CRS Report On Basel Endgame

Bank Capital Requirements: Basel III
Endgame
November 30, 2023
Congressional Research Service

https://crsreports.congress.gov
R47855
SUMMARY
R47855
Bank Capital Requirements: Basel III Endgame
November 30, 2023
Setting bank capital requirements is an iterative process. Requirements have repeatedly been
tweaked over the decades as problems emerge or policy priorities change. For example, in 2013 Marc Labonte
U.S. regulators began implementing what is known as Basel III, a new capital framework aimed Specialist in
at addressing many of the issues believed to precipitate the global financial crisis. The latest Macroeconomic Policy
recommendations of the Basel Committee on Banking Supervision (BCBS) were finalized in
2017. These recommendations fill in some of the more technical details of Basel III and are
Andrew P. Scott
sometimes colloquially referred to as the Basel III Endgame.
Analyst in Financial
Economics
On July 27, 2023, the federal banking regulators—the Office of the Comptroller of the Currency
(OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve (Fed)—
jointly issued a proposed rule that would revise large bank capital requirements. In addition to
implementing the Basel III Endgame, the proposal would implement some of the
recommendations that Fed Vice Chair Michael Barr proposed in a previous holistic capital review and respond to issues that
arose when three banks with over $100 billion in assets failed in 2023. The proposal would apply to banks with over $100
billion in assets. According to the proposal, its purpose is to improve the consistency of capital requirements across banks,
better match capital requirements to risk, reduce their complexity, and improve transparency of banks’ financial conditions
for supervisors and the public.
In the United States, the largest banks calculate their requirements using two methods: a standardized approach applicable to
all banks and a specialized advanced approach that allows the banks to model many of their own risks. Although internal
models can potentially be “gamed” (i.e., designed in a way to allow a bank to hold less capital rather than accurately measure
risk), they can also model risk more sophisticatedly and be more tailored to a bank’s unique risk profile. Following the Basel
III Endgame, the proposed rule would reduce the use of internal models through a new second standardized approach for
advanced approaches banks called the expanded risk-based approach. Other banks with over $100 billion in assets would be
required to calculate risk-weighted assets under two approaches for the first time. Despite the regulators’ intentions, many
within the industry have criticized this dual approach to capital requirements as unduly burdensome.
The proposal would also require banks with over $100 billion in assets to include unrealized capital gains and losses on
certain securities in their capital levels. Unrealized capital losses were one of the primary causes of Silicon Valley Bank’s
failure. The proposal would also extend two capital requirements—the supplementary leverage ratio and countercyclical
capital buffer—to all banks with over $100 billion in assets.
One criticism of the proposal is that it is not capital neutral but, rather, would require subjected banks to hold more capital.
Although the proposal does not raise required capital ratios, the regulators estimate that its effect on risk-weighted assets
would increase the average binding CET1 capital level large banks are required to hold by 16%. Note that (1) this estimate is
an average, and the effects on any particular bank would differ; and (2) this is an estimate based on past data—the actual
effect would depend on future actions by the banks, including how they responded to the rule. The proposal would have a
larger capital effect on trading activities than on lending, and it is estimated to have the largest effect on globally systemically
important banks.
Concerns about how specific changes to risk weights affect specific asset classes have also been raised, along with a few
other criticisms. Critics have argued that (1) the proposal (and existing requirements) has “gold-plated” Basel provisions,
such as risk weighting for residential mortgages, making them more stringent than the BCBS agreements; (2) the proposal is
largely not tailored to reflect differences in risk and complexity among large banks; and (3) regulators have not provided the
public with enough information on the basis for the specific details of the requirements.

Contents
Introduction ..................................................................................................................................... 1
Basel III Endgame ..................................................................................................................... 2
Holistic Capital Review ............................................................................................................ 3
Bank Failures ............................................................................................................................ 3
The Joint Large Bank Capital Proposed Rule ................................................................................. 4
Scope and Timing...................................................................................................................... 4
Changes to Risk Measurement .................................................................................................. 6
Credit Risk .......................................................................................................................... 6
Securitization Framework ................................................................................................... 7
Equity Risk ......................................................................................................................... 7
Operational Risk ................................................................................................................. 7
Market Risk......................................................................................................................... 7
Standardized Output Floor .................................................................................................. 8
Stress Capital Buffer ........................................................................................................... 8
Disclosure Requirements .................................................................................................... 8
Changes to the Definition of Capital, Including AOCI ............................................................. 8
Concerns About Specific Aspects of the Proposal .................................................................. 10
Tax Equity .......................................................................................................................... 11
Residential Mortgages ....................................................................................................... 11
Capital Markets Activities................................................................................................. 12
Fee-Based Activities ......................................................................................................... 12
Economic/Capital Impact ........................................................................................................ 12
Policy Issues .................................................................................................................................. 14
“Gold-Plating”......................................................................................................................... 15
Standard Rules vs. Internal Models......................................................................................... 15
Overlapping Approaches ......................................................................................................... 16
Capital Neutrality .................................................................................................................... 16
Tailoring .................................................................................................................................. 17
Transparency ........................................................................................................................... 18
Figures
Figure 1. Unrealized Gains and Losses on Securities Held by FDIC-Insured Depository
Institutions .................................................................................................................................. 10
Tables
Table 1. Estimated Impact of Proposed AOCI Inclusion on Capital ............................................. 13
Contacts
Author Information........................................................................................................................ 19

Introduction
On July 27, 2023, the federal banking regulators—the Office of the Comptroller of the Currency
(OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve (Fed)—
jointly issued a proposed rule that revises large bank capital requirements.1 The proposal (1)
implements the so-called Basel III Endgame (the regulators’ final phase of regulations intended to
implement policy consistent with the latest recommendations of the Basel Committee on Banking
Supervision [BCBS]),2 (2) implements some of the recommendations that Fed Vice Chair
Michael Barr proposed in his “holistic capital review,”3 and (3) responds to issues that arose in
the 2023 large bank failures.4
This report focuses on summarizing and analyzing the proposal, and it assumes the reader has
some familiarity with bank regulation and capital standards. The textbox below provides basic
background on these issues. For further background, see CRS Report R47447, Bank Capital
Requirements: A Primer and Policy Issues, by Andrew P. Scott and Marc Labonte.
What Are Bank Capital Requirements?

A bank’s balance sheet is split between ways to make money (i.e., assets such as loans, securities investments) and
ways to fund those opportunities (i.e., liabilities such as deposits and debt, and capital such as owner equity). For
accounting purposes, the bank’s capital will always equal its assets minus its liabilities. To remain solvent—that is,
to maintain a positive amount of capital—a bank must not allow its liabilities to exceed its assets. Banks have a
legal obligation to repay deposits and debt liabilities, but they can choose not to make payments to shareholders
and other capital sources, making it a valuable means for equalizing the balance sheet if an asset the bank owns
loses value. In other words, if a bank’s assets lose value, the bank can reduce the value of its capital to
compensate, thus retaining the capacity to repay its liabilities.
State and federal bank regulators take a number of measures to ensure the financial health of banks, generally
through what is referred to as prudential (or safety and soundness) regulation—rules and standards put in place to
mitigate risks associated with banking activity. One way that regulators ensure banks operate in a safe and sound
manner is by establishing capital requirements that banks must meet. Bank capital serves as a layer of protection
against losses, and in doing so it promotes public confidence in banking institutions. Regulators do this in part
because when banks fail, the federal government provides a financial safety net to protect depositors and the
broader economy from losses.
Capital requirements are statutorily mandated, but statute provides the regulators with discretion to set them as
“deem(ed) to be necessary and appropriate”—although Congress has occasionally intervened legislatively to
modify specific rules or details. Capital rules are set through regulation by the federal bank regulators, and many
are modeled off international agreements made by the members of the BCBS, which include U.S. regulators.
1 The proposal was published in the Federal Register on September 18, 2023. OCC, Federal Reserve, and FDIC,
“Regulatory Capital Rule: Amendments Applicable to Large Banking Organizations and to Banking Organizations
with Significant Trading Activity,” 88 Federal Register 64028, September 18, 2023, https://www.govinfo.gov/content/
pkg/FR-2023-09-18/pdf/2023-19200.pdf. A summary, fact sheet, and overview are available at
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230727a.htm. On July 27, the Fed issued a separate
proposed rulemaking that would revise the calculation of the capital surcharge for G-SIBs (Category I banks). That
proposal is beyond the scope of this report and can be found at Board of Governors of the Federal Reserve System,
Regulatory Capital Rule: Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies;
Systemic Risk Report (FR Y-15), July 27, 2023, https://www.federalregister.gov/documents/2023/09/01/2023-16896/
regulatory-capital-rule-risk-based-capital-surcharges-for-global-systemically-important-bank-holding.
2 BCBS, Basel III: Finalising Post-Crisis Reforms, December 2017, https://www.bis.org/bcbs/publ/d424.pdf.
3 See Fed Vice Chair for Supervision Michael S. Barr, “Holistic Capital Review,” speech at the Bipartisan Policy
Center, July 10, 2023, https://www.federalreserve.gov/newsevents/speech/barr20230710a.htm.

