Our Take: financial services regulatory update

Change remains a constant in financial services regulation

Read "our take" on the latest developments and what they mean.

Fed hosts capital conference

What happened? On July 22^nd, the Fed hosted a conference to discuss the U.S. capital framework for large banks, including the enhanced supplementary leverage ratio (eSLR), the global systemically important bank (GSIB) surcharge, stress testing, the Basel III endgame proposal.

What was discussed?

Leverage ratio:
- The panel on leverage ratio reform raised the question of whether it still serves a distinct policy function in a framework that has added multiple risk- and stress-based requirements. Some panelists argued that it remains a critical safeguard against model risk but agreed that it should be reformed to not be a binding constraint.
- Participants generally supported the Fed’s eSLR proposal, replacing the flat 2% add-on with a buffer equal to 50% of each firm’s Method 1 GSIB surcharge.¹ The proposed structure was viewed as better aligned with the resolution framework and more likely to reduce constraints on low-risk, balance sheet–intensive activities such as Treasury intermediation, repo, and custody.
- Panelists debated whether to exempt central bank reserves and Treasuries held in dealer books from the eSLR with some noting that targeted relief could improve market functioning in periods of stress, while others raised concerns that U.S. exemptions could prompt other jurisdictions to remove sovereign debt from their leverage requirements.
GSIB surcharge:
- The two methods used in the U.S. to calculate the GSIB surcharge were the focus of discussion. Several noted that Method 2, which is only applied in the U.S. has become more sensitive to balance sheet size and short-term funding activity than Method 1, leading to surcharge volatility that may not reflect underlying changes in risk.
- Several panelists noted that GSIB surcharges for U.S. firms remain higher than those of global peers and raised concerns that this puts U.S. institutions at a structural disadvantage.
- Panelists emphasized that the framework should avoid penalizing diversification or business model scale. There was support for reweighting key indicators, smoothing sharp increases as firms cross certain thresholds (i.e. cliff effects), and creating a formal process for recalibration – including reviewing how the surcharge interacts with the broader capital stack. Some participants also called for linking the size component of the GSIB score to macroeconomic measures – such as GDP – to prevent natural growth in the banking system from inflating surcharges over time.
Stress testing:
- Participants reaffirmed stress testing as an important tool while emphasizing the need for greater transparency, earlier scenario engagement, and improved alignment with firm-level risk views. Several called for the Fed to clarify the logic of key modeled assumptions and scenario construction, particularly in areas like pre-provision net revenue (PPNR) and operational risk.
- There was general support for the Fed’s proposal to average stress results over two years when setting stress capital buffers (SCBs) – reducing volatility and enabling firms to hold smaller management buffers – but panelists broadly agreed that this was only a first step.The conference also surfaced a deeper debate over whether the SCB should remain a binding standardized minimum capital Pillar 1 requirement across the industry – as it is in the U.S. – or be repositioned as a supervisory Pillar 2 requirement,² following the UK model. While some panelists raised the idea of shifting the SCB to a Pillar 2 supervisory tool, the prevailing view supported keeping it as a binding Pillar 1 requirement – citing the importance of transparency, comparability, and capital planning discipline across firms.
Basel III endgame:
- Panelists broadly criticized the Basel III endgame proposal as overly punitive and insufficiently attentive to interactions across the capital stack. Several noted that standardized capital charges for market, credit, and operational risk overlap with modelled losses already captured in the SCB. It was noted that, for certain products, capital requirements can exceed the amount of the exposure when standardized risk weights and stress test add-ons are accounted for, demonstrating the need for the two processes to be aligned and recalibrated.
- Some noted that a lack of coordination between standardized capital rules and stress test requirements is already leading banks to reduce certain portfolios or exit business lines, moving activities to nonbank financial institutions.
- A potential solution discussed was a two-stack capital approach, whereby the SCB is part of a standardized capital stack and the enhanced risk-based approach (ERBA) proposed in Basel III endgame does not incorporate the SCB.
- Others pointed to elements of the proposal that go beyond international norms, including minimum haircut floors, and listing requirements for investment grade treatment, and gold plating of risk weights.
- Many called for a reproposal that aligns more closely with global implementation timelines, simplifies treatment of risk charges that overlap across requirements, and clarifies how standardized and stress-based components are expected to work together.

What’s next? Comments on the eSLR proposal are due by August 25^th, and the Fed is expected to issue a follow-up proposal on stress testing transparency and scenario design by September 30^th.

