above $100 billion in assets, the agencies have now issued a separate standardized approach proposal for Category III and IV firms and smaller banks. That proposal would revise the simpler risk-based capital framework used by most banks by:
- Making credit risk treatment more risk-sensitive across major lending categories;
- Updating the treatment of counterparty credit risk, securitization, and credit risk mitigation;
- Eliminating the threshold-based deduction for mortgage servicing assets (MSAs) and applying a 250% risk weight to all MSAs; and
- Requiring Category III and IV firms to reflect AOCI in regulatory capital, subject to a five-year transition.
It would stop short of extending the full Basel III endgame framework, including its operational risk construct, to most banks outside Category I and II, while market risk requirements would still apply separately to firms with significant trading activity. Banking organizations outside Category I and II could nevertheless elect to adopt ERBA in full.
Revised GSIB surcharge methodology with updated coefficients, averaging, and smaller increments.
The proposal would revise the U.S. GSIB surcharge framework by updating the calculation of the surcharge under Method 22, including:
- A one-time downward adjustment to Method 2 coefficients;
- Annual indexing of those coefficients based on nominal GDP growth;
- Removal of the risk-weighted-assets denominator from the short-term wholesale funding score and recalibration of that component to approximately 20% of the total score;
- Use of daily or monthly averages for certain systemic indicators rather than year-end values; and
- Reduction of surcharge increments from 50 basis points to 10 basis points.
Our Take
A different capital direction.
The overall drop in capital requirements is a sharp reversal from the original 2023 Basel III endgame and GSIB surcharge proposals, which would have increased capital requirements for each bank category .
This shift reflects the view that the capital framework had become too duplicative, too complex, and in some places overly punitive, and that those features helped push traditional activities such as mortgage origination and middle-market lending toward nonbanks.
By taking a more targeted approach to broad risk weights and lowering charges for many mortgage, consumer, and corporate lending exposures, the proposals should make it more attractive for banks to hold these assets on balance sheet.
Reducing duplication is now part of the design.
The agencies now explicitly acknowledge the potential for duplicative capture of operational risk and market risk through risk-based capital requirements and through the stress test. The proposal addresses that issue through specific calibration changes across the framework. For large banks, increases in minimum capital for operational risk and trading exposures are paired with reductions in stress capital requirements tied to those same risks – particularly changes to the global market shock and operational risk components of the stress test.
However, some of these changes would diverge from the 2017 Basel III agreement, which could raise questions for foreign jurisdictions and internationally active banks. For example, some jurisdictions like the UK have delayed their implementations and may now need to reassess in light of the US changes and consider adjusting their formulations to align. Should meaningful differences persist, internationally active banks may need to reassess cross-border booking models and optimization strategies.
More risk sensitivity may create opportunities – and more dispersion.
The proposals move away from broad credit buckets toward more differentiated treatment based on collateral, borrower characteristics, and exposure size. The revisions should lower capital requirements for many mortgage and corporate exposures and better align the framework with actual credit risk, though outcomes will still vary across firms and portfolios. Banks with better-collateralized mortgage books, stronger corporate credits, and more clearly qualifying retail exposures should see greater benefit, while others may see less relief than the headline numbers suggest. In practice, the proposed changes would make credit risk treatment more dependent on data availability and quality, underwriting discipline, risk model effectiveness, and the ability to operationalize the framework consistently.
Market risk becomes more model-friendly.
While the proposal would still increase market risk capital requirements relative to the current framework, it would make internal models more usable and be materially less punitive than the 2023 proposal.
For firms that remain in scope, revisions to the test to determine whether firms can use their own models and the introduction of a lengthy transition period to observe the performance of that test will reduce concerns about cliff effects that were prominent in the 2023 proposal. Other changes, such as the enhanced diversification benefits across model-eligible and non-model desks, further give firms a better chance of using internal models in a stable way and of realizing the benefit of investments in data, systems, and governance. In doing so, the revised framework should do a better job of aligning capital outcomes to the actual risk of trading positions rather than to testing mechanics or abrupt threshold effects.
While the proposal raises applicability thresholds, over 15 foreign banks and domestic regional banks subject to the current market risk rule will be required to transition to the new framework and will see the associated increase in capital charges.