4 See CRS Insight IN12125, Silicon Valley Bank and Signature Bank Failures, by Andrew P. Scott and Marc Labonte.
Congressional Research Service 1

There are two major types of capital requirements: Risk-weighted capital requirements are based on risk-weighted
assets (RWA), which relate how much capital is required to the riskiness of the bank’s assets, whereas leverage
requirements are generally based on total assets irrespective of the riskiness of those assets.
Capital requirements are expressed as a minimum ratio of capital to assets. For risk-weighted requirements
𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑎𝑡𝑖𝑜 =
𝑟𝑖𝑠𝑘 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠
Banks must hold enough capital for their capital ratios to meet or exceed the required minimum. For example,
banks are required to hold Tier 1 capital equal to 8% of RWA to be well-capitalized. A bank that had RWA equal
to $100 would thus be required to hold $8 of Tier 1 capital.
The reason regulators use RWA in addition to total assets is because some types of assets are inherently riskier
than others. Without risk weighting, banks would have an incentive to hold riskier assets, as the same amount of
capital must be held against riskier and safer assets. But risk weights could also prove inaccurate. For example,
banks held highly rated mortgage-backed securities before the 2008 financial crisis in part because those assets had
a higher expected rate of return than did other assets with the same risk weight. These securities then suffered
unexpectedly large losses during the crisis. Thus, leverage ratios, which are based on balance sheet size rather
than risk, can be thought of as a backstop to ensure that incentives posed by risk-weighted capital ratios do not
result in a bank holding insufficient capital. Many parts of the Basel Endgame proposal would modify specific rules
on how RWA are calculated for large banks.
Basel III Endgame

Forty-five bank regulators worldwide, including those in the United States, formulate and agree
to apply generally consistent bank capital requirements through an international standard-setting
body called the Basel Committee on Banking Supervision. While the Basel frameworks (also
referred to as “accords”) have no legal force in the United States, it is helpful to understand the
BCBS approach because domestic regulators have chosen to closely align their rules—which are
implemented through the notice-and-comment rulemaking process pursuant to the Administrative
Procedure Act—with these frameworks. This choice is arguably predictable given that members
of the BCBS negotiate the rules together and that U.S. bank regulators are, as the representatives
from the world’s largest economy and financial system, influential members. As such, BCBS
standards likely reflect, at least in part and possibly significantly, the views and preferences of the
U.S. regulators.
Setting capital requirements through Basel is an iterative process—requirements have repeatedly
been tweaked over the decades as problems emerge or policy priorities change, with three
landmark revisions (known as Basel I, II, and III). In 2010, the BCBS issued new prudential
standards to address problems exposed by the 2008 financial crisis, revising and updating the
Basel II standards. These new standards came to be known as Basel III. Some of the more
technical details were filled in later when the BCBS agreed on and issued the final major set of
Basel III standards in December 2017. As with Basel III generally, many of the details in the 2017
proposal were in response to problems that arose during the financial crisis. This last round of
Basel III reforms is sometimes colloquially referred to as the Basel III Endgame. According to the
BCBS
A key objective of the revisions … is to reduce excessive variability of risk-weighted assets
(RWAs) … [and] help restore credibility in the calculation of RWAs by: (i) enhancing the
robustness and risk sensitivity of the standardised approaches for credit risk and operational
risk, which will facilitate the comparability of banks’ capital ratios; (ii) constraining the
use of internally-modelled approaches; and (iii) complementing the risk-weighted capital
ratio with a finalised leverage ratio and a revised and robust capital floor.5
5 BCBS, Basel III.

The recent U.S. proposal would implement all of these changes except the revision to the
leverage ratio, which is being addressed through separate rulemaking.6 With the issuance of the
proposed rule, U.S. regulators are now on par with some other major economies but still lagging
behind others in implementing the Basel III Endgame provisions.7
Basel participants are committed to applying Basel standards to internationally active banks (a
subset of large banks), and U.S. regulators have applied some—but not all—of the standards to
all domestic banks. Divergence between U.S. capital standards and the Basel III agreements
broadly comes in the form of either allowing small banks to opt out of Basel III requirements or
imposing more stringent requirements on large banks. As a result of this divergence, all U.S.
banks calculate their RWA using the standardized approach, and the largest, most systemically
important, and internationally active U.S. banks are also currently required to calculate RWA
using advanced approaches. The more complex advanced approaches are determined using
internal models specific to each bank, referred to as the “internal ratings-based approach” to
calculating RWA. Advanced approaches banks must calculate the two different ratios required of
both approaches: capital/standardized approach RWA and capital/advanced approaches RWA. To
determine whether they meet their minimum requirements, advanced approaches banks are
required to apply the lower of their two ratios to their capital requirements.
Holistic Capital Review

In 2022, Fed Vice Chair Barr announced a “holistic review of capital standards” for large banks,
which he described as “not looking only at each of the individual parts of capital standards, but
also at how those parts may interact with each other—as well as other regulatory requirements—
and what their cumulative effect is on safety and soundness and risks to the financial system.”8
One motivation for the review was to evaluate whether policy goals are still achieved given the
interaction of multiple large bank capital requirements. In a speech in July 2023, he announced
the outcome of that review, which resulted in recommendations for future rulemakings.9 Barr did
not recommend fundamental changes in large bank capital requirements and announced that
several requirements would not be changed at all. He highlighted implementation of the Basel III
Endgame as “an important aspect of my proposals,” and the rule significantly modifies various
aspects of how large banks calculate their capital requirements.
Bank Failures
After experiencing zero U.S. bank failures in 2021 and 2022, the spring of 2023 witnessed the
second (First Republic), third (Silicon Valley Bank), and fifth (Signature) largest failures in
history as measured by asset size in nominal dollars.10 Combined, these failures are expected
ultimately to impose tens of billions of dollars of losses on the FDIC’s Deposit Insurance Fund.
To avoid a broader run on the banking system, the FDIC invoked the rarely used systemic risk
6 The United States implemented a fixed leverage buffer for all U.S. G-SIBs, unlike the tiered buffer agreed to in the
BCBS’s Endgame proposal. The United States proposed a rule in 2018 that would incorporate the BCBS leverage
proposal but has not finalized that proposal to date.
7 BCBS, “Basel Committee Reports on Basel III Implementation Progress,” press release, October 3, 2023,
https://www.bis.org/press/p231003.htm.
8 Vice Chair for Supervision Michael S. Barr, “Why Bank Capital Matters,” speech at the American Enterprise
Institute, December 1, 2022, https://www.federalreserve.gov/newsevents/speech/barr20221201a.htm.