Our Take

A new era of regulatory engagement

The Fed’s capital conference signalled a shift toward more open, sustained engagement with industry, an approach that will shape the next phase of capital reform. It provided a public forum to evaluate how different aspects of the capital framework interact and consider ways to balance maintaining safety and soundness without constraining economic growth and critical market functions, such as custody and Treasury market intermediation. The discussion demonstrated that current requirements are due for change and future rulemakings will reflect a more holistic view of the capital framework – prioritizing coordination across requirements and reducing duplicative charges. Based on their remarks at the conference, the leaders of the banking agencies are committed to not just finalizing individual rules, but to bring cohesion and consistency across the broader capital regime. In addition, while it was not a focus of the conference, we expect the regulators to maintain tailoring to size and complexity as a core principle of supervision and regulation.

In terms of the specific reform efforts:

A structural eSLR fix that leaves deeper questions unanswered

The eSLR proposal is likely to be finalized largely as proposed, but the lively discussion at the conference showed that deeper questions remain unresolved. Although the Fed left the door open to excluding Treasuries and central bank deposits, the lack of consensus and prior statements by Fed governors suggest that this element may not be added to the final rule.

Calls to modernize the GSIB surcharge are growing harder to ignore

The Fed has not raised potential GSIB surcharge reforms since some were proposed alongside Basel III endgame – but the case for revisiting its mechanics is gaining traction. Method 2 continues to drive outsized volatility and capital add-ons for firms whose size and funding profiles do not align cleanly with systemic risk. At the conference, several participants flagged the need to modernize inputs and measure over the course of the year – particularly to address the distortions created by year-end window dressing. While statutory constraints may limit how far the Fed can go, there is clear room to improve risk alignment by smoothing scoring increments, revisiting outdated calibration assumptions, and adopting multi-period exposure measures.

Stress testing transparency will define the next phase

Averaging SCB results is a useful first step but alone is not sufficient to solve issues with volatility or improve planning unless paired with other structural changes. Firms continue to lack clarity on key Fed model assumptions, loss channels, and how stress scenarios are constructed. The Fed’s anticipated rulemaking on stress testing transparency will be the most consequential development for capital planning in years. If done well, it could enable enhanced Fed models to better reflect bank’s current risk profiles and reduce unexplained differences in capital consumption that create issues in balance sheet allocation strategies. Given the consensus that a transparent, improved stress testing process is more desireale than opaque Pillar II approach, we expect the SCB to remain in Pillar I.

Getting closer to a Basel III endgame reproposal

Momentum is building for a reproposal of Basel III endgame – driven by the need to resolve structural overlap across the capital stack and restore alignment with global standards. Regulators appear increasingly receptive to the industry consensus that the final rule should avoid raising aggregate capital levels and should not exceed the standards implemented in other jurisdictions. A reproposal that achieves international consistency and avoids duplicative charges would preserve credibility while reducing complexity – and send a strong signal that capital reform is being done with purpose, not in isolation.

Crypto legislation advances as agencies clarify risks

What happened? The following notable events took place regarding digital assets over the past two weeks:

On July 14^th, the Fed, OCC and FDIC issued a joint statement on risk management considerations around crypto asset safekeeping.
On July 17^th, the House voted 308-122 to pass the GENIUS Act, which establishes a regulatory framework for “payment stablecoins,” digital assets that (1) are designed to be used for payment or settlement; (2) are convertible to a fixed amount of monetary value; and (3) do not pay yield or interest. President Trump signed the GENIUS Act into law on July 18^th.
Also on July 17^th, the House voted 294-134 to pass the CLARITY Act, which defines digital asset regulatory jurisdiction for the SEC and CFTC and requires the agencies to pass rules and issue guidance around consumer protection and safety and soundness.
On July 22^nd, the Senate Banking Committee released a discussion draft of digital asset market structure legislation, which is intended to build upon the CLARITY Act and would further define digital asset oversight, direct the SEC to tailor existing requirements for digital assets, create examination standards for digital assets, and create disclosure requirements.

What does the GENIUS ACT contain? The Act provides a regulatory framework for stablecoin issuers and outlines requirements for financial stability and consumer protection.