A more practical operational risk calibration.
By reducing the contribution of certain fee-based activities and better aligning the charge with observed loss experience, the proposal would provide more favorable treatment for the business mix of large U.S. banks with custody, wealth, treasury, and other lower-loss activities.
The new operational risk formulation also addresses some of the criticisms of the 2023 proposal “gold plating” the 2017 Basel agreement, including layering an operational risk charge on top of a U.S. stress test framework that already captures stressed operational losses. The revised proposal addresses this issue by making the minimum capital requirement more tailored while also relying on changes to the stress test framework to reduce the degree of double counting.
The removal of the internal loss multiplier reinforces that shift by bringing the U.S. approach more in line with implementations in Europe, where the multiplier was set to one.
An expanded reform agenda creates a strategic choice for all but the largest firms.
By creating a separate standardized approach proposal for Category III and IV firms and banking organizations below $100 billion in assets, the agencies are making clear that capital reform is not limited to Basel III endgame and the largest banks. Lower and more differentiated capital requirements for many mortgage, retail, and corporate exposures should increase opportunities to grow lending portfolios, but banks will need more granular data as well as enhanced systems and governance to implement the framework effectively.
The separate proposal also raises the question of whether to opt into ERBA. Firms with lower operational risk charges and substantial wholesale lending portfolios are the most likely to benefit relative to the updated standardized approach. However, they may need to determine whether realizing the benefit warrants the broader burden of implementing and maintaining a more complex framework.
For many others, the revised standardized approach may be more attractive: it captures much of the credit-risk recalibration without requiring banks to take on a large-bank operational risk framework to get there.
GSIBs are getting most of what they asked for on the surcharge.
This is the clearest example of the agencies fixing a framework that had drifted from its original intent. The original construction ratcheted up with balance-sheet growth and did not account for the size of financial institutions relative to the economy, resulting in surcharges that increased over time even when systemic risk did not rise proportionately. The 2026 proposal should make the surcharge a more stable and predictable input to required capital, while also reducing the extent to which higher market and operational risk requirements are compounded by a mechanically rising GSIB surcharge.
The 2023 GSIB surcharge proposal already included daily and monthly averaging and smaller surcharge increments, but it also would have expanded the definition of financial institution for the purposes of interconnectedness, which would have pushed surcharges higher for some firms.
What’s next? Comments on all three proposals are due by June 18th, 2026. Unlike the three-year phase-in outlined in the 2023 Basel III endgame proposal, the 2026 proposals do not set out an overall implementation timeline. Instead, the agencies ask for feedback on the appropriate length of time between rule finalization and an effective date.
White House issues mortgage EO
What happened? On March 13th, the Trump Administration issued an Executive Order (EO) titled “Promoting Access to Mortgage Credit.”
What does the EO direct? In addition to directing the FHFA to report within 120 days on the efficiency of national housing finance markets and recommend regulatory or legislative changes, the EO calls for the federal housing and banking agencies to consider a broad set of mortgage-related regulatory, supervisory, and program changes:
| Topic | Agency | Agencies are directed to consider: |
| Mortgage origination and disclosure rules | CFPB |
|
| Supervision and enforcement | Fed, FDIC, OCC, NCUA, CFPB |
|
| Capital and liquidity | Fed, FDIC, OCC, NCUA, FHFA |
|
| Mortgage servicing | Fed, FDIC, OCC, NCUA, FHFA, CFPB, USDA, VA |
|
| Construction lending | Fed, FDIC, OCC, NCUA, FHFA, CFPB, USDA, VA |
|
What’s next? The FHFA report is due by July 11th.
Our Take
A structural push to re-expand bank mortgage lending capacity
For financial institutions, the EO is best understood as part of the Administration’s broader efforts to make mortgage lending more economic for traditional banks, particularly community and smaller institutions. By revisiting the rules, supervisory expectations and funding frameworks that shape the economics of mortgage lending, the EO aims to lower structural frictions that have, over time, pushed mortgage activity out of banks and toward NBFIs.