9 Barr, “Holistic Capital Review.”
10 CRS analysis of data from FDIC, “BankFind Suite,” https://banks.data.fdic.gov/.

exception to guarantee all uninsured depositors at two of the banks.11 While the Basel III
Endgame agreement predates the failures, regulators have pointed to the failures as a rationale for
applying most elements of the proposed rule to banks with over $100 billion in assets. Each of the
three large banks that failed had over $100 billion in assets.
As will be discussed below, the role that unrealized losses on securities played in the failures may
have contributed to the proposed rule’s inclusion of those losses in regulatory capital for all banks
with over $100 billion in assets. That capital treatment was first proposed for all banks in 201212
but was not part of the 2017 BCBS Basel III Endgame document. Other factors that played a role
in their failures—such as rapid asset growth, reliance on uninsured deposits, supervisory
forbearance, and concentration risk—are not specifically addressed by the proposal.
The Joint Large Bank Capital Proposed Rule

The proposed rulemaking would revise the capital framework for large banking organizations.
The Acting Comptroller of the Currency approved the joint proposal, and the FDIC board voted
3-2 and the Fed’s board voted 4-2 for the joint proposal. The comment period was extended from
November 30, 2023, to January 16, 2024. The sections below summarize the scope of the
proposal and its technical provisions.
According to the proposal, its purpose is to improve the consistency of capital requirements
across banks, better match capital requirements to risk, reduce their complexity, and improve
transparency of banks’ financial condition for supervisors and the public.
Scope and Timing

The proposed rule applies to insured depository institutions (IDIs), which include commercial
banks and savings associations; bank holding companies (BHCs); savings and loan holding
companies that are not substantially engaged in insurance; and foreign banking organizations with
over $100 billion in assets (hereinafter, collectively referred to as “banks,” except where a
distinction is necessary). As of the date of the proposal, the total number of affected institutions
are 25 U.S. BHCs, 12 intermediate holding companies (IHCs) of foreign banks, and 62 IDIs
(including IDIs of holding companies with over $100 billion in assets).13
The proposal would replace advanced approaches with a new expanded risk-based approach and
extend those requirements to Category III and IV banks. Since the Fed’s 2019 rule implementing
the enhanced prudential regulation tailoring required by the Economic Growth, Regulatory
Relief, and Consumer Protection Act (EGRRCPA; P.L. 115-174, enacted May 24, 2018 and often
referred to by the bill number, S. 2155), only the nine Category I and II banks are required to use
advanced approaches, but any other bank may voluntarily opt in.14 (See the text box below for
more details on EGRRCPA and large bank categories.) Unlike the 2019 rule, however, most of
11 See CRS In Focus IF12378, Bank Failures: The FDIC’s Systemic Risk Exception, by Marc Labonte.
12 Federal Reserve, “Federal Reserve Board Invites Comment on Three Proposed Rules Intended to Help Ensure Banks
Maintain Strong Capital Positions,” press release, June 7, 2012, https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20120607a.htm.
13 A current list of large depository holding companies is available at https://www.ffiec.gov/npw/Institution/
TopHoldings. A current list of large commercial banks is available at https://www.federalreserve.gov/releases/lbr/

current/default.htm.
14 A current list of Category I-IV banks is available at Table A-1 in https://www.federalreserve.gov/publications/2023-
may-supervision-and-regulation-report-appendix-a.htm.

the proposed rule would also apply to IDIs that are not subsidiaries of holding companies.
Signature Bank did not have a holding company.
EPR Categories
A new enhanced prudential regulatory (EPR) regime for large banks administered by the Fed was created in the
post-crisis Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203). In 2018, EGRRCPA
made changes to EPR, including raising the asset threshold for EPR from $50 billion to $250 billion in assets, with
Fed discretion to apply EPR standards to banks with $100 billion to $250 billion in assets. In 2019, the Fed (jointly
with the OCC and FDIC for some provisions) implemented changes included in EGRRCPA through rulemaking
that placed large banks in one of four categories based on their size and complexity and imposed progressively
more stringent requirements upon them.15 Category I banks are subject to the most stringent requirements, and
Category IV banks are subject to the least. Category I banks are those that have been designated as Globally
Systemically Important Banks (G-SIBs). Category IV banks are those with between $100 billion and $250 billion in
assets that do not meet other metrics of systemic importance. Capital requirements applicable to large banks,
including the ones discussed in this report, are applied based on these categories.
For a discussion of EPR requirements, see CRS Report R46779, Over the Line: Asset Thresholds in Bank Regulation, by
Marc Labonte and David W. Perkins.
In addition, the market risk provisions (described below) would apply to banks with $100 billion
or more in total assets or $5 billion or more of trading assets plus trading liabilities (increased
from $1 billion or more under current regulation) or trading assets plus trading liabilities equal to
10% or more of total assets (unchanged from current regulation).
Under the proposal, Category IV banks would also be subject to the countercyclical capital buffer
and the supplementary leverage ratio (SLR). Currently Category I-III banks are subject to the
countercyclical buffer, which requires large banks to hold more capital than other banks when
regulators believe that financial conditions make the risk of losses abnormally high. In normal
times, the countercyclical buffer is to be set at zero, but in high-risk circumstances, it could be set
as high as 2.5%.16 In practice, it has always been set at zero since inception but could potentially
be raised in the future.
Currently, Category II and III banks must meet a 3% SLR, and Category I banks must meet a
higher SLR. Under the proposal, Category IV banks would also have to meet an SLR equal to 3%
of Tier 1 capital/(total assets+off-balance sheet exposures). Like the leverage ratio, the SLR uses
Tier 1 capital in the numerator and unweighted assets in the denominator. The difference between
the leverage ratio and the SLR is that the SLR includes off-balance-sheet exposures in the
denominator. Thus, the numerator is the same, but the denominator is larger. The SLR is intended
to ensure that the bank is adequately safeguarded against off-balance-sheet losses that are not
captured in the leverage ratio.
15 Federal Reserve, “Federal Reserve Board Finalizes Rules That Tailor Its Regulations for Domestic and Foreign
Banks to More Closely Match Their Risk Profiles,” press release, October 10, 2019, https://www.federalreserve.gov/
newsevents/pressreleases/bcreg20191010a.htm; Federal Reserve, “Federal Reserve Board Issues Final Rule Modifying
the Annual Assessment Fees for Its Supervision and Regulation of Large Financial Companies,” press release,
November 19, 2020, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201119a.htm; Federal Reserve,
FDIC, OCC, “Agencies Issue Final Rule to Strengthen Resilience of Large Banks,” press release, October 20, 2020,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201020b.htm; Federal Reserve, FDIC, “Agencies
Finalize Changes to Resolution Plan Requirements; Keeps Requirements for Largest Firms and Reduces Requirements
for Smaller Firms,” press release, October 28, 2019, https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20191028b.htm.
16 Federal Reserve, “Regulatory Capital Rules: The Federal Reserve Board’s Framework for Implementing the U.S.
Basel III Countercyclical Capital Buffer,” 81 Federal Register 63682, September 16, 2016,
https://www.federalreserve.gov/newsevents/press/bcreg/20160908b.htm.

The proposal includes a three-year phase in (until June 30, 2028) of the change to RWA under the
expanded risk-based approach, discussed in the next section, and to the effect on capital of
changes in accumulated other comprehensive income, discussed in the section below entitled
“Changes to the Definition of Capital, Including AOCI.” Other parts of the proposal would apply
upon the effective date of the rule.
Changes to Risk Measurement

As discussed above, advanced approaches banks currently face two requirements for calculating
their RWA—the standardized approach and the advanced approach. The proposal replaces the
advanced approach with the expanded risk-based approach. Other banks with over $100 billion in
assets would be required to calculate RWA under two approaches for the first time.
The standardized approach would remain focused on general credit risk and market risk whereas
the expanded risk-based approach would comprise credit risk, credit value adjustment (CVA) risk
for over-the-counter derivatives, operational risk, and market risk. Thus, banks that were
previously subject to only the standardized approach would be facing for the first time some of
the major requirements that advanced approaches banks currently face, such as operational risk
requirements. The internal models (or ratings-based) approach used in advanced approaches gives
banks some latitude to assess risk in their own ways. The proposed rule would replace the internal
ratings-based approach17 for credit and operational risk with a second standardized approach (the
expanded risk-based approach). Market risk and CVA risk would use a revised internal model-
based approach that would “better account for tail risk” and “require a more rigorous model
approval process.”
Under the proposed framework, the RWA under the new approach “would equal the sum of risk-
weighted assets for credit risk, equity risk, operational risk, market risk, and CVA risk” less
certain adjustments for credit losses. The RWA under the standardized approach would have a
revised approach to determining market RWA. The bank would apply the RWA measure that
yields the lowest capital ratio under each calculation.
The individual elements that face revisions are discussed in more detail in the following
sections.18
Credit Risk
Credit risk is the risk that a borrower or counterparty will fail to meet a financial obligation. The
proposal would replace the internal models for credit risk with a new expanded risk-based
approach. The new approach would retain many of the same definitions and some of the risk
weights from the current framework. The proposal intends to provide “more transparent capital
requirements for credit risk exposures” than the internal models approach and “more granular risk
factors” than the current standardized approach. For example, the expanded risk-based approach
would include exposures to banks and credit unions; subordinated debt; and retail, real estate, and
corporate entities.
17 More on the internal ratings-based approach can be found at https://www.federalreserve.gov/supervisionreg/basel/

advanced-approaches-capital-framework-implementation.htm.
18 For more detail, see Davis Polk, “U.S. Basel III Endgame Proposed Rule,” September 14, 2023,
https://www.davispolk.com/insights/client-update/us-basel-iii-endgame-proposed-rule.

