A Boulder in a Pond: The Fed Drops Updated US Banking Capital Requirements
On March 19, 2026, the Federal Reserve (Fed) Board of Governors released its long-awaited capital requirements proposals, which The Wall Street Journal called a “major victory for big banks.”i Capital levels will be decreased between 4.8% and 7.8% depending on the size of the banks, yet required capital levels will be double what they were before the 2008 financial crisis.
The proposals are designed to reverse the pull of credit business from non-bank, private institutions. As Vice Chair for Supervision Michelle Bowman noted last week, “These changes to the capital framework eliminate overlapping requirements, right-size calibrations to match actual risk, and comprehensively address long-standing gaps in our prudential framework.”ii
In 2026, banks are in good shape. The average common equity tier 1 ratio (CET1) for US banks has remained consistently above 14% over the last five years, while the top 20 US banks had an estimated excess capital of over $250 billion through the first half of 2025.iii If these rules are finalized, it will indeed be a major victory for big banks, affecting numerous investment banking functions.
Regulatory Capital Rule: Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies; Systemic Risk Report (FR Y-15)
The original Basel III Endgame proposal from summer 2023 was viewed as punitive, potentially increasing risk-weighted assets (RWA) for many transactions by an average of 19% (with some asset classes seeing increases up to 26%). The amended Fed capital proposals, including its Basel III revision, are designed to achieve the following ends:
- 1.To account for changes in the financial system and the economy, adjust the fixed coefficients for measuring systemic indicator scores in the method 2 global systemically important bank (GSIB) surcharge rules framework, instead of variable measurement to annually updated global indicators in method 1.
- 2.To mitigate unintended effects of the current calculation, such as constraining credit availability, modifying the short-term wholesale funding systemic indicator (reduced to 20% from the previous 30%) by measuring it as an absolute amount rather than as a ratio scaled to a firm’s average risk-weighted assets.
- 3.To better reflect the risk profile of a firm and reduce incentives for a firm to reduce its GSIB surcharge by making temporary adjustments to reported indicators of systemic risk at year end, require firms to calculate certain systemic indicators as an annual average of their daily or monthly values instead of on a point-in-time basis at year end.
- 4.To reduce cliff effects (when benefit levels decline more steeply than earnings increase) and increase the sensitivity of the GSIB surcharge to changes in a firm’s systemic risk profile, introduce narrower method 2 score band ranges, in increments of 10 basis points rather than 50 basis points.
- 5.To improve the measurement of certain systemic indicators, amend the FR Y-15 to improve the clarity of instructions and consistency of data reporting and systemic indicator measurement.iv
New era begins in investment banking: deeper pockets of liquidity
ISDA and SIFMA’s quantitative impact study that showed that the Fundamental Review of the Trading Book (FRTB) part of the 2023 version of the proposal would have increased capital requirements for clearing by 80% and would have resulted in a substantial increase in market risk capital of between 73% and 101%, depending on the extent to which banks use internal models.v
US bank capital requirements are inextricably linked to High-Quality Liquid Assets (HQLA) and funding models. In 2011, Treasurys made up only 3% of bank balance sheets; today, they represent 11%. However, these Treasurys are often locked in HQLA buckets to meet regulatory liquidity demands, making them unavailable for trading activity. In times of market volatility, these Treasurys get locked in HQLA buckets. Easing these requirements (specifically supplementary leverage ratio and HQLA rules) is a major goal for some regulators to free up inventory and create deeper markets in US Treasury intermediation and other low-risk activities.
Instead of effectively forcing banks to de-leverage, the updated proposals may free up $175 billion in excess capital. For Tier 2 banks, the proposal removes the market risk capital requirement for seven depository institutions and non-holding companies. This move provides capital relief for those with trading books, potentially freeing capacity to expand market-making or prime brokerage activities.
Winning back credit business from private firms
The Federal Reserve capital proposals encourage banks to regain market share from private credit because bank-led structuring offers greater transparency for capital oversight than shadow banking entities. A few voices offered immediate pushback.
“Today’s proposals, if adopted, would harm the resilience of banks and the US financial system,” Fed Governor Michael Barr said.vi
“Critics say they will weaken financial system safeguards just as geopolitical and private credit risks are surging.” - Reutersvii
“Mortgage capital relief is unlikely to bring banks back into the home lending business as other factors discouraging them from participating persist...Steep hurdles that remain, such as ever-increasing competition from nonbanks, the high capital needed to operate the low-margin business line and persisting regulatory hurdles, will keep banks on the sidelines." - Zoe Sagalow, S&P Globalviii
New rules are designed to not overstate systemic risk based on a bank’s balance sheet. Theoretically the new rules will narrow the gap which has allowed private credit managers to seize so much of the business in the past 15 years, such as the surcharges that private firms do not incur.
Impact on banks' ability to create RMBS and CMBS
Banks should now be able to get back into the mid-market lending horserace and do a lot more bespoke structuring of RMBS and CMBS, creating CDOs and CLOs, as well as financing-heavy activities like repo, securities financing, and credit warehousing.
RMBS — mixed but net positive for origination.
The proposal introduces an LTV-based risk weight framework for residential mortgage exposures, replacing the current flat risk weight structure.
Net effect: Banks should find it easier and more economically attractive to originate, pool, and securitize conforming residential mortgages, but the economics of non-agency/private-label RMBS backed by income-dependent properties (e.g., investor SFR, rental portfolios) are modestly pressured.