The Act provides the following licensing and oversight framework for stablecoin issuers:
- Subsidiaries of insured depository institutions must receive approval and then oversight by their primary federal regulator (e.g., the Fed, FDIC or OCC).
- Nonbanks that are not engaged in financial services would need to obtain a unanimous vote from the Stablecoin Certification Review Committee, which will consist of the Treasury Secretary as Chair, the Fed Chair (or Vice Chair for Supervision if designated by the Fed Chair), and the FDIC Chair. To approve the application to become a permitted payment stablecoin issuer, the Committee must find that the nonbank issuer (1) does not pose a material risk to safety and soundness and (2) will comply with data use requirements.
  - To be approved as a federal qualified nonbank issuer, OCC approval and oversight would be required.
  - Entities also may opt to be a state-qualified payment stablecoin issuer - an entity established under the laws of a state that has been approved by a state payment stablecoin regulator to issue payment stablecoins and is not an uninsured national bank, federal branch, insured depository institution, or a subsidiary. Certain small state issuers may be allowed to opt for state supervision, although federal banking agencies would retain backup enforcement authority.
The GENIUS Act also contains a broad set of requirements around areas such as consumer protection and safety and soundness, including maintenance of reserves on a 1:1 basis, disclosure requirements, capital and liquidity requirements, AML expectations and consumer protection standards.

What does the CLARITY Act contain? The Act outlines regulatory jurisdiction for digital assets and contains other requirements including those around disclosures and consumer protection.

Digital assets are subject to oversight by the following agencies:
- The CFTC will oversee “digital commodities,” which the CLARITY Act defines as “a digital asset intrinsically linked to a blockchain system, and its value is derived from…the use of the blockchain system.” Most non-stablecoin crypto assets such as Bitcoin and Ethereum would fall under this definition;
- The SEC will oversee tokens that constitute investment contracts such as capital raising activities that offer investors an ownership stake in a digital asset project; and
- Banking regulators will oversee payment stablecoins consistent with the GENIUS Act outlined above.
Other notable provisions of the CLARITY Act include requirements around registration, disclosure and consumer protection.

What does the market infrastructure discussion draft contain? The draft defines “ancillary assets” as assets that are not securities but are sold in connection with the purchase and sale of a security through an investment contract. Ancillary assets would not be subject to SEC registration but would be subject to disclosure requirements to be implemented by the SEC. The draft also clarifies authorized bank activity, calls upon the banking agencies to develop capital requirements for digital assets and directs Treasury to develop an examination process for reporting, AML and sanctions compliance related to digital assets.

What does the joint statement on risk management considerations say? The joint statement explains that banks should perform a risk assessment that incorporates (1) the bank’s core financial risks; (2) its ability to understand the asset class; (3) its ability to ensure a strong control environment; and (4) contingency plans. It also highlights the need for secure cryptographic key management practices as well as issues stemming from illicit finance risk, regulatory risk and third-party risk.

What’s next? The GENIUS Act will take effect on the earlier of 1) 18 months after it is enacted or 2) 120 days after final regulations are issued – which must be done within a year of enactment.

The CLARITY Act will need to be passed by the Senate before moving to the President’s desk for signature.

Our Take

Stablecoin clarity is here

The GENIUS Act being signed into law will have immediate impacts across a range of market participants, including:

Current stablecoin issuers must now assess whether they qualify under the GENIUS Act as well as their abilities to meet new requirements such as 1:1 reserve backing, independent attestation, operational resilience, and consumer protection.
Non-banks looking to become stablecoin issuers have several options available, each with its own set of benefits and drawbacks. For more details on pros and cons associated with national bank charters, state bank charters, trust charters, acquisitions, and applying as a nonbank issuer, see our recent publication Regulatory clarity for digital assets: GENIUS and CLARITY Acts set the path forward.
Banks looking to become stablecoin issuers will need a clearly defined strategy to guide them, taking into account expected transformation and costs associated with introducing new or enhanced capabilities to support risk management, compliance, operations and technology.
Even those organizations with no current plans to engage with digital assets may be impacted. All firms should assess their exposure to digital assets through vendors, customers, payment rails, and tokenized financial products as stablecoins are poised to impact treasury operations, liquidity, and settlement infrastructure across the broader financial system.

Clarity paves the way for longer-term digital asset strategies

We expect that the Senate will pass a reconciled CLARITY Act and it will be signed into law by the President in the near future. While certain areas will require additional clarification and rulemaking, traditional financial institutions are now positioned to operationalize their digital asset strategies. This includes:

Tokenizing real-world assets, including money market funds, treasuries, commercial paper, structured products, and other traditionally illiquid instruments;
Launching pilots and proofs-of-concept across capital markets, custody, payments and collateralization workflows; and
Accelerating partnerships between incumbents and digital asset firms, especially those with experience building on public blockchain networks, must prepare for enhanced disclosure and registration as defined by the CLARITY Act.