Securitization Framework
Securitization is the process of pooling together certain types of assets and packaging them as
securities that pay income to investors based on an ordered priority. The securitization framework
provides the capital requirement element related to the repayments on securitized assets. The
proposed rule would retain much of the existing capital rule but would modify requirements for
certain securitizations, and it would establish a standardized approach to replace the existing
supervisory formula approaches. It would also prohibit using the framework for certain credit
derivatives (contracts where payment obligations are determined by changes in creditworthiness
of some reference entity) and establish a new treatment for certain derivative contracts and
securitization exposures.
Equity Risk
Given that equity exposures “represent an ownership interest in the issuer of an equity instrument
and have a lower priority of payment or reimbursement,” equity risk is the risk of loss in the
event that the issuing entity fails to pay all of its debts.19 Currently, advanced approaches banks
can use internal models for both publicly and nonpublicly traded equity derivative contracts and
exposures. The proposed rule would eliminate the internal models approach. Instead, publicly
traded equity exposures and certain equity exposures to investment funds would be subject to the
market risk framework described below. A standardized approach would be implemented for
calculating the capital requirements for illiquid and infrequently traded equity exposures. The
remaining sections of the current capital rule that do not rely on models would generally remain
the same.
Operational Risk
Currently, advanced approaches banks calculate RWA for operational risk—the “risk of loss
resulting from inadequate or failed internal processes, people, and systems, or from external
events”—using an internal model called the advanced measurement approaches. The proposed
rule would eliminate this model and introduce a standardized capital requirement for operational
risk. The operational risk capital requirements under the expanded risk-based approach would be
based on a banking organization’s business volume and historical losses. According to Barr, these
indicators are good predictors of future operational losses, and “large banks have experienced
significant losses due to operational weaknesses over the past two decades.”20
Market Risk
The current framework allows the use of internal models for calculating capital requirements for
market risk—exposure to asset price movements. The proposal would introduce a risk-sensitive
standardized methodology for calculating RWA. This measure would be the default methodology
for banks that face market risk requirements. According to Barr, “The aim of the revised market
risk framework is to comprehensively address the lessons of the global financial crisis. The
revised framework would permit banks to use their own models to compute elements of the
19OCC, Federal Reserve, and FDIC, “Regulatory Capital Rule,” pp. 64114-64115.
20Vice Chair for Supervision Michael S. Barr, “Capital Supports Lending,” speech, October 9, 2023,
https://www.federalreserve.gov/newsevents/speech/barr20231009a.htm. Other policymakers have argued that capital
requirements are not the best way to address operational risk. See Board of Governors of the Federal Reserve System,
“Statement by Governor Michelle W. Bowman,” press release, July 27, 2023, https://www.federalreserve.gov/
newsevents/pressreleases/bowman-statement-20230727.htm.

market risk capital requirements only when such risk can be modeled well.”21 The measure would
include “a sensitivities-based capital requirement that would capture non-default market risk
based on the estimated losses produced by risk factor sensitivities under regulatorily determined
stress conditions.” It would also include a standardized default risk and residual risk capital
requirement. Limited use of internal models would be permitted when they can “appropriately
capture risk.”22
Standardized Output Floor

The proposed rule would implement a “standardized output floor” at 72.5% of the sum of the
bank’s credit, equity, operational, and CVA RWA as calculated under the expanded risk-based
approach plus market RWA under the standardized approach. The purpose of this floor is to set a
limit on how much banks can reduce their RWA (and hence, capital requirements) using internal
models for market risk.
Stress Capital Buffer

As described above, advanced approaches banks must calculate their capital requirements using
two methods. Banks must maintain a capital buffer on top of minimum capital requirements to
avoid restrictions, such as limits on share buybacks and dividends. Currently, the stress capital
buffer, which is based on stress test losses, is used only under the standardized approach, and a
fixed capital conservation buffer of 2.5% is used for advanced approaches. The proposal would
require large banks to use the stress capital buffer in both the standardized approach and the new
expanded risk-based approach.
Disclosure Requirements
The proposal would revise certain “qualitative disclosure requirements” and introduce new
disclosure requirements to “facilitate market participants’ understanding” of banks’ financial
condition and riskiness. The proposal would also transfer most of the existing quantitative
disclosures to regulatory reporting forms, which would be coordinated through the Federal
Financial Institutions Examination Council, an interagency body composed of depository
regulators.
Changes to the Definition of Capital, Including AOCI

The proposed rule would extend certain requirements that affect the definition of capital that
currently apply to advanced approaches banks to banks with over $100 billion in assets. First, the
proposal would increase the amount of mortgage servicing assets (MSAs) and temporary
difference deferred tax assets (DTAs) that are deducted from a bank’s capital. Currently a bank
can hold MSAs or DTAs equal to up to 25% of its common equity Tier 1 (CET1) capital before a
deduction from capital is made. Under the proposal, the threshold would be lowered from 25% to
10%. Second, the proposal would require covered banks to disclose to investors that capital could
be subordinated to the U.S. government in receivership or bankruptcy when the banks issue new
capital. Third, the proposal would limit the inclusion of allowances for credit losses in capital for
Category III and IV banks and change how the limit is calculated for Category I and II banks.
21 Barr, “Capital Supports Lending.”

22 OCC, Federal Reserve, and FDIC, “Regulatory Capital Rule,” pp. 64092-64093.

Finally, these banks would have to include most parts of an accounting category called
accumulated other comprehensive income (AOCI) in CET1 capital, which would align capital
rules with the treatment of AOCI under generally accepted accounting principles. One component
of AOCI to be included is unrealized capital gains and losses on available for sale (AFS) debt
securities (e.g., corporate and government bonds).23 Doing so would have the effect of increasing
a bank’s CET1 levels when it had unrealized capital gains and reducing CET1 when it had losses.
Changes to AOCI are not part of the 2017 Endgame proposal from the BCBS, and U.S. proposals
to do so originally predate that document.24 In 2012, the original Basel III proposal would have
applied this requirement to all banks (and BHCs). The regulators argued that “unrealized losses
could materially affect a banking organization’s capital position … and associated risks should
therefore be reflected in its capital ratios.”25
Facing criticism from banks that this treatment would cause capital levels to be too volatile, the
version of the rule finalized in 2013 applied the requirement only to advanced approach banks—
at the time, banks with at least $250 billion in assets or $10 billion in on-balance sheet foreign
exposure. All other banks could permanently elect to opt out of this requirement. Doing so is
sometimes referred to as the “AOCI filter.”26
In its 2019 regulation implementing EGRRCPA, the Fed reduced the number of banks subject to
various EPR requirements, including limiting the AOCI requirement to Category I and II banks—
applying it to only the nine Category I and II banks.27
The 2023 proposal would extend the AOCI requirement to any U.S. bank, BHC, or IHC with over
$100 billion in assets. As with earlier reforms, the treatment of trading and held-to-maturity
(HTM) securities would not change.
As seen in Figure 1, recognizing unrealized gains and losses would lead to higher capital in some
years and lower in others for banks overall, but unrealized losses have increased rapidly
beginning in 2022, equaling $232 billion on AFS securities and $284 billion on HTM securities in
the first quarter of 2023. This compares to $4 billion in realized losses in the first quarter. The
proposal only partially addresses the current problem for two reasons. First, it does not apply to
unrealized losses on HTM securities (the rationale being the bank does not intend to sell those
securities), which account for over half of banks’ unrealized losses. Second it does not apply to
banks with less than $100 billion in assets, whereas banks of all sizes have experienced
unrealized losses. According to the FDIC, community banks had unrealized losses of $59.2
billion in the first quarter of 2023, and their securities holdings (22% of total assets) are
comparable to other banks (24%).28
23 Banks classify the debt securities they invest in as either trading, AFS, or held to maturity, depending on how likely
the bank is to sell a security over a particular time frame. For AFS, a bank does not have current plans to sell but
recognizes a possibility of selling before the security matures.
24 BCBS, Basel III.
25 Federal Reserve, “Federal Reserve Board Invites Comment on Three Proposed Rules Intended to Help Ensure Banks
Maintain Strong Capital Positions,” press release, June 7, 2012, https://www.federalreserve.gov/newsevents/