Key implications:
- Lower-LTV loans (well-collateralized, owner-occupied mortgages) receive lower risk weights, incentivizing the origination of high-quality conforming products suitable for RMBS pools.
- Income-property/investment loans (dependent on property cash flows, e.g., rental income) receive higher risk weights — potentially dampening bank origination of those assets for private-label RMBS.
- MSA deduction removal reduces the capital cost of retaining servicing rights after securitization, directly improving the economics of the originate-to-securitize model.
- The 250% risk weight on MSAs remains, but the proposal eliminating the deduction threshold removes the ceiling that discouraged large-scale mortgage banking operations.
CMBS — broadly unchanged at the origination level, some pressure at holding level.
The proposal does not directly revise risk weights for commercial real estate or commercial mortgage exposures. Those remain under the general standardized approach. However:
- Corporate exposure risk weight drops from 100% → 95%, with “other assets” dropping to 90%. CMBS-related warehouse lines or unrated tranches retained on balance sheet benefit.
US is the regulatory pace car on the global banking speedway
The world has its eyes on the US. In anticipation of this US announcement, the UK delayed Basel III implementation in 2025 but did confirm the rules this January. In May of last year, the EU did likewise, but The Financial Times reported on March 17 that the EU would delay the increase in banking capital requirements to stave off falling behind US institutions.ix European capital requirements, particularly for Core Tier 1 equity, are often several hundred basis points higher than those in the US, effectively forcing European banks to de-leverage more aggressively. So far, Asian rule makers have kept quiet, but we expect the EU to pursue more simplicity and unlock ways to remain competitive.
How banks can seize the moment with automation, data modernization
Now, a measure of regulatory clarity has materialized for sell-side institutions. Banks that have already initiated data and operational tech transformations are well-positioned to take advantage of a new environment in which data volumes will explode: trade-level data, intraday margin data, collateral movement data, and stress and exception data. Banks that have delayed transformations but amp up data infrastructure modernization now will gain the flexibility to use the same reference and investment data across risk, compliance, operations, trading, and more. They should appraise their enterprise data management systems to understand their capability to accurately capture transactions and prices, manage life cycle events, and reconcile information promptly. Then, they can identify and address data quality and management gaps. Make no mistake: Most financial institutions should be in some phase of data modernization, regardless of new capital regulations.
Banks can leverage their modernized technology platforms to improve regulatory stress testing, automate liquidity management, and practice micro-level capital discipline across portfolios. Treasury managers can then gain granular transparency into cash balances and liquidity requirements to stay flexible amid fluctuating markets and increased regulations. Expanded focus on the risk-based approach to calculating RWAs will require new models, more data, and accelerated timelines for regulatory reporting. As a result, timely access to high-quality data will be crucial for ensuring accurate RWA calculations. Naturally, the costs of compliance will increase, so banks need to ensure operational efficiencies wherever they can get it.
In terms of recapturing more mid-market and home lending credit businesses, institutions will need to leverage technology to solve data fragmentation, settlement latency, and reporting transparency issues. Their infrastructure will need to better handle the complexities of asset-backed finance (ABF) and other complex private credit structures more efficiently than the private credit sector.
Inflection points like this do not often occur, so it is critical for institutions to be ready to seize the day. On March 19, the federal bank regulatory agencies requested comment on three proposals to modernize the regulatory capital framework for banks of all sizes, setting a June 18, 2026 public comment deadline.x
Authored By
Ted O’Connor
Ted is a Senior Vice President focused on Business Development at Arcesium. In this role, Ted works with leading financial institutions in the capital markets to optimize data, technology, and operational needs.
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[i] WSJ, March 19, 2026. https://www.wsj.com/finance/regulation/u-s-regulators-propose-more-lenient-capital-rules-for-big-banks-afd3797f
[ii] Federal Reserve, March 12, 2026. https://www.federalreserve.gov/newsevents/speech/bowman20260312a.htm#fn2
[iii] Deloitte, October 30, 2025. https://www.deloitte.com/us/en/insights/industry/financial-services/financial-services-industry-outlooks/banking-industry-outlook.html
[iv] Federal Reserve. https://www.federalreserve.gov/apps/reportingforms/Report/Index/FR_Y-15
[v] ISDA, https://www.isda.org/a/I21gE/US-Basel-III-Endgame-Trading-and-Capital-Markets-Impact.pdf
[vi] Bloomberg, March 19, 2026. https://www.bloomberg.com/news/articles/2026-03-19/us-regulators-unveil-plans-to-ease-capital-rules-for-big-banks
[vii] Reuters, March 19, 2026. https://www.reuters.com/sustainability/boards-policy-regulation/how-us-regulators-are-overhauling-bank-capital-rules-2026-03-19/
[viii] S&P Global, March 18, 2026. https://www.spglobal.com/market-intelligence/en/news-insights/articles/2026/3/basel-iii-endgame-unlikely-to-revive-banks-mortgage-appetite-99753644
[ix] FT, 2026. https://www.ft.com/content/d8b46889-f5cb-42f0-8e71-7c489ff6d6b0
[x] Federal Reserve, March 19, 2026. https://www.federalreserve.gov/newsevents/pressreleases/bcreg20260319a.htm