New technologies, new risks

As evidenced by the banking agencies’ statement, firms need to be aware of the risks stemming from new products and services and develop strategies to mitigate them. Key areas of focus include:

Financial crime. With FinCEN guidance potentially years away, firms should in the meantime ensure they are using blockchain analytics tools to detect suspicious transactions or the use of on-chain obfuscation methods such as mixers, as well as putting into place and administering core elements of an AML program.
Cybersecurity. Firms should ensure their cyber programs are tailored to the risks associated with digital assets and have staff with expertise in private keys and cryptography.
Third-party risk. Firms should maintain or build sufficient technical expertise to conduct appropriate due diligence on new types of third-party service providers, know whether third parties are using subcontractors, and assess their concentration risk in critical vendors.
Liquidity risk. Bank liquidity risk management frameworks will need to adapt to the risks that digital asset products create. Robust capabilities for real-time intraday liquidity monitoring and new scenarios for liquidity stress tests to account for digital asset shocks will become table stakes. Liquidity managers must also consider near-term impacts to deposit stability as stablecoins and other digital assets create an attractive alternative for their existing deposit base.

On our radar

These notable developments hit our radar recently:

White House publishes AI plan. On July 23^rd, the White House released America’s AI Action Plan, outlining a whole-of-government strategy intended to assure U.S. dominance in artificial intelligence (AI). The Action Plan builds on Executive Order 14179 and proposes aggressive policy shifts across federal funding, workforce development, export controls, and federal adoption. The plan directs agencies including the financial services regulators to review and revise any existing rules, guidance, or enforcement actions that may inhibit AI innovation.

Agencies propose rescinding 2023 CRA final rule. On July 16^th, the FDIC, Fed, and OCC formally proposed to rescind the Community Reinvestment Act (CRA) final rule adopted in October 2023. The agencies intend to revert to the prior CRA regulations issued in 1995 with certain technical amendments. Comments on the proposal are due 30 days after publication in the Federal Register.

FinCEN to delay IA AML rule implementation. On July 16^th, FinCEN announced plans to postpone the effective date of its final rule requiring Anti-Money Laundering/Countering the Financing of Terrorism programs and Suspicious Activity Report filings for registered investment advisers and exempt reporting advisers. The effective date will be delayed from January 1, 2026, to January 1, 2028. FinCEN also plans to revisit the scope of the rule in a future rulemaking.

CFTC withdraws advisory on prime brokerage arrangements. On July 18^th, the CFTC’s Division of Clearing and Risk withdrew Staff Advisory Letter No. 23-06, which had addressed potential derivatives clearing organization (DCO) registration requirements for certain prime brokerage arrangements involving centralized credit intermediation. The withdrawal reflects the agency’s intent to reassess the application of registration requirements in these contexts.

Agencies seek further comment on efforts to reduce regulatory burden. On July 21^st, the FDIC, Federal Reserve Board, and OCC issued a joint request for public comment under the Economic Growth and Regulatory Paperwork Reduction Act. The agencies are reviewing regulations in three remaining categories: Banking Operations, Capital, and the CRA. The request is open for 90 days.

House panel advances bipartisan bills to modernize financial supervision. On July 23^rd, the House Financial Services Committee (HFSC) voted to advance multiple bills: The Tailored Regulatory Updates for Supervisory Testing Act would raise the threshold for extended 18-month examination cycles from $3 billion to $6 billion in total assets for qualifying FDIC-insured institutions; The Bringing the Discount Window into the 21^st Century Act would require the Fed to review and improve discount window operations; The American Access to Banking Act would direct federal banking and credit union regulators to promote de novo formation of financial institutions through streamlined applications, capital access support, and outreach efforts; The FDIC Board Accountability Act would convert the CFPB director’s FDIC board seat into a non-voting role and impose a two-term limit on FDIC board members; and the Stop Agency Fiat Enforcement of Guidance Act would require financial regulatory agencies to include clarity statements when issuing nonbinding guidance.

_{¹ Method 1 calculates a GSIB surcharge based on five systemic indicators relative to U.S. peers. Method 2 uses the same indicators but applies different weightings and includes a short-term wholesale funding metric. Banks are subject to the higher of the two.}

_{² The Basel framework contains three pillars of capital regulation. Pillar 1 establishes standardized, binding capital requirements that apply uniformly across firms. Pillar 2 allows supervisors to impose firm-specific expectations based on risk profile, governance, or other supervisory judgment. Pillar 3 promotes market discipline through public disclosure of risk and capital metrics.}