pressreleases/bcreg20120607a.htm.
26 OCC and the Board of Governors of the Federal Reserve System, “Regulatory Capital Rules,” 78 Federal Register
198, October 11, 2013, https://www.gpo.gov/fdsys/pkg/FR-2013-10-11/pdf/2013-21653.pdf.

27 Federal Reserve, “Federal Reserve Board Finalizes Rules That Tailor Its Regulations for Domestic and Foreign
Banks to More Closely Match Their Risk Profiles,” press release, October 10, 2019, https://www.federalreserve.gov/
newsevents/pressreleases/bcreg20191010a.htm.
28 For more information, see CRS Insight IN12231, Banks’ Unrealized Losses, Part 1: New Treatment in the “Basel III
Endgame” Proposal, by Marc Labonte.

Figure 1. Unrealized Gains and Losses on Securities Held by FDIC-Insured

Depository Institutions
2008:Q1-2023:Q1
Source: FDIC.
Losses on securities played a major role in the failure of Silicon Valley Bank (SVB). At the end of
2022, SVB had $1.9 billion in AFS losses that would have been recognized in capital under
AOCI, although most of SVB’s securities were classified as HTM and so would not have been
affected by the proposal.29 SVB had over $100 billion in assets and would have been subject to
the Endgame proposal.30 The Fed also reports that SVB would have had to start complying with
the AOCI requirement in 2021 as an advanced approach bank had the 2019 tailoring rule not
limited the AOCI requirement to Category I and II banks.31
Concerns About Specific Aspects of the Proposal

Because the proposal primarily has the effect of changing the way that specific RWA are
calculated, the proposal disproportionately affects specific asset classes most affected by the
modified risk weights. Banks holding those assets, in turn, would be most affected by the
proposal.
The goal of risk weights is to assign a weight that appropriately reflects an activity’s actual risk.
Appropriate risk weights incentivize banks to pursue activities where risk and reward are properly
balanced. If regulators raise risk weights because previous weights were too low relative to actual
29 To a lesser extent, unrealized losses on securities also played a role in the failures of Signature and First Republic.
See FDIC, “FDIC’s Supervision of Signature Bank,” press release, April 28, 2023, p. 16, https://www.fdic.gov/news/
press-releases/2023/pr23033a.pdf; and Rachel Louise Ensign and Ben Eisen, “First Republic Bank Is Seized, Sold to
JPMorgan in Second-Largest U.S. Bank Failure,” Wall Street Journal, May 1, 2023, https://www.wsj.com/articles/first-
republic-bank-is-seized-sold-to-jpmorgan-in-second-largest-u-s-bank-failure-5cec723.
30 For more information, see CRS Insight IN12232, Banks’ Unrealized Losses, Part 2: Comparing to SVB, by Marc
Labonte.
31 Federal Reserve, Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank, April 2023,
https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf.

risk, then the safety and soundness of the banking system would be improved by reducing the
incentive to pursue that activity. By contrast, if regulators raise risk weights to be higher than is
commensurate with the activity’s actual risk, then banks would be too disincentivized to engage
in an activity, and economic efficiency would fall (or the activity would migrate out of the
banking system). Further complicating matters is the fact that riskiness changes unpredictably
over time. Regulators may be able to retroactively estimate the approximate riskiness of an
activity based on historical data, but that historical relationship may not hold in the future.
The new proposal has received some criticism from industry.32 A few specific complaints about
affected asset classes have been raised so far,33 although the volume of complaints is not
necessarily commensurate with the most affected asset classes.
Tax Equity
One concern is the way that equity is being treated in the proposal. For example, some interest
groups, such as the renewable energies industry, have voiced concern over the way tax equity34
would be treated. The current framework applies a 100% risk weight to nonpublicly traded equity
under 10% of a bank’s total capital. Banks with values that exceed 10% would apply a 400% risk
weight. The proposal would remove the 10% threshold, and it would result in banks facing the
higher risk weights irrespective of their exposure levels. Industry advocates have suggested that
the removal of this threshold is likely to disincentivize investment in renewable energies, which
often rely on tax equity project financing.35
Residential Mortgages
Compared to the current standardized approach, which assigns a 50% risk weight for prudently
underwritten mortgages that are current or a 100% risk weight otherwise, the proposal would
assign risk weights that rise in increments from 40% to 125% depending on the loan-to-value
(LTV) ratio and whether the mortgage is dependent on cash flows from the property, such as rent.
For example, a mortgage with a 60%-80% LTV that is not dependent on cash flows would be
assigned a 50% risk weight. Mortgages with a higher LTV would receive a higher risk weight, as
would those with the same LTV that are dependent on cash flows. On average, risk weights on
residential mortgages would be expected to rise.36 Risk weights under the proposal are also higher
than the BCBS’s standards in the 2017 Endgame document.37
Another proposal that might affect mortgage markets would change how banks make deductions
from their capital. In the current regime, Category III and IV banks must limit deductions of
32 On October 20, 2023, the agencies extended the comment period for the proposal. See Federal Reserve Board, FDIC,
and OCC, “Agencies Extend Comment Period on Proposed Rules to Strengthen Large Bank Capital Requirements,”
press release, October 20, 2023, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20231020a.htm.
33 The issues discussed in this section were highlighted in Barr, “Capital Supports Lending.”
34 For more information on tax equity, see CRS Report R45693, Tax Equity Financing: An Introduction and Policy
Considerations, by Mark P. Keightley, Donald J. Marples, and Molly F. Sherlock.

35 For example, see David Burton and Hilary Lefko, “Proposed Basell III Rules Could Be Catastrophic for the
Traditional Tax Equity Market,” September 5, 2023, https://www.projectfinance.law/tax-equity-news/2023/september/

proposed-basel-iii-rules-could-be-catastrophic-for-the-traditional-tax-equity-market/.
36 One study argues that the proposed risk weights exceed the capital that would have been needed to cover mortgage
losses during the Great Recession. See Laurie Goodman and Jun Zhu, “Bank Capital Notice of Proposed Rulemaking A
Look at the Provisions Affecting Mortgage Loans in Bank Portfolios,” Urban Institute, September 2023,
https://www.urban.org/sites/default/files/2023-09/
Bank%20Capital%20Notice%20of%20Proposed%20Rulemaking.pdf.
37 BCBS, Basel III, Table 11.

certain assets such as mortgage servicing assets (or rights) that individually exceed 25% of CET1
capital. The proposal would lower that threshold to 10%, on par with the threshold facing
Category I and II banks.
Capital Markets Activities

