• U.S. regulators plan modest capital requirement reductions under new Basel aligned proposals
• Largest banks face mixed impacts with lower surcharges offsetting targeted increases
• Smaller banks are expected to see more meaningful reductions in capital requirements
• Changes aim to support lending and reduce migration of activities to nonbanks
• Mortgage and consumer lending avoid new capital penalties under revised framework
• Capital rules will be simplified through a single risk based capital ratio

U.S. banking regulators are preparing to unveil a revised capital framework that could modestly ease requirements for many institutions while reshaping how risk is measured across the sector.

The proposals, expected imminently from the Federal Reserve alongside the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., represent a significant shift in the ongoing effort to align U.S. rules with global Basel standards. 

The changes are also seen as a response to earlier proposals that faced strong political opposition due to their potential impact on bank capital levels.

Michelle Bowman, the Federal Reserve’s vice chair for supervision, indicated that the revised framework will result in a slight overall reduction in capital requirements for banks, although the impact will vary depending on size and business model.

Banks at the top end of the market are expected to face a more nuanced outcome. While Basel aligned adjustments may increase requirements in certain areas, those increases will be offset by a reduction in the surcharge applied to globally systemically important banks.

At the same time, smaller institutions are likely to see somewhat larger reductions in their capital requirements. The shift reflects an effort by regulators to recalibrate the framework in a way that supports lending and reduces distortions in the financial system.

A central objective of the proposals is to encourage banks to continue participating in core lending activities rather than ceding ground to nonbank financial institutions. 

Regulators have become increasingly concerned that overly stringent capital rules can push lower risk activities such as mortgage lending and commercial finance outside the regulated banking sector.

The revised framework therefore avoids introducing additional capital penalties for mortgages and consumer lending. 

It also opens a broader discussion on the role of private mortgage insurance within the capital regime, signaling that policymakers are willing to revisit how housing related risks are treated.

Changes to the treatment of mortgage servicing assets also form a key part of the proposal. Under the new approach, these assets would no longer be deducted from regulatory capital. 

Instead, they would be assigned a higher risk weight, reflecting their underlying risk profile while allowing banks to retain them within their capital calculations.

Operational risk requirements are also set to be refined, particularly for larger institutions. Regulators are proposing adjustments that better reflect the nature of fee based business lines such as credit cards. 

By accounting for revenues and costs on a net basis, the framework aims to provide a more accurate representation of operational risk exposure.

Similarly, capital requirements for wealth management and custody services have been recalibrated to recognize the typically lower risk associated with these activities. 

The move suggests a broader effort to align capital standards more closely with actual business risk rather than applying uniform assumptions across different lines of activity.

One of the most notable structural changes in the proposal is the simplification of capital calculations for the largest banks. 

The current framework requires institutions to calculate capital ratios using both a standardized approach and an internal models based approach, often leading to complexity and duplication.

Under the revised framework, regulators plan to replace this dual system with a single risk based capital ratio. The change is intended to streamline compliance while maintaining the integrity of capital requirements.

The proposals also reflect a broader shift in regulatory philosophy. Rather than significantly increasing capital buffers across the board, policymakers appear focused on refining the framework to improve its effectiveness and reduce unintended consequences.

Previous proposals had sought to raise capital requirements for the largest U.S. banks by substantial margins, but those efforts were ultimately abandoned following industry pushback and political resistance.

The latest approach suggests a more balanced path forward, combining targeted adjustments with modest overall relief. Regulators are expected to seek public feedback on the proposals, indicating that further refinements may follow before the rules are finalized.

For banks, the changes could have meaningful implications for capital planning, business strategy, and competitive dynamics. 

By easing certain constraints while simplifying the overall framework, the proposals may provide greater flexibility for institutions to allocate capital and support economic activity.

At the same time, the evolving regulatory landscape underscores the ongoing challenge of balancing financial stability with the need to maintain a dynamic and competitive banking sector.