The order stops short of requiring agencies to make specific changes. Instead, it directs them to consider most of these changes, which makes this more of a policy roadmap than an immediate reshaping of mortgage regulation. That distinction is especially important because many of the most consequential items run through the CFPB, an agency with significant resource constraints that would slow the path from EO to advance notices, proposed rules, and final rules. The most meaningful changes for lenders would likely require formal rulemaking rather than supervisory signalling alone.
The key messages of the EO align with the banking agencies’ recent capital reform proposals, which aim to reduce disincentives to bank mortgage activities. The supply side of the mortgage market, however, may not materially increase activity if interest rates do not materially change and affordability pressures remain.
Treasury releases illicit finance assessments and related updates
What happened? Recently, the Treasury Department released several items on its view of illicit finance threats and the tools needed to address them:
- On March 9th, the National Money Laundering Risk Assessment (NMLRA), National Terrorist Financing Risk Assessment (NTFRA), and National Proliferation Financing Risk Assessment (NPFRA).
- On March 6th, Treasury also released a GENIUS Act report to Congress on innovative technologies to counter illicit finance involving digital assets.
- Separately, on March 10th, FinCEN renewed and expanded its Geographic Targeting Order (GTO) for the southwest border, imposing additional CTR filing requirements on in-scope MSBs.
What do the national risk assessments say?
Treasury’s three assessments emphasize a consistent theme: core threats persist, but technology is increasing speed, scale, and concealment options. Key highlights include:
- On money laundering, Treasury found the top threats remain consistent: fraud, drug trafficking, cybercrime, human trafficking/smuggling, and corruption, with illicit trade also generating billions in proceeds. It also notes that actors are making greater use of social media, encrypted messaging apps, digital assets, and AI to target victims and move or obscure funds.
- On terrorist financing, Treasury cited geopolitical shifts as fueling radicalization and fundraising, and notes terrorism’s epicenter has increasingly shifted toward Sub-Saharan Africa. It also highlights detection challenges where financing is self-funded or linked to online radicalization; domestically, supporters have used MSBs and cash and, increasingly, digital assets to move funds.
- On proliferation financing, Treasury assessed an elevated threat, with key risks linked to DPRK and Iran (and other state actors such as Russia) and notes Chinese individuals/entities are playing a more widespread role in sanctions evasion facilitation. It also notes that threat actors continue to use digital assets, front and shell companies, and intermediaries to move funds and circumvent sanctions and export controls.
What does the GENIUS Act report on countering illicit finance emphasize? Treasury describes a technology agenda spanning AI, digital identity, blockchain analytics, APIs, and DeFi-related tools, and calls for approaches that improve detection without becoming overly prescriptive. It also recommends a digital asset-specific “hold law” that would give institutions and platforms a safe harbor to temporarily and voluntarily hold digital assets tied to suspected illegal activity during a short investigation. Treasury notes that such a law could be particularly useful for permitted payment stablecoins. The report also highlights typologies and risk signals tied to the national risk assessments, including misuse of digital asset kiosks, DPRK hacking of digital asset service providers, and terrorist groups soliciting funds in digital assets.
What happened with the southwest border GTO? FinCEN’s renewed GTO continues to require certain MSBs in designated southwest-border geographies to file Currency Transaction Reports (CTRs) for cash transactions of $1,000–$10,000 and to meet enhanced identity verification and recordkeeping expectations. The order runs through September 2nd, 2026. MSBs newly brought into scope have until April 6th, 2026 to begin complying.
Our Take
Digital tools are moving to the center of illicit finance expectations.
Treasury is not pointing to an entirely new threat set so much as to a faster, more technology-enabled version of the one firms already know. Fraud, drug trafficking, terrorist financing, sanctions evasion, and proliferation finance remain central concerns, but Treasury is making clear that digital assets, AI, encrypted communications, and social media are changing how those threats are executed, scaled, and concealed. The separate GENIUS Act report reinforces that point by highlighting blockchain analytics, digital identity, and other technologies that can improve detection and intervention.
For financial institutions, the message is that financial crimes programs will increasingly be judged by how well they work across digital channels, not just by whether policies exist on paper. That points to several near-term actions: refresh AML, sanctions, proliferation finance, and fraud risk assessments; review direct and indirect digital-asset exposure across KYC, screening, investigations, and third-party or MSB oversight; and pressure-test escalation and information-sharing workflows for typologies that cut across fraud, cyber, sanctions, and money laundering.