New market risk requirements cause the largest increase in RWA for Category I and II banks
compared to the status quo and also increase for Category III and IV banks. This could increase
the cost of banks providing capital markets services such as securities trading, market making,
and underwriting. For most types of securities, underwriting activity is dominated by Category I
banks. Category III and IV banks that were not previously subject to CVA rules and Category I
and II banks that did not previously face advanced approaches as a binding constraint would now
be bound by CVA risk rules that could cause the cost of derivatives offerings to rise. The new
operational risk requirements are also based partly on trading activities.38
Fee-Based Activities
Newly applicable operational risk requirements for Category III and IV banks would have the
largest effect on RWA for those banks. (By contrast, operational risk requirements would reduce
RWA for Category I and II banks compared to advanced approaches but would be newly binding
for those banks that switch from having the standardized approach to the proposed enhanced risk-
based approach as the binding constraint.) Operational risk requirements are based in part on fee
and commission income received and expenses paid from “advisory and financial services,
including insurance income.” Those fee-based services include fiduciary activities, brokerage,
investment banking, interchange and wire transfer fees, and underwriting.
Economic/Capital Impact
The proposed rule provides a five-page qualitative cost-benefit analysis of the impact of the rule
on covered banks and the broader economy in contrast to a numerical estimate of the overall net
impact. In their analysis, the regulators state that they expect the benefits of the proposal to
outweigh the risks because “better alignment between capital requirements and risk-taking helps
to ensure that banks internalize the risk of their operations.”39 The regulators expect capital
requirements to increase “modestly” for lending activities and “substantially” for trading
requirements. According to Barr
The bulk of the rise in required capital anticipated in the proposed rule is attributed to
trading and other activities besides lending—activities that have generated outsized losses
at large banks and areas where our current rules have shortcomings. The estimated increase
in capital required for lending activities on average—inclusive of both credit risk and
operational risk requirements—is limited. Such a rise might be expected to increase the
cost to banks for funding the average lending portfolio by up to 3 basis points—0.03
percentage points.40
Although the proposed rule would not increase the required capital ratios banks face, it would
increase the amount of capital that banks would have to hold, primarily because it would increase
38 Securities Industry and Financial Markets Association, “The Basel III Endgame’s Potential Impacts on Commercial
End-Users,” July 11, 2023, https://www.sifma.org/resources/news/the-basel-iii-endgames-potential-impacts-on-
commercial-end-users/.
39 OCC, Federal Reserve, and FDIC, “Regulatory Capital Rule,” p. 64167.
40 Barr, “Capital Supports Lending.”

their RWA (i.e., the denominator of risk-weighted capital ratios). The regulators estimate that the
proposal would increase the average binding CET1 capital level that large banks are required to
hold by 16% and Tier 1 capital by 9%.41 Note that (1) this estimate is an average, and the effects
on any particular bank would differ; and (2) this is an estimate based on past data, and the actual
effect would depend on future actions by the banks, including how they responded to the rule. For
example, banks could reduce their trading activities to lower the capital impact. The largest and
most complex banks would see the greatest impact (CET1 requirements would increase 19% for
Category I and II banks, 6% for Category III and IV domestic banks, and 14% for IHCs), though
the effects would vary by bank. As discussed above, the effect would be greatest for banks with
the most affected activities, such as significant trading activities and fee-based income. The
regulators estimate that all banks already hold enough capital to meet the new capital
requirements except for five Category I or II holding companies, which would need to raise
capital “between 16 and 105 basis points relative to their risk-weighted assets” to meet the
proposed requirements.
The regulators also estimate that the proposal would increase the average total loss absorbing
capacity (TLAC) requirement by 15.2%, leading three banks to have a shortfall, and the average
long-term debt requirement by 2.0% for Category I banks.42 Currently, TLAC and long-term debt
requirements apply only to Category I banks, but a separate proposed rule would extend long-
term debt requirements to all banks and BHCs with over $100 billion in assets.43
In addition, the changes to the definition of capital in the proposal would increase how much
capital banks have to hold by modifying what qualifies for the numerator of the capital ratio. The
regulators estimate, based on 2015 to 2022 data, that the inclusion of AOCI in capital would
increase average capital in the long run, as summarized in Table 1. In any given year, the effect
would be larger if banks have unrealized losses and smaller if banks have unrealized gains.
Table 1. Estimated Impact of Proposed AOCI Inclusion on Capital

Long-Run Average Increase
CET1 RW Leverage
Category III domestic 4.6% 3.8%

Category III IHC 13.2% 9.7%
Category IV 2.6% 2.5%
Source: Office of the Comptroller of the Currency, Federal Reserve, and Federal Deposit Insurance
Corporation, “Regulatory Capital Rule: Amendments Applicable to Large Banking Organizations and to Banking
Organizations with Significant Trading Activity,” 88 Federal Register 64171, September 18, 2023,
https://www.govinfo.gov/content/pkg/FR-2023-09-18/pdf/2023-19200.pdf.
41 The regulators included only Category I-IV banking organizations in this analysis, so not all entities are subject to
parts of the rule.
42 Under the TLAC rule, Category I banks are required to hold TLAC equal to at least 18% of RWA and 7.5% of
unweighted assets (including off-balance-sheet exposures) at the holding company level. TLAC is composed of Tier 1
capital and a minimum amount of long-term debt (equal to the greater of 4.5% of unweighted assets including off-
balance-sheet exposures or 6% plus the G-SIB surcharge of RWA) issued by the holding company. TLAC is intended
to make these equity and debt holders absorb losses by writing off existing equity and converting debt to equity in the
event of the firm’s insolvency, a process referred to as a bank “bail in.” This furthers the policy goal of avoiding
taxpayer bailouts of large financial firms.
43 Board of Governors of the Federal Reserve System, FDIC, and OCC, “Agencies Request Comment on Proposed
Rule to Require Large Banks to Maintain Long-Term Debt to Improve Financial Stability and Resolution,” press
release, August 29, 2023, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230829a.htm.

The proposal would also reduce the G-SIB surcharge for Category I banks by 0.16 percentage
points, partially offsetting the capital increases required by other parts of the proposal.
In addition, the proposal imposes a regulatory burden through compliance costs. The regulators
estimate that the proposal would increase “estimated annual burden hours” by over 900,000 hours
cumulatively for all of the banks subject to the proposal.44
Policy Issues
The policy debate over capital requirements is long-standing, with proponents of stronger
prudential regulations often citing past financial turmoil as evidence that the existing framework
is insufficient. Opponents to more stringent regulation point toward risks to bank profitability and
competitiveness with nonbanks. This represents the perennial friction between safety and
soundness facing bank regulators.
A better capitalized and safer banking system could make future banking failures and crises less
likely but could also make credit more expensive and less available.45 Depending on the marginal
change in those two potential effects, stricter capital rules could improve or worsen economic
outcomes on net over the long term. Proponents of strict capital rules argue that they are
necessary to avoid bad outcomes such as those seen during and after the 2008 financial crisis,
when hundreds of U.S. banks failed and even more received government assistance. That
financial crisis caused the deepest and longest recession since the Great Depression. According to
the proposal, many of its changes draw from the lessons of the financial crisis and, to a lesser
extent, the 2023 large bank failures. Critics argue that the banking system, which has already
been operating under stronger regulatory requirements since the financial crisis, has proven
resilient through the COVID-19 pandemic disruptions and multiple rounds of stress testing and
thus does not need stricter requirements.
Banks’ past losses can inform capital rules, but future losses are often from new and
unpredictable sources. This is to say that the likelihood of specific capital requirements being
exactly correct is close to zero, as it is largely an (informed) exercise where policymakers seek to
balance risks to safety and soundness and profitability across the industry. Given that there are
several different requirements and over 4,500 unique banking institutions in the United States,
there is little chance a standard approach is perfectly suitable to any one institution. Rather,
capital regulations (in particular standardized rules) seek to address the industry’s total risk, and
policymakers attempt to provide tailored regulation where they determine it is needed.
Against the backdrop of these tradeoffs and uncertainty surrounding them, regulators have little
incentive to lower capital requirements, as their mandates skew toward safety and soundness, and
banking industry leaders generally push for lower requirements, as they feel constrained by any
regulation that makes them use more expensive funding sources and potentially impedes their
profitability.
In addition to the overall economic effects of the proposal, critics have raised some more specific
points that are discussed in the rest of this section.
44 CRS calculations based on data provided in the Endgame proposal.

45 Weighed against the potential for less frequent financial crises caused by fewer banking failures is the risk that
higher capital requirements push credit intermediation outside of the banking system to less regulated parts of the
financial system, and this increases the risk of future financial crises. The proposal could also shift credit
intermediation from large banks to small banks not subject to the proposal, which could mitigate negative effects on
credit availability and reduce the risk of future financial crises.

“Gold-Plating”
Critics complain that the United States has unnecessarily “gold-plated” several of the
requirements originally proposed by the BCBS—within both the Endgame proposal and previous
rules implementing Basel standards—in ways that make U.S. standards more stringent.46 Basel
sets out a framework for the regulators to implement. The banking industry has been vocal that
the U.S. regulators’ proposal exceeds many of these requirements, particularly when compared to
international peers such as the European Union.47 For example, a number of requirements in the
proposal, such as mortgage risk weights, exceed those proposed by the BCBS.48 However, U.S.
regulators argue that the largest U.S. banks (to which the gold-plated standards apply) have
unique characteristics that exceed the standard risks of most banks domestically and
internationally.49 Meanwhile, the European Union has proposed requiring its affected banks to
hold less capital than the BCBS proposal (but still more than they currently hold).50 Gold-plating
is disadvantageous from an international competitiveness perspective but may or may not be
helpful from a safety and soundness and financial stability perspective.
Standard Rules vs. Internal Models

As noted above, one goal of the proposal is to reduce complexity for Category I and II banks. For
other banks with over $100 billion in assets, complexity would be increased, as they would face a
new set of requirements. There is a long-standing debate over whether simple or complex
regulations better reduce risk in the presence of uncertainty in general, as simple rules are more
easily understood and applied and may be hard to game, but complex rules can more effectively
address the complicated risks and activities undertaken by banks.
Despite the goal of reducing complexity, both the internal models and their proposed
replacements are highly complex and technical. Internal models have the advantage of being
created and calibrated by the bank, which has the most inside knowledge of the risks it faces. But
internal models have the disadvantage of lacking transparency and being potentially susceptible
to internal manipulation to reduce capital requirements. According to the regulators, in practice
internal models have resulted in “unwarranted variability across banking organizations in
requirements for exposures with similar risks.”51
The proposal replaces the largest banks’ ability to use internal models to assess risk in most cases
and more heavily controls the way that banks can apply internal models to assess market risk. If
regulators have decided that banks cannot properly assess risk, some may question whether
46 See, for example, FDIC, “Statement by Travis Hill, Vice Chairman, FDIC, on the Proposal to Revise the Regulatory
Capital Requirements for Large Banks,” July 27, 2023, https://www.fdic.gov/news/speeches/2023/spjul2723b.html.
47 This argument is laid out in Sean Campbell, “U.S. vs. European Capital Adequacy—The Increasingly Unlevel
Playing Field Unfolding in Basel III Finalization,” Financial Services Forum, May 4, 2023, https://fsforum.com/news/
u-s-vs-european-capital-adequacy-the-increasingly-unlevel-playing-field-unfolding-in-basel-iii-finalization.
48 FDIC Board Member Jonathan McKernan, “Statement on the Proposed Amendments to the Capital Framework,”
July 27, 2023, https://www.fdic.gov/news/speeches/2023/spjul2723c.html.

49 The lack of tailoring in the proposal would undermine this argument, as the regulators view Category I banks as
posing significantly more systemic risk than Category IV banks.

50 European Banking Authority, Basel III Monitoring Exercise (Annex—Analysis of EU Specific Adjustments),
September 2023, https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Reports/

2023/Basel%20III%20monitoring%20report/1062188/
Annex%20to%20Basel%20III%20monitoring%20report%20as%20of%20December%202022%20-%20EU-
specific%20Analysis.pdf.
51 OCC, Federal Reserve, and FDIC, “Regulatory Capital Rule,” p. 64031.

regulators can assess risk better. Particularly with respect to the bank failures of 2023, existing
prudential regulatory requirements did not result in supervisory actions by supervisors that
prevented the banks from failing.
Overlapping Approaches
The standardized approach that applies to small and large U.S. banks includes some deviations
from the standards issued by the BCBS. Both the advanced approach and its proposed
replacement, the “expanded risk-based approach” applying to large banks, hew more closely to
the BCBS’s standards.
U.S. regulators have set themselves two policy goals that they are navigating between: (1) setting
rules that align with the BCBS’s standards to promote a “level playing field” in the United States
and abroad or (2) setting rules that are different from Basel standards but tailored to address U.S.-
specific concerns.52 Rather than choosing between these two goals, U.S. regulators have chosen to
apply both sets of rules to advanced approaches banks (sometimes referred to as “two capital
stacks”) simultaneously—and then use only the binding one—in order to achieve both goals. The
proposal would extend this dual system to all banks with over $100 billion in assets.
Requiring large banks to calculate their capital ratios using two methods also ensures that large
U.S. banks do not face lower requirements than small ones do. The tradeoff is more burdensome
regulatory compliance for large banks. This system requires compliance departments at large
banks to ensure that each activity undertaken by the bank is compliant with two sets of capital
rules, even though only one set of rules ends up being binding. One could debate whether
regulators are imposing unduly burdensome regulations on large banks—especially if the new
expanded risk-based approach turns out to consistently be the binding one—instead of choosing
between their own potentially incompatible policy goals.53 While it is often suggested that large
banks have different levels of scale and complexity than community banks do, it is potentially
unclear why regulators would then retain the original standardized approach for these banks. As
discussed above, the dual system has also allowed “gold-plated” U.S. standards in some cases,
which could pose challenges for one of the policy goals—the level playing field internationally.
Capital Neutrality
One of the main intended purposes of the proposal is to better align risk with capital through
modifications to risk weights. A perhaps unintended outcome of the proposal is to require large
banks to hold more capital overall because of the increase in RWA—the proposal would
effectively raise required Tier 1 capital by an estimated 16% and CET1 by 9%.54 This occurs
because the standardized approach goes from being the binding approach that requires more
capital under current rules to the non-binding approach that requires less under the proposal for
52 A U.S.-specific set of rules also helps ensure that capital requirements are compliant with the “Collins Amendment,”
Section 171 of the Dodd-Frank Act, which does not allow capital requirements to be lower than those in place at the
date of enactment.
53 Securities Industry and Financial Markets Association, “Understanding the Proposed Changes to the US Capital
Framework,” August 28, 2023, https://www.sifma.org/resources/news/understanding-the-proposed-changes-to-the-us-

capital-framework/; Board of Governors of the Federal Reserve System, “Statement by Governor Michelle W.
Bowman.”
54 The BCBS did not intend the proposal to require banks to hold more capital. The 2017 BCBS Endgame document
stated that the Endgame reforms were “focused on not significantly increasing overall capital requirements.” BCBS,
Basel III, p. 1.