The renewed GTO makes that priority more immediate. It shows that Treasury and FinCEN remain focused on the intersection of geography, cash, and MSB networks, and are prepared to use targeted reporting tools where they want more visibility than standard thresholds provide. For MSBs and the banks that serve them, that means reviewing CTR workflows, data capture, agent oversight, and training for the expanded reporting band and for shifts in structuring or transaction patterns around the $1,000-to-$10,000 range.
On our radar
SEC clarifies application of securities laws to crypto assets. On March 17th, the SEC issued an interpretation outlining how federal securities laws apply to certain crypto assets and related transactions, with the CFTC joining to signal aligned oversight under the Commodity Exchange Act. The interpretation introduces a token classification framework and clarifies the treatment of activities such as staking, airdrops, and tokenized assets, as well as when crypto assets may fall within or outside the definition of an investment contract.
CFTC staff issues FAQs on crypto asset and blockchain-related activities. On March 20th, the CFTC’s Market Participants Division and Division of Clearing and Risk published FAQs addressing registrant and registered entity activities involving crypto assets and blockchain technologies.
CFTC and MLB formalize cooperation on prediction markets. On March 19th, the CFTC and Major League Baseball announced a first-of-its-kind MOU establishing a framework to share information and coordinate on issues related to prediction markets tied to professional baseball.
FHFA updates insurance requirements for Government Sponsored Enterprise mortgages. On March 18th, the FHFA announced changes to insurance requirements for loans backed by Fannie Mae and Freddie Mac, including permitting actual cash value (ACV) coverage for roofs and simplifying deductible rules for condo properties. The updates are intended to reduce insurance costs and expand mortgage accessibility, particularly for condo buyers and borrowers in higher-cost or rural insurance markets.
FHFA reinstates grandfather exceptions under private transfer fee covenant rules. On March 17th, the FHFA issued a final rule amending its Private Transfer Fee Covenants (PTFC) Regulation to reinstate certain grandfathering provisions that had been removed in prior amendments. The technical update is intended to clarify applicability and address unintended consequences for stakeholders that relied on the original exceptions, with retroactive applicability to July 16, 2012. The rule is effective March 17, 2026.
SEC proposes updates to quotation requirements for certain securities. On March 19th, the SEC published a proposed rule to revise information gathering and review requirements for broker-dealers before initiating or resuming quotations in over-the-counter markets. The proposal would limit the scope of Rule 15c2-11 to equity securities, clarifying its application and reducing compliance burdens for non-equity instruments. Comments are due May 18th, 2026.
Prudential Regulation Authority (PRA) consults on targeted reforms to strengthen liquidity resilience. On March 17th, the Bank of England’s PRA published a consultation paper proposing updates to its liquidity framework including enhanced stress testing for rapid outflows, removal of certain exemptions for monetisation testing of high-quality assets, and clearer expectations on the use of central bank facilities. Comments are due by June 17th.
FDIC rescinds policy on private capital participation in failed bank acquisitions. On March 19th, the FDIC approved the rescission of its 2009 Statement of Policy on Qualifications for Failed Bank Acquisitions, which had imposed additional conditions on private investors participating in bank resolutions. The action is intended to remove barriers to nonbank participation and enhance competition in the bidding process.
DOL restores ERISA fiduciary framework following court vacatur of 2024 rule. The Department of Labor removed its 2024 Retirement Security Rule from the Code of Federal Regulations after federal courts vacated the rule, reinstating the longstanding five-part test for determining investment advice fiduciary status under ERISA. The department indicated it does not plan to pursue near-term rulemaking and will consider whether additional guidance or transitional relief is warranted.
Footnotes:
1The categories of the Fed’s tailoring framework are defined here.
2Method 1 is based on the Basel GSIB framework using global systemic indicators. Method 2 is the U.S.-specific GSIB surcharge methodology, which applies different weights to certain factors, including short-term wholesale funding, and has typically produced higher and binding surcharges for U.S. GSIBs.
Our Take: financial services regulatory update – March 20, 2026
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