most large banks, which must simultaneously comply with both approaches. This may explain
why large banks prefer the status quo.55
In theory, regulators could offset the effect of higher RWA on required capital with reductions to
ratios, making the proposal roughly capital neutral. Capital neutrality would be desirable if the
overall required level of capital is currently achieving the goals of capital requirements (namely,
safety and soundness and financial stability). If that were the case, effectively requiring banks to
hold more capital would impose economic costs that outweigh the benefits.56 There is little
consensus on this topic, but several Fed and FDIC board members who voted against the proposal
argued that evidence suggests that large banks already hold sufficient capital to achieve policy
goals.57 A drawback to making the proposal capital neutral is that it would require applying either
different capital ratios to small and large banks or different ratios to the standardized approach
and the new expanded risk-based approach.
Tailoring
EGRRCPA amended Title I of the Dodd-Frank Act to require the tailoring of EPR requirements
for large banks, differentiating among large banks based on factors such as size, riskiness,
complexity, and the activities they engage in. For banks between $100 billion and $250 billion in
assets, it provides the Fed discretion to apply EPR requirements if it determines that the
requirement is appropriate to prevent financial instability or promote safety and soundness.
The Endgame proposal is tailored in the sense that it entirely exempts banks with less than $100
billion in assets unless they are active in trading. But most of the provisions of the proposal apply
uniformly to all banks with over $100 billion in assets, leading to criticisms that is not adequately
tailored.58 (Proposed changes to the SLR and the G-SIB surcharge, the latter of which was issued
on the same day in a separate proposal, would leave those two provisions tailored differently for
Category I banks compared to other large banks.) The largest bank the proposal applies to has
over 30 times more assets than the smallest. Generally, Basel standards are meant to apply to
internationally active banks, but international activity would no longer be used as a screening
criterion.
It is unclear whether the proposal is reliant on any authority specific to Title I, as the regulators
have broad authority to set capital requirements.59 Nevertheless, regulators have repeatedly
acknowledged that it is appropriate to tailor regulation generally. On the one hand, much of the
added regulatory complexity of the proposal applies only if banks are participating in the affected
activities. On the other hand, the case for the necessity of these changes for all of the banks
subject to the rule is not clear. Proving that requirements do not apply to a bank can still impose
compliance costs. A letter signed by the House Financial Services Committee chair and other
majority Members on the committee argued that a lack of tailoring in this rule and others would
55 See Table 11 of the proposal. OCC, Federal Reserve, and FDIC, “Regulatory Capital Rule.”
56 In his dissenting vote, Fed Governor Waller made this argument. Further, he argues that higher required capital was
being driven mainly by the operational and market risk requirements, which he argued are risks that are already
adequately addressed by other requirements. Board of Governors of the Federal Reserve System, “Statement by
Governor Christopher J. Waller,” press release, July 27, 2023, https://www.federalreserve.gov/newsevents/
pressreleases/waller-statement-20230727.htm.
57 See, for example, FDIC, “Statement by Travis Hill.”
58 See, for example, Board of Governors of the Federal Reserve System, “Statement by Governor Christopher J.
Waller.”
59 Other indications that suggest that the proposal is not promulgated solely under Title I authority is that (1) Title I is
limited to BHCs, foreign banks, and designated nonbank financial companies, whereas the proposal applies to IDIs
without holding companies; and (2) it is administered solely by the Fed, whereas the proposal is joint.

lead to a “barbell” shaped banking system with no midsize banks.60 Although the 2023 bank
failures are invoked as a rationale for the lack of tailoring, outside of the changes to AOCI, the
connection between Endgame provisions (which the BCBS issued in 2017) and the failures is
unclear.
Transparency
On September 12, 2023, six major industry trade associations submitted a joint comment letter
arguing that the proposal
would significantly increase capital requirements for larger banks. Yet in support of these
substantial new requirements, the proposed rule repeatedly relies on data and analyses that
the agencies have not made available to the public. This reliance on non-public information
violates clear requirements under the Administrative Procedure Act that agencies must
publicly disclose the data and analyses on which their rulemaking is based. To remedy this
violation, the agencies must make available the various types of missing material identified
below—along with any and all other evidence and analyses the agencies relied on in
proposing the rule—and re-propose the rule.61
The letter refers to the nonpublic internal agency research that went into estimating the various
parameters and formulas found throughout the proposed regulation.62 The proposal also contained
an economic impact analysis (discussed in the section above entitled “Economic/Capital Impact”)
that critics argued was insufficient and flawed.63 (On October 20, 2023, the Fed announced that it
would collect more up-to-date and detailed data from the banks subject to the proposal to “further
clarify the estimated effects of the proposal and inform any final rule.”64) While it is beyond the
scope of this report to weigh in on the legal merits of the letter’s claims, as context, the proposal
takes up 316 pages of the Federal Register, with the first 156 pages a preamble that explains and
justifies the proposal. The underlying documentation that the letter calls for would presumably be
much longer still. By its nature, this underlying documentation would arguably be too technical to
be useful or comprehensible to the general public, although it could be useful to industry and
researchers.
60 Chair Patrick McHenry et al., letter to Vice Chair Barr, Chairman Gruenberg, and Acting Director Hsu, September
13, 2023, https://financialservices.house.gov/uploadedfiles/2023-09-13_fsc_gop_letter_to_bank_regulators.pdf.
61 Bank Policy Institute, “Request for Re-Proposal of Regulatory Capital Rule to Remedy Administrative Procedure
Act Violations,” comment letter, September 12, 2023, https://bpi.com/wp-content/uploads/2023/09/Letter-to-Agencies-

Re-Missing-Information-2023.09.12-vF.pdf.
62 Another possibility is that underlying decisions were made by the BCBS and adopted without consideration by the
U.S. regulators. As a result, critics argue that U.S. regulators have not worked out and justified to the public whether
the requirements are optimal. The BCBS does not necessarily explain changes to final versions of recommendations.
See McKernan, “Statement on the Proposed Amendments to the Capital Framework.”
63 McHenry et al., letter to Vice Chair Barr, Chairman Gruenberg, and Acting Director Hsu.
64 Board of Governors of the Federal Reserve System, “Federal Reserve Board Launches Data Collection to Gather
More Information from the Banks Affected by the Large Bank Capital Proposal It Announced Earlier This Year,” press
release, October 20, 2023, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20231020b.htm.

Author Information
Marc Labonte Andrew P. Scott

Specialist in Macroeconomic Policy Analyst in Financial Economics
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
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under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
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Bank Capital Requirements: Basel III

November 30, 2023

Congressional Research Service

Congressional Research Service

Congressional Research Service

What Are Bank Capital Requirements?

Center, July 10, 2023, https://www.federalreserve.gov/newsevents/speech/barr20230710a.htm.

Congressional Research Service 1

Basel III Endgame

5 BCBS, Basel III.

Congressional Research Service 2

Holistic Capital Review

Institute, December 1, 2022, https://www.federalreserve.gov/newsevents/speech/barr20221201a.htm.

10 CRS analysis of data from FDIC, “BankFind Suite,” https://banks.data.fdic.gov/.

Congressional Research Service 3

The Joint Large Bank Capital Proposed Rule

Scope and Timing

TopHoldings. A current list of large commercial banks is available at https://www.federalreserve.gov/releases/lbr/

Congressional Research Service 4

Congressional Research Service 5

Changes to Risk Measurement

17 More on the internal ratings-based approach can be found at https://www.federalreserve.gov/supervisionreg/basel/

Congressional Research Service 6

Congressional Research Service 7

Standardized Output Floor

Stress Capital Buffer

Changes to the Definition of Capital, Including AOCI

21 Barr, “Capital Supports Lending.”

Congressional Research Service 8

Maintain Strong Capital Positions,” press release, June 7, 2012, https://www.federalreserve.gov/newsevents/

198, October 11, 2013, https://www.gpo.gov/fdsys/pkg/FR-2013-10-11/pdf/2013-21653.pdf.

Endgame” Proposal, by Marc Labonte.

Congressional Research Service 9

Figure 1. Unrealized Gains and Losses on Securities Held by FDIC-Insured

Concerns About Specific Aspects of the Proposal

Congressional Research Service 10

Considerations, by Mark P. Keightley, Donald J. Marples, and Molly F. Sherlock.

Traditional Tax Equity Market,” September 5, 2023, https://www.projectfinance.law/tax-equity-news/2023/september/

Congressional Research Service 11

Capital Markets Activities

40 Barr, “Capital Supports Lending.”

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Table 1. Estimated Impact of Proposed AOCI Inclusion on Capital

Category III domestic 4.6% 3.8%

Congressional Research Service 13

44 CRS calculations based on data provided in the Endgame proposal.

Congressional Research Service 14

Standard Rules vs. Internal Models

July 27, 2023, https://www.fdic.gov/news/speeches/2023/spjul2723c.html.

posing significantly more systemic risk than Category IV banks.

September 2023, https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Reports/

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Framework,” August 28, 2023, https://www.sifma.org/resources/news/understanding-the-proposed-changes-to-the-us-

Congressional Research Service 16

Congressional Research Service 17

Act Violations,” comment letter, September 12, 2023, https://bpi.com/wp-content/uploads/2023/09/Letter-to-Agencies-

Congressional Research Service 18

Marc Labonte Andrew P. Scott

Congressional Research Service R47855 · VERSION 2 · NEW 19